As filed with the Securities and Exchange Commission on June 28, 1999
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. 37 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 40 (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
DEBORAH R. GATZEK, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[x] on September 1, 1999 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.
FRANKLIN STRATEGIC SERIES
Prospectus
Franklin Aggressive Growth Fund - Class A, B & C
Franklin Blue Chip Fund - Class A
Franklin California Growth Fund - Class A, B & C
Franklin Large Cap Growth Fund - Class A, B & C
Franklin MidCap Growth Fund - Class A
Franklin Small Cap Growth Fund - Class A & C
INVESTMENT STRATEGY Growth
SEPTEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Franklin Aggressive Growth Fund
[insert page #] Franklin Blue Chip Fund
[insert page #] Franklin California Growth Fund
[insert page #] Franklin Large Cap Growth Fund
[insert page #] Franklin MidCap Growth Fund
[insert page #] Franklin Small Cap Growth Fund
[insert page #] Distributions and Taxes; Year 2000 Problem
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
AGGRESSIVE GROWTH FUND
[Insert graphic of bullseye and arrows]GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund normally invests primarily in equity
securities of companies demonstrating accelerating growth, increasing
profitability, or above-average growth or growth potential as compared with
the overall economy.
[Begin callout]
The fund invests primarily in aggressive growth companies' equity securities.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible securities
and warrants.
The fund invests in small, medium, and large capitalization companies with
strong growth potential across a wide range of sectors. In choosing equity
investments, the fund's manager will focus on sectors that have exceptional
growth potential and fast growing, innovative companies within these sectors.
In addition, solid management and sound financial records are factors the
manager also considers.
Although the manager will search for investments across a large number of
sectors, it expects to have significant positions in particular sectors.
These sectors may include, for example, technology (including computers and
telecommunications), health care (including biotechnology), consumer
products, and consumer services (including media, broadcasting and
entertainment).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in growth companies' equity securities.
[Insert graphic of chart with line going up and down]MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
The prices of growth stocks are based largely on projections of the issuer's
future earnings and revenues. If a company's earnings or revenues fall short
of expectations, its stock price may fall dramatically. The fund's manager
uses an aggressive growth strategy in choosing the fund's investments. As a
result, an investment in the fund involves a greater degree of risk and its
share price may be more volatile than an investment in a conservative equity
fund or a growth fund investing entirely in proven growth stocks. Growth
stocks may be more expensive relative to their earnings or assets compared to
value or other stocks.
SMALLER AND MIDSIZE COMPANIES Historically, smaller and midsize company
securities have been more volatile in price than larger company securities,
especially over the short term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller and midsize
companies, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller and midsize companies to changing
economic conditions.
In addition, smaller and midsize companies may lack depth of management, they
may be unable to generate funds necessary for growth or development, or they
may be developing or marketing new products or services for which markets are
not yet established and may never become established.
Smaller and midsize companies involve greater risks than larger, more
established companies and should be considered speculative.
TECHNOLOGY COMPANIES The technology sector has historically been volatile due
to the rapid pace of product change and development within the sector, and
the stock prices of companies operating within this sector are often subject
to abrupt or erratic movements.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, and similar matters. They are also subject
to legislative risk, i.e., the risk of a reform of the health care system
through legislation.
TELECOMMUNICATIONS, MEDIA, AND BROADCASTING COMPANIES The activities of
telecommunications, media, and broadcasting companies operate under
international, federal, and state regulations. These companies may be
adversely affected by changes in government regulations. In addition, these
sectors have been undergoing deregulation to enable increased competition,
which could affect the companies in these sectors that the fund holds.
CONSUMER PRODUCTS, SERVICES, AND ENTERTAINMENT COMPANIES These companies have
historically been sensitive to the economy in general, through changes in
consumer spending patterns. These companies may be adversely affected by
changes in consumer opinion or demand for a given product or service.
PORTFOLIO TURNOVER Because of the fund's aggressive growth strategy, the
fund's portfolio turnover rate may be higher than that of other mutual funds.
High portfolio turnover may involve additional expenses to the fund,
including transaction costs for purchases and sales of securities. These
transactions may result in realization of taxable capital gains, including
short-term capital gains, which are generally taxed at ordinary income tax
rates.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to go up.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [9] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None1 4.00% 0.99% 2
Exchange fee3 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)4
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Management fees5 0.50% 0.50% 0.50%
Distribution and service
(12b-1) fees6 0.35% 1.00% 1.00%
Other expenses5 0.84% 0.84% 0.84%
------------------------------------
Total annual fund operating expenses5 1.69% 2.34% 2.34%
------------------------------------
1. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
2. This is equivalent to a charge of 1% based on net asset value.
3. This fee is only for market timers (see page [#]).
4. The management fees and distribution and service (12b-1) fees shown are
based on the fund's maximum contractual amount. Other expenses are estimated
for the current fiscal year.
5. The manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund. With this reduction, management and administration fees
are estimated to be 0.26% and total annual fund operating expenses are
estimated to be 1.25% for Class A, 1.90% for Class B, and 1.90% for Class C
for the current fiscal year. The manager and administrator may end this
arrangement at any time upon notice to the fund's Board of Trustees.
6. Because of the distribution and service (12b-1)fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS
- -----------------------------------------------------------
CLASS A $ 737 1 $1,077
CLASS B
Assuming you sold your shares
at the end of the period $ 637 $1,030
Assuming you stayed in the fund
$ 237 $ 730
CLASS C $ 433 2 $ 823
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $335 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
MICHAEL MCCARTHY, Vice President of Advisers
Mr. McCarthy has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1992.
JOHN P. SCANDALIOS, Senior Securities Analyst of Advisers
Mr. Scandalios has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1996. Previously, he was with Chase Manhattan
Bank.
CONRAD B. HERRMANN CFA, Senior Vice President of Advisers
Mr. Herrmann has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1989.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million up to and including
$1 billion;
o 0.35% of the value of net assets over $1 billion up to and including
$1.5 billion;
o 0.30% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
o 0.275% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
o 0.25% of the value of net assets over $11.5 billion up to and including
$16.5 billion;
o 0.24% of the value of net assets over $16.5 billion up to and including
$19 billion;
o 0.23% of the value of net assets over $19 billion up to and including
$21.5 billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
FRANKLIN BLUE CHIP FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 80% of its total assets in equity securities of blue chip companies
located in the U.S.
For purposes of the fund's investments, BLUE CHIP companies are
well-established companies with a record of growth in earnings, revenue, or
EBITDA (earnings before interest, taxes, depreciation and amortization)
relative to other companies in their respective industries. These companies
generally dominate or are expected to dominate their respective industries
and have a reputation for quality management as well as superior products and
services.
[Begin callout]
The fund invests primarily in blue chip companies' common stocks.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible
securities and warrants. The fund invests primarily in common stocks.
In choosing equity investments, the fund's manager focuses on companies that
have a sustainable competitive advantage, a strong financial record, and
market capitalization of more than $1 billion. The manager searches for
investments across a large number of industries. The fund intends to limit
its investment in foreign securities to 10% of total assets. This may
include companies in developed or emerging markets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economies where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in blue chip companies' common stocks.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund.
Investments in depositary receipts also involve some or all of the following
risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign markets and their participants generally have less
government supervision and regulation than in the U.S.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past two calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS1
[Insert bar graph]
7.45% 18.24%
97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 18.66%
WORST QUARTER:
Q3 '98 -10.85%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
1 YEAR INCEPTION
(6/3/96)
- -------------------------------------------------------------
Blue Chip Fund2 11.43% 9.54%
S&P 500 Index3 28.58% 28.79%
MSCI World Index4 24.80% 18.45%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index tracks
the performance of approximately 1500 securities in 22 countries and is
designed to measure world stock market performance. It includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- -------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of
offering price 5.75%
Load imposed on purchases 5.75%
Maximum deferred sales charge (load) None1
Exchange fee2 $5.00
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- -------------------------------------------------------------------------
Management fees3 0.75%
Distribution and service
(12b-1) fees4 0.30%
Other expenses 0.46%
------------------------
Total annual fund operating expenses3 1.51%
========================
1. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
2. This fee is only for market timers (see page [#]).
3. For the fiscal year ended April 30, 1999, the manager had agreed in
advance to limit its management fees and to assume as its own expense certain
expenses otherwise payable by the fund. With this reduction, management fees
were 0.49% and total annual fund operating expenses were 1.25%. The manager
may end this arrangement at any time upon notice to the fund's Board of
Trustees.
4. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
$720 1 $1,026 $1,353 $2,277
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
SALLY EDWARDS HAFF, Senior Vice President of Advisers
Ms. Haff has been a manager of the fund since April, 1999. She joined the
Franklin Templeton Group in 1986.
ALYSSA RIEDER, Portfolio Manager of Advisers
Ms. Rieder has been a manager of the fund since April, 1999. She joined the
Franklin Templeton Group in 1998. Previously, she was in financial management
roles at T. Rowe Price and YFA.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, management
fees, before any advance waiver, were 0.75% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.49% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED APRIL 30,
- ----------------------------------------------------------------
1999 1998 19971
- ----------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 12.46 10.85 10.00
-----------------------------
Net investment income .04 .09 .09
Net realized and unrealized
gains 1.97 1.67 .82
-----------------------------
Total from investment operations 2.01 1.76 .91
-----------------------------
Distributions from net
investment income (.06) (.06) (.06)
Distributions from net
realized gains -- (.09) --
-----------------------------
Total distributions (.06) (.15) (.06)
-----------------------------
Net asset value, end of year 14.41 12.46 10.85
=============================
Total return (%)2 16.18 16.41 9.14
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 54,880 16,836 5,600
Ratios to average net
assets: (%)
Expenses 1.25 1.25 1.25 3
Expenses excluding waiver and
payments by affiliate 1.51 1.95 2.22 3
Net investment income .55 1.04 1.07 3
Portfolio turnover rate (%) 35.74 57.67 11.14
1. For the period June 3, 1996 (effective date) to April 30, 1997 for Class C.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
FRANKLIN CALIFORNIA GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund normally invests primarily in equity
securities of California companies.
[Begin callout]
The fund invests primarily in California companies' equity securities.
[End callout]
For purposes of the fund's investments, CALIFORNIA COMPANIES are companies
headquartered or conducting a majority of their operations in the state of
California. The fund invests in small to mid-size companies as well as in
relatively well-known, larger capitalization companies in mature industries
that the manager believes have the potential for capital appreciation.
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible
securities and warrants.
The manager expects to invest a portion of the fund's assets in securities of
companies in the technology sector, including computer companies. Typically,
the fund will invest in technology companies that market their products or
services globally rather than only domestically or regionally.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in California companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
The prices of growth stocks are based largely on projections of the issuer's
future earnings and revenues. If a company's earnings or revenues fall short
of expectations, its stock price may fall dramatically. Growth stocks may be
more expensive relative to their earnings or assets compared to value or
other stocks. Because the fund invests in growth stocks, its share price may
be more volatile than other types of investments.
SMALLER AND MIDSIZE COMPANIES Historically, smaller and midsize company
securities have been more volatile in price than large company securities,
especially over the short term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller and midsize
companies, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller and midsize companies to changing
economic conditions.
In addition, smaller and midsize companies may lack depth of management, they
may be unable to generate funds necessary for growth or development, or they
may be developing or marketing new products or services for which markets are
not yet established and may never become established.
Smaller and midsize companies involve greater risks than larger, more
established companies and should be considered speculative.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares, and may involve more
risk than an investment in a fund that does not focus on securities of a
single state. The fund, however, intends to meet certain tax diversification
requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past seven calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
5.50% 17.57% 16.53% 47.63% 30.44% 15.70% 10.72%
92 93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 22.00%
WORST QUARTER:
Q3 '98 -15.27%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (10/18/91)
- ---------------------------------------------------------------------------
California Fund - Class A2 4.35% 22.05% 18.92%
S&P 500 Index3 28.58% 24.06% 20.13%
Franklin California 250 Index4 28.02% 23.18% 19.97%
SINCE
INCEPTION
1 YEAR (09/03/96)
- ---------------------------------------------------------------------------
California Fund - Class C 2 7.87% 17.15%
S&P 500 Index 3 28.58% 33.49%
Franklin California 250 Index 4 28.02% 26.98%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
July 1, 1993, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. The unmanaged Franklin California 250 Growth Index consists of the 250
largest California based companies on an equal weighted basis chosen to
approximate the business segment weightings of the California economy. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 3 4.00% 0.99% 4
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees 0.48% 0.48% 0.48%
Distribution and service
(12b-1) fees 5 0.25% 1.00% 1.00%
Other expenses 0.27% 0.27% 0.27%
------------------------------------
Total annual fund operating expenses 1.00% 1.75% 1.75%
------------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1999. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
CLASS A $671 1 $875 $1,096 $1,729
CLASS B
Assuming you sold your shares
at the end of the period $578 $851 $1,149 $1,864 2
Assuming you stayed in the fund
$178 $551 $ 949 $1,864 2
CLASS C $374 3 $646 $1,039 $2,142
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $276 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $227 billion in assets.
The team responsible for the fund's management is:
CONRAD B. HERRMANN CFA, Senior Vice President of Advisers
Mr. Herrmann has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1989.
CANYON A. CHAN CFA, Vice President of Advisers
Mr. Chan has been a manager of the fund since April, 1999. He joined the
Franklin Templeton Group in 1991.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.48% of its average daily net assets to the manager.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED APRIL 30,
- --------------------------------------------------------------------------------
1999 1 1998 1997 2 1996 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 24.97 19.35 18.26 14.03 12.05
------------------------------------------------
Net investment income .10 .14 .13 .20 .16
Net realized and unrealized
gains 1.42 6.48 1.51 6.03 3.04
------------------------------------------------
Total from investment operations
1.52 6.62 1.64 6.23 3.20
------------------------------------------------
Distributions from net
investment income (.14) (.14) (.12) (.23) (.12)
In excess of net investment
income (.53) (.86) (.43) (1.77) (1.10)
------------------------------------------------
Total distributions (.67) (1.00) (.55) (2.00) (1.22)
------------------------------------------------
Net asset value, end of year 25.82 24.97 19.35 18.26 14.03
================================================
Total return (%) 3 6.39 34.98 8.94 47.42 29.09
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 780,598 721,254 282,898 81,175 13,844
Ratios to average net
assets: (%)
Expenses 1.00 .99 1.08 .71 .25
Expenses excluding waiver
and payments by affiliate 1.00 .99 1.08 1.09 1.27
Net investment income .41 .67 .84 1.42 1.63
Portfolio turnover rate (%) 52.76 48.52 44.81 61.82 79.52
CLASS B
- ------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 24.31
---------
Net investment (loss) (.01)
Net realized and unrealized
gains 1.45
---------
Total from investment operations
1.44
---------
Net asset value, end of year 25.75
=========
Total return (%) 3 5.88
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 2,657
Ratios to average net
assets: (%)
Expenses 1.75 4
Net investment loss (.33) 4
Portfolio turnover rate (%) 52.76
CLASS C
- -------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 24.81 19.27 18.05
----------------------------
Net investment income
(loss) (.07) -- .05
Net realized and unrealized
gains 1.42 6.43 1.65
----------------------------
Total from investment operations
1.35 6.43 1.70
Distributions from net
investment income -- (.03) (.05)
Distributions from net
realized gains (.53) (.86) (.43)
----------------------------
Total distributions (.53) (.89) (.48)
----------------------------
Net asset value, end of year 25.63 24.81 19.27
============================
Total return (%) 3 5.67 34.02 9.32
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 159,310 122,701 24,556
Ratios to average net
assets: (%)
Expenses 1.75 1.74 1.86 4
Net investment income
(loss) (.33) (.10) (.05) 4
Portfolio turnover rate (%) 52.76 48.52 44.81
1. For the period January 1, 1999 (effective date) to April 30, 1999 for
Class B.
2. For the period September 3, 1996 (effective date) to April 30, 1997 for
Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
FRANKLIN LARGE CAP GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's principal investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 80% of its total assets in equity securities of large cap growth
companies located in the U.S.
For purposes of the fund's investments, lARGE CAP GROWTH COMPANIES include
well-established companies with market capitalization of $8.5 billion or more
that are expected to have revenue growth in excess of the economy as a whole
either through above-average industry expansion or market share gains. These
companies generally dominate, or are gaining market share, in their
respective industries and have a reputation for quality management, as well
as superior products and services.
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible
securities and warrants.
[Begin callout]
The fund invests primarily in large cap growth companies' equity securities.
[End callout]
In choosing equity investments, the fund's manager will focus on companies
that have exhibited above average growth, strong financial records and large
market capitalization. In addition, management expertise, industry
leadership, growth in market share and sustainable competitive advantage are
factors the manager also considers. Although the manager will search for
investments across a large number of industries, it expects to have
significant positions (but not in excess of 25% of its total assets in a
given sector) in the technology (including computers, telecommunications and
electronics), health care and finance industries.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in large cap growth companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
TECHNOLOGY COMPANIES The technology sector has historically been volatile due
to the rapid pace of product change and development, and the stock prices of
companies operating within this sector are often subject to abrupt or erratic
movements. In addition, the activities of telecommunications companies fall
under international, federal and state regulations. These companies may be
adversely affected by changes in government regulations.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, and similar matters. They are also
subject to legislative risk, i.e., the risk of a reform of the health care
system through legislation.
FINANCIAL SERVICES COMPANIES Financial services companies are subject to
extensive government regulation which tends to limit both the amount and
types of loans and other financial commitments such companies can make, and
the interest rates and fees they can charge. These limitations can have a
significant impact on the profitability of a financial services company since
profitability is impacted by the company's ability to make financial
commitments such as loans.
The financial services industry is currently undergoing a number of changes
such as continuing consolidations, development of new products and structures
and changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 1 4.00% 0.99% 2
Exchange fee 3 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)4
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Management fees 5 0.50% 0.50% 0.50%
Distribution and service
(12b-1) fees 6 0.35% 1.00% 1.00%
Other expenses 5 0.84% 0.84% 0.84%
------------------------------------
Total annual fund operating expenses 5 1.69% 2.34% 2.34%
------------------------------------
1. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
2. This is equivalent to a charge of 1% based on net asset value.
3. This fee is only for market timers (see page [#]).
4. The management fees and distribution and service (12b-1) fees shown are
based on the fund's maximum contractual amount. Other expenses are estimated
for the current fiscal year.
5. The manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund. With this reduction, management and administration fees
are estimated to be 0.26% and total annual fund operating expenses are
estimated to be 1.25% for Class A, 1.90% for Class B, and 1.90% for Class C
for the current fiscal year. The manager and administrator may end this
arrangement at any time upon notice to the fund's Board of Trustees.
6. Because of the distribution and service (12b-1)fees, over the long-term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS
- ----------------------------------------------------------------------------
CLASS A $ 737 1 $1,077
CLASS B
Assuming you sold your shares
at the end of the period $ 637 $1,030
Assuming you stayed in the fund
$ 237 $ 730
CLASS C $ 433 2 $ 823
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $335 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
THERESA SPATH, CFA Portfolio Manager of Advisers
Ms. Spath has been a manager of the fund since its inception. She joined the
Franklin Templeton Group in 1994.
JASON R. NUNN, Portfolio Manager of Advisers
Mr. Nunn has been a manager of the fund since its inception. He joined the
Franklin Templeton Group in 1998. Previously, he worked in corporate finance
with Alex. Brown & Sons.
EDWARD B. JAMIESON, Executive Vice President of Advisers
Mr. Jamieson has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million and not over $1
billion;
o 0.35% of the value of net assets over $1 billion and not over $1.5
billion;
o 0.30% of the value of net assets over $1.5 billion and not over $6.5
billion;
o 0.275% of the value of net assets over $6.5 billion and not over $11.5
billion;
o 0.25% of the value of net assets over $11.5 billion and not over $16.5
billion;
o 0.24% of the value of net assets over $16.5 billion and not over $19
billion;
o 0.23% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
FRANKLIN MIDCAP GROWTH FUND
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past five calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS1
[Insert bar graph]
-2.09% 33.07% 23.47% 14.94% -1.84%
94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 17.46%
WORST QUARTER:
Q3 '98 -23.19%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (8/17/93)
- ---------------------------------------------------------------------------
MidCap Fund 2 -7.49% 11.63% 11.76%
S&P 500 Index 3 28.58% 24.06% 22.96%
S&P MidCap 400 Index 4 19.11% 18.84% 18.65%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
June 1, 1996, the fund implemented a Rule 12b-1 plan, which affects
subsequent performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The unmanaged S&P MidCap 400 Index
consists of 400 domestic stocks chosen for market size, liquidity, and
industry group representation. It is market-value weighted index and includes
reinvested dividends. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
- -------------------------------------------------------------------------
Maximum sales charge (load) as a percentage of
offering price 5.75%
Load imposed on purchases 5.75%
Maximum deferred sales charge (load) None 1
Exchange fee 2 $5.00
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- -------------------------------------------------------------------------
Management fees 0.65%
Distribution and service
(12b-1) fees 3 0.26%
Other expenses 0.33%
------------------------
Total annual fund operating expenses 1.24%
------------------------
1. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
2. This fee is only for market timers (see page [#]).
3. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$694 1 $946 $1,217 $1,989
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
EDWARD B. JAMIESON, Executive Vice President of Advisers
Mr. Jamieson has been a manager of the fund since 1996. He joined the
Franklin Templeton Group in 1987.
CATHERINE ROBERTS BOWMAN, Vice President of Advisers
Ms. Bowman has been a manager of the fund since 1996. She joined the Franklin
Templeton Group in 1990.
KENNETH BROAD, Vice President of Advisers
Mr. Broad has been a manager of the fund since April, 1999. He joined the
Franklin Templeton Group in 1994.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.65% of its average daily net assets to the manager.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED APRIL 30,
- --------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 17.44 13.34 14.24 10.81 10.05
----------------------------------------------
Net investment income (loss) .04 -- (.02) .18 .21
Net realized and unrealized
gains (losses) (1.17) 4.66 .93 3.59 .77
----------------------------------------------
Total from investment operations
(1.13) 4.66 .91 3.77 .98
----------------------------------------------
Distributions from net
investment income -- -- (.05) (.21) (.20)
Distributions from net
realized gains (.16) (.56) (1.76) (.13) (.02)
----------------------------------------------
Total distributions (.16) (.56) (1.81) (.34) (.22)
----------------------------------------------
Net asset value, end of year 16.15 17.44 13.34 14.24 10.81
----------------------------------------------
Total return (%) 1 (6.36) 35.53 6.31 35.40 10.06
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 33,901 29,864 12,853 7,575 5,591
Ratios to average net
assets: (%)
Expenses 1.24 1.17 1.07 .16 --
Expenses excluding waiver and
payments by affiliate 1.24 1.17 1.07 .96 .98
Net investment income .30 (.03) (.22) 1.42 2.12
Portfolio turnover rate (%) 59.97 50.16 76.35 102.65 163.54
1. Total return does not include sales charges.
FRANKLIN SMALL CAP GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests at
least 65% of total assets in equity securities of small cap growth companies.
[Begin callout]
The fund invests primarily in small cap growth companies' equity securities.
[End callout]
For purposes of the fund's investments, SMALL CAP GROWTH companies include
companies that have market capitalization of less than $1.5 billion at the
time of the fund's investments that the manager believes are positioned for
rapid growth in revenues or earnings and assets. The manager believes the
securities of these companies may experience significant capital appreciation.
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible
securities and warrants. These may also include private investments in
companies whose securities are not publicly traded, which may take the form
of letter stock or convertible preferred stock.
In choosing equity investments, the fund's manager considers such factors as
the financial strength of the company, the expertise of management, the
growth potential of the company within its industry, and the growth potential
of the industry itself.
The fund also invests up to 35% of its total assets in equity securities of
larger capitalization companies that the manager believes have the potential
for capital appreciation.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in small cap growth companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
Historically, small cap company securities have been more volatile in price
than large company securities, especially over the short term. Among the
reasons for the greater price volatility are the less certain growth
prospects of small cap companies, the lower degree of liquidity in the
markets for such securities, and the greater sensitivity of small cap
companies to changing economic conditions.
In addition, small cap companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Small cap companies involve greater risks than larger, more established
companies and should be considered speculative.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
The prices of growth stocks are based largely on projections of the issuer's
future earnings and revenues. If a company's earnings or revenues fall short
of expectations, its stock price may fall dramatically. Growth stocks may be
more expensive relative to their earnings or assets compared to value or
other stocks. Because the fund invests in growth stocks, its share price may
be more volatile than other types of investments.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past six calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
21.77% 9.22% 42.20% 27.07% 15.78% -0.02%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 23.32%
WORST QUARTER:
Q3 '98 -23.56%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (2/14/92)
- ---------------------------------------------------------------------------
Small Cap Fund - Class A 2 -5.77% 16.58% 16.82%
S&P 500 Index 3 28.58% 24.06% 20.11%
Russell 2500 Index 4 0.38% 14.13% 14.03%
SINCE
INCEPTION
1 YEAR (10/1/95)
- ---------------------------------------------------------------------------
Small Cap Fund - Class C 2 -2.64% 12.03%
S&P 500 Index 3 28.58% 28.08%
Russell 2500 Index 4 0.38% 13.90%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
July 1, 1993, Class A implemented a Rule 12b-1 plan, which affects subsequent
performance.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The unmanaged Russell 2500 Index is
composed of the bottom 500 securities in the Russell 1000 Index and all
stocks in the Russell 2000 Index. The index includes reinvested dividends.
One cannot invest directly in an index, nor is an index representative of the
fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A1 CLASS C1
- ---------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 1.99%
Load imposed on purchases 5.75% 1.00%
Maximum deferred sales charge (load) None 2 0.99% 3
Exchange fee None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A1 CLASS C1
- ---------------------------------------------------------------------
Management fees 0.46% 0.46%
Distribution and service
(12b-1) fees4 0.25% 1.00%
Other expenses 0.23% 0.23%
--------------------------
Total annual fund operating expenses 0.94% 1.69%
--------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
3. This is equivalent to a charge of 1% based on net asset value.
4. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
CLASS A $665 1 $857 $1,065 $1,663
CLASS C $368 2 $627 $1,009 $2,078
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. For the same Class C investment, your costs would be $270 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its affiliates
manage over $227 billion in assets.
The team responsible for the fund's management is:
EDWARD B. JAMIESON, Executive Vice President of Advisers
Mr. Jamieson has been a manager of the fund since 1992. He joined the
Franklin Templeton Group in 1987.
MICHAEL MCCARTHY, Vice President of Advisers
Mr. McCarthy has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1992.
AIDAN O'CONNELL, Portfolio Manager of Advisers
Mr. O'Connell has been a manager of the fund since 1998. Previously, he was a
research associate and a corporate finance associate at Hambrecht & Quist.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.46% of its average daily net assets to the manager.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
<TABLE>
<CAPTION>
CLASS A YEAR ENDED APRIL 30,
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1 1995
- -------------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 25.93 18.96 19.75 14.90 12.75
-----------------------------------------------------
Net investment income .06 .07 .03 .01 .03
Net realized and
unrealized gains (losses) (1.02) 7.92 .04 6.23 3.14
-----------------------------------------------------
Total from investment
operations (.96) 7.99 .07 6.24 3.17
-----------------------------------------------------
Distributions from net
investment income (.14) (.09) (.06) (.01) (.02)
Distributions from net
realized gains (.18) (.93) (.80) (1.38) (1.00)
-----------------------------------------------------
Total distributions (.32) (1.02) (.86) (1.39) (1.02)
-----------------------------------------------------
Net asset value, end of year 24.65 25.93 18.96 19.75 14.90
=====================================================
Total return (%) 2 (3.44) 43.09 .14 44.06 27.05
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 4,251,284 3,957,972 1,071,352 444,912 63,010
Ratios to average net
assets: (%)
Expenses .94 .89 .92 .97 .69
Expenses excluding waiver
and payments by affiliate .94 .89 .92 1.00 1.16
Net investment income .30 .32 .10 .09 .25
Portfolio turnover rate (%) 46.73 42.97 55.27 87.92 104.84
</TABLE>
CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 25.59 18.78 19.66 17.94
-------------------------------------------
Net investment loss (.09) (.02) (.05) (.03)
Net realized and unrealized
gains (losses) (1.00) 7.76 (.03) 2.71
-------------------------------------------
Total from investment
operations (1.09) 7.74 (.08) 2.68
-------------------------------------------
Distributions from net
realized gains (.18) (.93) (.80) (.96)
-------------------------------------------
Net asset value, end of year 24.32 25.59 18.78 19.66
-------------------------------------------
Total return (%) 2 (4.08) 42.06 (.65) 15.98
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 764,715 731,707 146,164 24,102
Ratios to average net
assets: (%)
Expenses 1.69 1.67 1.69 1.76 3
Net investment loss (.44) (.42) (.70) (.69)3
Portfolio turnover rate (%) 46.73 42.97 55.27 87.92
1. For the period October 1, 1995 (effective date) to April 30, 1996 for
Class C.
2. Total return does not include sales charges, and is not annualized.
3. Annualized
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES; YEAR 2000 PROBLEM
INCOME AND CAPITAL GAINS DISTRIBUTIONS The California Fund, MidCap Fund and
Small Cap Fund intend to pay a dividend at least semiannually representing
its net investment income. Capital gains, if any, may be distributed
annually. The Aggressive Fund, Blue Chip Fund and Large Cap Fund intend to
pay a dividend at least annually representing substantially all of its net
investment income and any net realized capital gains. The amount of these
distributions will vary and there is no guarantee the fund will pay
dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for each fund's distributions will vary. Please keep in mind
that if you invest in the fund shortly before the record date of a
distribution, any distribution will lower the value of a fund's shares by the
amount of the distribution and you will receive some of your investment back
in the form of a taxable distribution. If you would like information on
upcoming record dates for a fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YEAR 2000 PROBLEM The funds' business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
funds' portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The funds could experience difficulties in effecting transactions if
any of their foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
Each fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
The Aggressive Growth Fund, California Fund and Large Cap Fund each offer
Class A, B and C shares. The Small Cap Fund offers Class A and C shares. The
Blue Chip Fund and MidCap Fund offer Class A shares. Each class of each fund
has its own sales charge and expense structure, allowing you to choose the
class that best meets your situation. Your investment representative can help
you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 5.75% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% or charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six within 18 months
within 12 months years
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND
CLASS C SHARES WERE DESIGNATED CLASS II. THE BLUE CHIP FUND AND MIDCAP FUND
OFFER CLASS A ONLY. THE SMALL CAP FUND OFFERS CLASS A AND CLASS C. THE
AGGRESSIVE GROWTH FUND, CALIFORNIA FUND, LARGE CAP FUND AND SMALL CAP FUND
OFFER CLASS A, B AND C. THE CALIFORNIA FUND BEGAN OFFERING CLASS B SHARES ON
JANUARY 1, 1999.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the Aggressive Growth Fund,
Blue Chip Fund, Large Cap Fund and MidCap Fund to pay distribution fees of up
to 0.35% per year by the to those who sell and distribute Class A shares and
provide other services to shareholders. For the California Fund and Small Cap
Fund, Class A has a distribution plan, sometimes known as a Rule 12b-1 plan,
that allows the funds to pay distribution fees of up to 0.25% per year by the
to those who sell and distribute Class A shares and provide other services to
shareholders. Because these fees are paid out of Class A's assets on an
on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- ---------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page [#]). After 8 years, your Class B shares automatically convert to Class
A shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 1% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.75% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge.
You also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals, institutions and retirement
plans or by investors who reinvest certain distributions and proceeds within
365 days. The CDSC for each class also may be waived for certain redemptions
and distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Plan Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- ---------------------------------------------------------------------------
INITIAL ADDITIONAL
- ---------------------------------------------------------------------------
Regular accounts $1,000 $50
- ---------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- ---------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- ---------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- ---------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs
$250 $50
- ---------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members
$100 $50
- ---------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of the fund. the fund. Include your
envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION Except for Class A shares of the Aggressive
Growth Fund and Large Cap Fund, you may be able to invest automatically in
Class A shares of a fund by transferring money from your paycheck to the fund
by electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A without any
sales charge. Advisor Class shareholders who exchange their shares for Class
A shares and later decide they would like to exchange into another fund that
offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. If you own both Class A and B shares,
also specify the class of shares, otherwise we
will sell your Class A shares first. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
BY WIRE sure we have your bank account information on
file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates its net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated
by dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
Each fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the funds'
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The Aggressive Growth Fund, Blue Chip Fund, Large Cap Fund and
MidCap Fund may restrict or refuse exchanges by market timers. If accepted,
each exchange by a market timer will be charged $5 by Franklin/Templeton
Investor Services, Inc., the fund's transfer agent. The California Fund and
Small Cap Fund do not allow investments by market timers. You will be
considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserve certain rights, including:
o The funds may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the funds promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
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COMMISSION (%) --- 4.00 2.00
Investment under $50,000 5.00 --- ---
$50,000 but under $100,000 3.75 --- ---
$100,000 but under $250,000 2.80 --- ---
$250,000 but under $500,000 2.00 --- ---
$500,000 but under $1 million 1.60 --- ---
$1 million or more up to 1.00 1 --- ---
12B-1 FEE TO DEALER 0.25% 2 0.25 3 1.00 4
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and up to 0.25% on Class A NAV purchases by certain
trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. The Aggressive Growth Fund, Blue Chip Fund, Large Cap Fund and MidCap Fund
may pay up to 0.35% to Distributors or others, out of which 0.10% generally
will be retained by Distributors for its distribution expenses.
3. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
4. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the funds or your account, you can write to
us at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one
of the following numbers. For your protection and to help ensure we provide
you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ----------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-6243 FSS1 P 09/99
Prospectus
Franklin Strategic Series
ADVISOR CLASS
Franklin Aggressive Growth Fund
Franklin Large Cap Growth Fund
Franklin Small Cap Growth Fund
INVESTMENT STRATEGY Growth
SEPTEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goals and Strategies
[insert page #] Franklin Aggressive Growth Fund
[insert page #] Franklin Large Cap Growth Fund
[insert page #] Franklin Small Cap Growth Fund
[insert page #] Distributions and Taxes; Year 2000 Problem
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN AGGRESSIVE GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL INVESTMENTS The fund normally invests primarily in equity
securities of companies demonstrating accelerating growth, increasing
profitability, or above-average growth or growth potential as compared with
the overall economy.
[Begin callout]
The fund invests primarily in aggressive growth companies' equity securities.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible securities
and warrants.
The fund invests in small, medium, and large capitalization companies with
strong growth potential across a wide range of sectors. In choosing equity
investments, the fund's manager will focus on sectors that have exceptional
growth potential and fast growing, innovative companies within these sectors.
In addition, solid management and sound financial records are factors the
manager also considers.
Although the manager will search for investments across a large number of
sectors, it expects to have significant positions in particular sectors.
These sectors may include, for example, technology (including computers and
telecommunications), health care (including biotechnology), consumer
products, and consumer services (including media, broadcasting and
entertainment).
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in growth companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
The prices of growth stocks are based largely on projections of the issuer's
future earnings and revenues. If a company's earnings or revenues fall short
of expectations, its stock price may fall dramatically. The fund's manager
uses an aggressive growth strategy in choosing the fund's investments. As a
result, an investment in the fund involves a greater degree of risk and its
share price may be more volatile than an investment in a conservative equity
fund or a growth fund investing entirely in proven growth stocks. Growth
stocks may be more expensive relative to their earnings or assets compared to
value or other stocks.
SMALLER AND MIDSIZE COMPANIES Historically, smaller and midsize company
securities have been more volatile in price than larger company securities,
especially over the short term. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller and midsize
companies, the lower degree of liquidity in the markets for such securities,
and the greater sensitivity of smaller and midsize companies to changing
economic conditions.
In addition, smaller and midsize companies may lack depth of management, they
may be unable to generate funds necessary for growth or development, or they
may be developing or marketing new products or services for which markets are
not yet established and may never become established.
Smaller and midsize companies involve greater risks than larger, more
established companies and should be considered speculative.
TECHNOLOGY COMPANIES The technology sector has historically been volatile due
to the rapid pace of product change and development within the sector, and
the stock prices of companies operating within this sector are often subject
to abrupt or erratic movements.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, and similar matters. They are also subject
to legislative risk, i.e., the risk of a reform of the health care system
through legislation.
TELECOMMUNICATIONS, MEDIA, AND BROADCASTING COMPANIES The activities of
telecommunications, media, and broadcasting companies operate under
international, federal, and state regulations. These companies may be
adversely affected by changes in government regulations. In addition, these
sectors have been undergoing deregulation to enable increased competition,
which could affect the companies in these sectors that the fund holds.
CONSUMER PRODUCTS, SERVICES, AND ENTERTAINMENT COMPANIES These companies have
historically been sensitive to the economy in general, through changes in
consumer spending patterns. These companies may be adversely affected by
changes in consumer opinion or demand for a given product or service.
PORTFOLIO TURNOVER Because of the fund's aggressive growth strategy, the
fund's portfolio turnover rate may be higher than that of other mutual funds.
High portfolio turnover may involve additional expenses to the fund,
including transaction costs for purchases and sales of securities. These
transactions may result in realization of taxable capital gains, including
short-term capital gains, which are generally taxed at ordinary income tax
rates.
MARKET A security's value may be reduced by market activity or the results of
supply and demand. This is a basic risk associated with all securities. When
there are more sellers than buyers, prices tend to fall. Likewise, when there
are more buyers than sellers, prices tend to go up.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -----------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) 2
ADVISOR CLASS
- -----------------------------------------------------------------------
Management fees 3 0.50%
Distribution and service (12b-1) fees None
Other expenses 0.84%
------------------
Total annual fund operating expenses 3 1.34%
------------------
1. This fee is only for market timers (see page [#]).
2. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated for the current fiscal year.
3. The manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund. With this reduction, management and administration fees
are estimated to be 0.26% and total annual fund operating expenses are
estimated to be 0.90% for the current fiscal year. The manager and
administrator may end this arrangement at any time upon notice to the fund's
Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS
- ------------------------------------------------
$136 $425
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
MICHAEL MCCARTHY, Vice President of Advisers
Mr. McCarthy has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1992.
JOHN P. SCANDALIOS, Senior Securities Analyst of Advisers
Mr. Scandalios has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1996. Previously, he was with Chase Manhattan
Bank.
CONRAD B. HERRMANN CFA, Senior Vice President of Advisers
Mr. Herrmann has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1989.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million up to and including
$1 billion;
o 0.35% of the value of net assets over $1 billion up to and including
$1.5 billion;
o 0.30% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
o 0.275% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
o 0.25% of the value of net assets over $11.5 billion up to and including
$16.5 billion;
o 0.24% of the value of net assets over $16.5 billion up to and including
$19 billion;
o 0.23% of the value of net assets over $19 billion up to and including
$21.5 billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
THE LARGE CAP FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's principal investment goal is long-term capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 80% of its total assets in equity securities of large cap growth
companies located in the U.S.
For purposes of the fund's investments, large cap growth companies include
well-established companies with market capitalization of $8.5 billion or more
that are expected to have revenue growth in excess of the economy as a whole
either through above-average industry expansion or market share gains. These
companies generally dominate, or are gaining market share, in their
respective industries and have a reputation for quality management, as well
as superior products and services.
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible securities
and warrants.
[Begin callout]
The fund invests primarily in large cap growth companies' equity securities.
[End callout]
In choosing equity investments, the fund's manager will focus on companies
that have exhibited above average growth, strong financial records and large
market capitalization. In addition, management expertise, industry
leadership, growth in market share and sustainable competitive advantage are
factors the manager also considers. Although the manager will search for
investments across a large number of industries, it expects to have
significant positions (but not in excess of 25% of its total assets in a
given sector) in the technology (including computers, telecommunications and
electronics), health care and finance industries.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in large cap growth companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
TECHNOLOGY COMPANIES The technology sector has historically been volatile
due to the rapid pace of product change and development, and the stock prices
of companies operating within this sector are often subject to abrupt or
erratic movements. In addition, the activities of telecommunications
companies fall under international, federal and state regulations. These
companies may be adversely affected by changes in government regulations.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for
new drugs and medical instruments, and similar matters. They are also subject
to legislative risk, i.e., the risk of a reform of the health care system
through legislation.
FINANCIAL SERVICES COMPANIES Financial services companies are subject to
extensive government regulation which tends to limit both the amount and
types of loans and other financial commitments such companies can make, and
the interest rates and fees they can charge. These limitations can have a
significant impact on the profitability of a financial services company since
profitability is impacted by the company's ability to make financial
commitments such as loans.
The financial services industry is currently undergoing a number of changes
such as continuing consolidations, development of new products and structures
and changes to its regulatory framework. These changes are likely to have a
significant impact on the financial services industry.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page 7 for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of bull and bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- ------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) 2
ADVISOR CLASS
- ------------------------------------------------------------------------------
Management fees 3 0.50%
Distribution and service (12b-1) fees None
Other expenses 0.84%
Total annual fund operating expenses 3 1.34%
1. This fee is only for market timers (see page #).
2. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated for the current fiscal year.
3. The manager and administrator have agreed in advance to limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund. With this reduction, management and administration fees
are estimated to be 0.26% and total annual fund operating expenses are
estimated to be 0.90% for the current fiscal year. The manager and
administrator may end this arrangement at any time upon notice to the fund's
Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS
- ------------------------------------------------------------------------------
$136 $425
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
THERESA SPATH CFA, Portfolio Manager of Advisers
Ms. Spath has been a manager of the fund since its inception. She joined the
Franklin Templeton Group in 1994.
JOSEPH R. NUNN, Portfolio Manager of Advisers
Mr. Nunn has been a manager of the fund since its inception. He joined the
Franklin Templeton Group in 1997. Previously, he worked in corporate finance
for Alex. Brown & Sons.
EDWARD B. JAMIESON, Executive Vice President of Advisers
Mr. Jamieson has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1987.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million up to and including
$1 billion;
o 0.35% of the value of net assets over $1 billion up to and including
$1.5 billion;
o 0.30% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
o 0.275% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
o 0.25% of the value of net assets over $11.5 billion up to and including
$16.5 billion;
o 0.24% of the value of net assets over $16.5 billion up to and including
$19 billion;
o 0.23% of the value of net assets over $19 billion up to and including
$21.5 billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
THE FRANKLIN SMALL CAP GROWTH FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is long-term capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests at
least 65% of total assets in equity securities of small cap growth companies.
[Begin callout]
The fund invests primarily in small cap growth companies' equity securities.
[End callout]
For purposes of the fund's investments, SMALL CAP GROWTH companies include
companies that have market capitalization of less than $1.5 billion at the
time of the fund's investments that the manager believes are positioned for
rapid growth in revenues or earnings and assets. The manager believes the
securities of these companies may experience significant capital appreciation.
Equity securities generally entitle the holder to participate in a company's
general operating results. They include common stocks, convertible
securities and warrants. These may also include private investments in
companies whose securities are not publicly traded, which may take the form
of letter stock or convertible preferred stock.
In choosing equity investments, the fund's manager considers such factors as
the financial strength of the company, the expertise of management, the
growth potential of the company within its industry, and the growth potential
of the industry itself.
The fund also invests up to 35% of its total assets in equity securities of
larger capitalization companies that the manager believes have the potential
for capital appreciation.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economy are
experiencing excessive volatility or a prolonged general decline, or other
adverse conditions exist. Under these circumstances, the fund may be unable
to pursue its investment goal, because it may not invest or may invest
substantially less in small cap growth companies' equity securities.
[Insert graphic of chart with line going up and down] MAIN RISKS
Historically, small cap company securities have been more volatile in price
than large company securities, especially over the short term. Among the
reasons for the greater price volatility are the less certain growth
prospects of small cap companies, the lower degree of liquidity in the
markets for such securities, and the greater sensitivity of small cap
companies to changing economic conditions.
In addition, small cap companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Small cap companies involve greater risks than larger, more established
companies and should be considered speculative.
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
The prices of growth stocks are based largely on projections of the issuer's
future earnings and revenues. If a company's earnings or revenues fall short
of expectations, its stock price may fall dramatically. Growth stocks may be
more expensive relative to their earnings or assets compared to value or
other stocks. Because the fund invests in growth stocks, its share price may
be more volatile than other types of investments.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past six calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1,2
[Insert bar graph]
21.77% 9.22% 42.20% 27.07% 16.07% 0.35%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 23.42%
WORST QUARTER:
Q3 '98 -23.52%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (2/14/92)
- ---------------------------------------------------------------------------
Small Cap Fund - Advisor Class 2 0.35% 18.11% 17.93%
S&P 500 Index 3 28.58% 24.06% 20.11%
Russell 2500 Index 4 0.38% 14.13% 14.03%
1. As of June 30, 1999, the fund's year-to-date return was []%.
2. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. Source: Standard & Poor's(R) Micropal. The Russell 2500 Index is composed of
the bottom 500 securities in the Russell 1000 Index and all stocks in the
Russell 2000 Index. The largest company in the Russell 2500 Index has a
market capitalization of approximately $1.3 billion. One cannot invest
directly in an index, nor is an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- ----------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- ----------------------------------------------------------------------
Management fees 0.46%
Distribution and service (12b-1) fees None
Other expenses 0.23%
-----------------
Total annual fund operating expenses [3] 0.69%
-----------------
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$70 $221 $384 $859
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
EDWARD B. JAMIESON, Executive Vice President of Advisers
Mr. Jamieson has been a manager of the fund since 1992. He joined the
Franklin Templeton Group in 1987.
MICHAEL MCCARTHY, Vice President of Advisers
Mr. McCarthy has been a manager of the fund since 1993. He joined the
Franklin Templeton Group in 1992.
AIDAN O'CONNELL, Portfolio Manager of Advisers
Mr. O'Connell has been a manager of the fund since 1998. Previously, he was a
research associate and a corporate finance associate at Hambrecht & Quist.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.46% of its average daily net assets to the manager.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED APRIL 30,
- -------------------------------------------------------------
1999 1998 1997 1
- -------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 26.01 18.97 20.48
----------------------------
Net investment income .10 .09 .01
Net realized and unrealized
gains (losses) (1.00) 8.01 (1.52)
----------------------------
Total from investment operations
(.90) 8.10 (1.51)
Distributions from net
investment income (.20) (.13) --
----------------------------
Distributions from net realized
gains (.18) (.93) --
----------------------------
Net asset value, end of year 24.73 26.01 18.97
----------------------------
Total return (%) 2 (3.12) 43.68 (7.37)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 168,055 118,683 18,777
Ratios to average net assets:
(%)
Expenses .69 .64 .69 3
Net investment income .56 .58 .30 3
Portfolio turnover rate (%) 46.73 42.97 55.27
1. For the period January 2, 1997 (effective date) to April 30, 1997.
2. Total return is not annualized.
3. Annualized.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES; YEAR 2000 PROBLEM
INCOME AND CAPITAL GAINS DISTRIBUTIONS The Small Cap Fund intends to pay a
dividend at least semiannually representing its net investment income.
Capital gains, if any, may be distributed annually. The Aggressive Fund and
Large Cap Fund intend to pay a dividend at least annually representing
substantially all of each fund's net investment income and any net realized
capital gains. The amount of this distribution will vary and there is no
guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the funds' distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the funds' shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the funds' distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YEAR 2000 PROBLEM The funds' business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the funds' operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
funds' portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The funds could experience difficulties in effecting transactions if
any of their foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The funds' manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the funds' ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors or certified financial
planners with clients invested in any series of Franklin Mutual Series
Fund Inc. on October 31, 1996, or who buy through a broker-dealer or
service agent who has an agreement with Franklin Templeton Distributors,
Inc. (Distributors). Minimum investments: $1,000 initial and $50
additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial ($50 for accounts with an automatic investment plan) and $50
additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments:
No initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries
or participants, in the case of certain retirement plans, have full or
shared investment discretion. Minimum investments: No initial or
additional minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds. There are certain other
requirements and the group must have a purpose other than buying fund
shares without a sales charge.
Please note that Advisor Class shares of the funds generally are not
available to retirement plans through Franklin Templeton's ValuSelect(R)
program. Retirement plans in the ValuSelect program before January 1, 1998,
however, may invest in the funds' Advisor Class shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of the fund. the fund. Include your
envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#] for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You also may exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund,you also may
exchange your shares for Class A shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class shares if you otherwise qualify to buy the
fund's Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of three proceeds of $1,000 or more wired to a bank or
lightning bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
sure we have your bank account information on
BY WIRE file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below,
directions] or send signed written instructions. See the
policies above for selling shares by mail or
BY EXCHANGE phone.
If you hold share certificates, you will need
to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares
outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund does not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-6243 FSS1PA
Prospectus
Franklin
Strategic Series
INVESTMENT STRATEGY FRANKLIN BIOTECHNOLOGY DISCOVERY FUND - CLASS A
GROWTH
INVESTMENT STRATEGY FRANKLIN GLOBAL HEALTH CARE FUND - CLASS A, B & C
GLOBAL GROWTH
INVESTMENT STRATEGY FRANKLIN GLOBAL UTILITIES FUND - CLASS A, B & C
GLOBAL GROWTH & INCOME
INVESTMENT STRATEGY FRANKLIN NATURAL RESOURCES FUND - CLASS A
GROWTH & INCOME
SEPTEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUNDS
[Begin callout]
INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Franklin Biotechnology Discovery Fund
[insert page #] Franklin Global Health Care Fund
[insert page #] Franklin Global Utilities Fund
[insert page #] Franklin Natural Resources Fund
[insert page #] Distributions and Taxes; Year 2000 Problem
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT EACH FUND
[End callout]
Back Cover
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is to seek capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests
primarily in securities of biotechnology companies and discovery research
firms located in the U.S. and other countries. The fund normally invests at
least 65% of its assets in equity securities of biotechnology companies. The
fund may also invest up to 35% of its assets in debt securities of any type
of foreign or U.S. issuer. The fund invests a substantial portion of its
assets in smaller capitalization companies, which are generally companies
with a market capitalization of less than $1.5 billion at the time of the
fund's investment.
[Begin callout]
The fund normally invests at least 65% of its assets in equity securities of
biotechnology companies.
[End callout]
For the fund's investment purposes, a biotechnology company is one that has
at least 50% of its earnings derived from biotechnology activities, or at
least 50% of its assets devoted to such activities, based on the company's
most recent fiscal year. Biotechnology activities are research, development,
manufacture, and distribution of various biotechnological or biomedical
products, services, and processes. This may include companies involved with
genomics, genetic engineering, and gene therapy. It also includes companies
involved in the application and development of biotechnology in areas such as
healthcare, pharmaceuticals, and agriculture.
Equity securities generally entitle the holder to participate in a company's
general operating results. These include common stocks, preferred stocks and
convertible securities, as well as warrants and rights. Debt securities
represent an obligation of the issuer to repay a loan of money to it, and
generally provide for the payment of interest. These include bonds, notes
and debentures; commercial paper; and bankers' acceptances. The fund
generally buys debt securities that are rated investment grade or unrated
securities that it determines to be of comparable quality. Investment grade
debt securities are rated in the top four ratings categories by independent
rating organizations such as Standard & Poor's Corporation or Moody's
Investors Service, Inc. The fund intends to invest less than 5% in debt
securities rated below investment grade.
The fund anticipates that under normal conditions, it will invest more of its
assets in U.S. securities than in securities of any other single country,
although the fund may have more than 50% of its total assets in foreign
securities. The fund may buy foreign securities that are traded in the U.S.
or in foreign markets, as well as American, European, and Global Depositary
Receipts. Depositary receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or domestic company.
From time to time, the fund may engage in short sale transactions. In a short
sale transaction the fund generally sells a security that it does not own
with the expectation that it will later be able to buy the security in the
market at a lower price, thereby yielding a profit. The fund may also from
time to time make private investments in companies whose securities are not
publicly traded. These investments typically will take the form of letter
stock or convertible preferred stock. Because these securities are not
publicly traded, there is no secondary market for the securities. The fund
will treat these securities as illiquid.
When the fund's assets total $150 million, no new accounts, other than
retirement plan accounts, will be accepted. If you are a shareholder of
record at that time, you will be able to continue to add to your existing
account through new purchases, including purchases through reinvestment of
dividends or capital gains distributions. The fund reserves the right to
modify this policy at any time.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in biotechnology companies and discovery
research firms located in the U.S. and other countries.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
BIOTECHNOLOGY INDUSTRY The biotechnology industry is subject to extensive
government regulation. The industry will be affected by government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability, and similar matters. For example, in the
past several years, the U.S. Congress has considered legislation concerning
healthcare reform and changes to the U.S. Food and Drug Administration's
(FDA) approval process. If such legislation is passed it may affect the
biotechnology industry. As these factors impact the biotechnology industry,
the value of your shares may fluctuate significantly over relatively short
periods of time.
Because the biotechnology industry is relatively new, investors may be quick
to react to developments that affect the industry. In the past, biotechnology
securities have exhibited considerable volatility in reaction to research and
other developments. In comparison to more developed industries, there may be
a thin trading market in biotechnology securities, and adverse developments
in the biotechnology industry may be more likely to result in decreases in
the value of biotechnology stocks.
Biotechnology companies are often small, start-up ventures whose products are
only in the research stage. Only a limited number of biotechnology companies
have reached the point of approval of products by the FDA and subsequent
commercial production and distribution of such products. Therefore, the
success of investments in the biotechnology industry is often based upon
speculation and expectations about future products, research progress, and
new product filings with regulatory authorities. Such investments are
speculative and may drop sharply in value in response to regulatory or
research setbacks.
YEAR 2000. On April 27, 1999, the U.S. General Accounting Office issued a
report on the readiness of Medicare and the health care sector for Year
2000. Among other things, this report noted that the health care industry
may be ill-prepared to deal with the potential disruptions brought about by
software problems caused by the change to the Year 2000. While the fund's
manager cannot audit each company in which the fund invests, its personnel
have reviewed the statements of preparedness of the companies owned by the
fund and, based upon these statements, does not expect significant
disruptions in these companies' business plans. The fund's manager will
continue to monitor the Year 2000 issue within the health care industry and
continue actively to incorporate Year 2000 preparedness as a factor in its
analysis of the fund's holdings.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of smaller companies, the lower degree of liquidity in the
markets for such securities and the greater sensitivity of smaller companies
to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services which for which markets are
not yet established and may never become established.
Smaller companies involve greater risks than larger, more established
companies and should be considered speculative.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
INTEREST RATE When interest rates go up, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these
price changes.
SHORT SALES Short sales carry risks of loss if the price of the security sold
short increases after the sale. In this situation, when the fund replaces the
borrowed security by buying the security in the securities markets, the fund
may pay more for the security than it has received from the purchaser in the
short sale.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event. Reduced liquidity in the secondary market for certain
securities also may make it more difficult for the fund to obtain market
quotations based on actual trades for the purpose of valuing the fund's
portfolio.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares. The fund, however,
intends to meet certain tax diversification requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This information gives some indication of the risks of investing in the fund
by comparing the fund's performance with a broad-based securities market
index. Of course, past performance cannot predict or guarantee future results.
ANNUAL TOTAL RETURNS 1
[Insert bar graph]
10.73%
98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 21.62%
WORST QUARTER:
Q3 '98 -10.57%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (9/15/97)
- ----------------------------------------------------------
Franklin Biotechnology Discovery 4.35% -2.21%
Fund 2
S&P 500(R) Index 3 28.58% 26.78%
AMEX Biotechnology Index 4 13.98% 9.96%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
4. The unmanaged AMEX Biotechnology Index is an equal-dollar weighted index.
It is designed to measure the performance of a cross section of companies in
the biotechnology industry that are involved primarily in the use of
biological processes to develop products or provide services. It does not
include reinvested dividends.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) as a
percentage of offering price 5.75%
Load imposed on purchases 5.75%
Maximum deferred sales charge (load) None 1
Exchange fee None
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
- ---------------------------------------------------------------
Management fees 0.63%
Distribution and service
(12b-1) fees 2 0.31%
Other expenses 0.58%
--------------------
Total annual fund operating expenses 1.52%
--------------------
1. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
2. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
$721 1 $1,028 $1,356 $2,283
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
KURT VON EMSTER CFA, Vice President of Advisers
Mr. von Emster has been a manager of the fund since 1997. He joined the
Franklin Templeton Group in 1989.
EVAN MCCULLOCH CFA, Vice President of Advisers
Mr. McCulloch has been a manager of the fund since 1997. He joined the
Franklin Templeton Group in 1992.
RUPERT H. JOHNSON, JR., President of Advisers
Mr. Johnson has been a manager of the fund since 1997. He joined the Franklin
Templeton Group in 1965.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.63% of its average daily net assets to the manager.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception.
This information has been audited by PricewaterhouseCoopers LLP.
YEAR ENDED APRIL
30,
- --------------------------------------------------------
1999 1998 1
- --------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 26.89 25.00
-------------------
Net investment loss (.10) (.05)
Net realized and unrealized
gains (losses) (2.96) 1.99
-------------------
Total from investment operations (3.06) 1.94
-------------------
Less distributions from net
realized gains (.42) (.05)
-------------------
Net asset value, end of year 23.41 26.89
-------------------
Total return (%) 2 (11.46) 7.78
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 69,450 73,546
Ratios to average net
assets: (%)
Expenses 1.52 1.50 3
Expenses excluding waiver and
payments by affiliate 1.52 1.61 3
Net investment loss (.40) (.44) 3
Portfolio turnover rate (%) 97.62 75.50
1. For the period September 15, 1997 (effective date) to April 30, 1998.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
FRANKLIN GLOBAL HEALTH CARE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is to seek capital appreciation.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests at
least 70% of its total assets in the equity securities of health care
companies located throughout the world. The fund may also invest up to 30% of
its assets in domestic and foreign debt securities. Equity securities
generally entitle the holder to participate in a company's general operating
results. These include common stocks, preferred stocks and convertible
securities, as well as warrants and rights. Debt securities represent an
obligation of the issuer to repay a loan of money to it, and generally
provide for the payment of interest. These include bonds, notes and
debentures; commercial paper; and bankers' acceptances. The fund invests a
substantial portion of its assets in smaller capitalization companies, which
are generally companies with a market capitalization of less than $1.5
billion at the time of the fund's investment.
The fund will seek to invest in companies that have, in the opinion of the
manager, the potential for above average growth in revenues and/or earnings.
When the manager believes that no attractive investment opportunities exist,
the fund may maintain a significant portion of its assets in cash.
[Begin callout]
The fund normally invests at least 70% of its total assets in the equity
securities of U.S. and foreign health care companies.
[End callout]
For the fund's investment purposes, a health care company is one that derives
at least 50% of its earnings or revenues from health care activities, or has
devoted at least 50% of its assets to such activities, based on the company's
most recent fiscal year. Health care activities include research,
development, production, or distribution of products and services in
industries such as pharmaceutical, biotechnology, health care facilities,
medical supplies, medical technology, managed care companies, health care
related information systems, and personal health care products. The manager
believes that a portfolio of global securities may provide a greater
potential for investment participation in present and future opportunities
that may present themselves in the health care related industries.
The fund invests 70% of its assets in securities of issuers in at least three
different countries. The fund will not invest more than 40% of its net assets
in any one country other than the U.S. The fund expects that a significant
portion of its investments will be in securities of domestic issuers. The
fund may buy American, European, and Global Depositary Receipts. Depositary
receipts are certificates typically issued by a bank or trust company that
give their holders the right to receive securities issued by a foreign or
domestic company.
The fund may buy debt securities that are rated B or better by Standard &
Poor's Corporation (S&P) or Moody's Investors Service, Inc. (Moody's), or
unrated securities that it determines to be of comparable quality. At
present, the fund intends to invest less than 5% in debt securities rated
below investment grade. Investment grade debt securities are rated in the top
four ratings categories by independent rating organizations such as S&P and
Moody's.
The fund may also from time to time make private investments in companies
whose securities are not publicly traded. These investments typically will
take the form of letter stock or convertible preferred stock. Because these
securities are not publicly traded, there is no secondary market for the
securities. The fund will treat these securities as illiquid.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in health care companies located throughout
the world.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
HEALTH CARE INDUSTRY The activities of health care companies may be funded or
subsidized by federal and state governments. If government subsidies are
discontinued, the profitability of these companies could be adversely
affected. Stocks held by the fund will be affected by government policies on
health care reimbursements, regulatory approval for new drugs and medical
instruments, and similar matters. Health care companies are also subject to
legislative risk, which is the risk of a reform of the health care system
through legislation. Health care companies may face lawsuits related to
product liability issues. Also, many products and services provided by health
care companies are subject to rapid obsolescence. The value of an investment
in the fund may fluctuate significantly over relatively short periods of time.
YEAR 2000. On April 27, 1999, the U.S. General Accounting Office issued a
report on the readiness of Medicare and the health care sector for Year
2000. Among other things, this report noted that the health care industry
may be ill-prepared to deal with the potential disruptions brought about by
software problems caused by the change to the Year 2000. While the fund's
manager cannot audit each company in which the fund invests, its personnel
have reviewed the statements of preparedness of the companies owned by the
fund and, based upon these statements, does not expect significant
disruptions in these companies' business plans. The fund's manager will
continue to monitor the Year 2000 issue within the health care industry and
continue actively to incorporate Year 2000 preparedness as a factor in its
analysis of the fund's holdings.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of smaller companies, the lower degree of liquidity in the
markets for such securities and the greater sensitivity of smaller companies
to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services which for which markets are
not yet established and may never become established.
Smaller companies involve greater risks than larger, more established
companies and should be considered speculative.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
INTEREST RATE When interest rates go up, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these
price changes.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares. The fund, however,
intends to meet certain tax diversification requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 6 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
6.21% 14.29% 54.59% 16.47% 10.20% -7.54%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q3 '95 22.17%
WORST QUARTER:
Q3 '98 -17.73%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (2/14/92)
- ----------------------------------------------------------------
Franklin Global Health Care
Fund - Class A 2 -12.85% 14.60% 11.47%
S&P 500(R)Index 3 28.58% 24.06% 20.10%
SINCE
INCEPTION
1 YEAR (9/3/96)
- ----------------------------------------------------------------
Franklin Global Health Care
Fund - Class C 2 -9.97% 1.95%
S&P 500(R) Index 3 28.58% 33.34%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- --------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 3 4.00% 0.99% 4
(load)
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)[6]
CLASS A 1 CLASS B 2 CLASS C 1
- --------------------------------------------------------------------
Management fees 0.59% 0.59% 0.59%
Distribution and service
(12b-1) fees 5 0.25% 1.00% 0.98%
Other expenses 0.50% 0.50% 0.50%
-------------------------------
Total annual fund operating expenses 1.34% 2.09% 2.07%
-------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1999. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
CLASS A $704 1 $975 $1,267 $2,095
CLASS B
Assuming you sold your
shares at the end of the $612 $955 $1,324 $2,229 2
period
Assuming you stayed in the
fund $212 $655 $1,124 $2,229 2
CLASS C $406 3 $742 $1,202 $2,476
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $308 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
KURT VON EMSTER CFA, Vice President of Advisers
Mr. von Emster has been a manager of the fund since 1997. He joined the
Franklin Templeton Group in 1989.
EVAN MCCULLOCH CFA, Vice President of Advisers
Mr. McCulloch has been a manager of the fund since 1997. He joined the
Franklin Templeton Group in 1992.
RUPERT H. JOHNSON, JR., President of Advisers
Mr. Johnson has been a manager of the fund since 1997. He joined the Franklin
Templeton Group in 1965.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.59% of its average daily net assets to the manager.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED APRIL 30,
- ---------------------------------------------------------------------
1999 1998 1997 1 1996 1995
- ---------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 19.28 16.11 19.34 11.45 10.43
----------------------------------------
Net investment income (.16) (.14) (.06) .11 .08
(loss)
Net realized and
unrealized (5.23) 4.58 (2.75) 8.96 1.56
gains (losses)
----------------------------------------
Total from investment
operations (5.39) 4.44 (2.81) 9.07 1.64
----------------------------------------
Dividends from net
investment income -- (.09) (.04) (.13) (.06)
Distributions from net
realized gains (.01) (1.18) (.38) (1.05) (.56)
----------------------------------------
Total distributions (.01) (1.27) (.42) (1.18) (.62)
----------------------------------------
Net asset value, end of year 13.88 19.28 16.11 19.34 11.45
----------------------------------------
Total return (%) 2 (27.95) 28.22 (14.71) 82.78 16.33
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 74,252 176,545 150,653 108,914 12,906
Ratios to average net
assets: (%)
Expenses 1.34 1.15 1.14 .73 .25
Expenses excluding waiver
and payments by affiliate 1.34 1.15 1.14 1.16 1.37
Net investment income (.72) (.67) (.39) .50 .80
(loss)
Portfolio turnover rate (%) 66.54 66.84 73.17 54.78 93.79
CLASS B 3
- -------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of period 16.97
--------
Net investment loss (.03)
Net realized and
unrealized (3.10)
losses
--------
Total from investment
operations (3.13)
--------
Net asset value, end of 13.84
period
--------
Total return (%) 2 (18.44)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
($ x 1,000) 208
Ratios to average net
assets: (%)
Expenses 1.84 4
Net investment loss (1.22) 4
Portfolio turnover rate (%) 66.54
CLASS C
- -----------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 19.17 16.07 17.37
------------------------
Net investment loss (.29) (.20) (.07)
Net realized and
unrealized (5.16) 4.48 (.85)
gains (losses)
------------------------
Total from investment
operations (5.45) 4.28 (.92)
Distributions from net
realized gains (.01) (1.18) (.38)
------------------------
Net asset value, end of year 13.71 19.17 16.07
------------------------
Total return (%) 2 (28.42) 27.22 (5.47)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 13,747 25,321 10,099
Ratios to average net
assets: (%)
Expenses 2.07 1.90 1.92 4
Net investment loss (1.45) (1.44) (1.29)4
Portfolio turnover rate (%) 66.54 66.84 73.17
1. For the period September 3, 1996 (effective date) to April 30, 1997, for
Class C.
2. Total return does not include sales charges, and is not annualized.
3. For the period January 1, 1999 (effective date) to April 30, 1999.
4. Annualized.
FRANKLIN GLOBAL UTILITIES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is to seek to provide total return without incurring
undue risk. Total return consists of both capital appreciation and current
dividend and interest income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests at
least 65% of its total assets in the equity and debt securities of U.S. and
foreign companies in the utilities industries. The fund may invest up to 35%
of its assets in securities of U.S. and foreign issuers outside the utilities
industries. Equity securities generally entitle the holder to participate in
a company's general operating results. These include common stocks,
preferred stocks and convertible securities (including, for this fund,
enhanced convertible securities). Debt securities represent an obligation of
the issuer to repay a loan of money to it, and generally provide for the
payment of interest. These include bonds, notes and debentures; commercial
paper; and bankers' acceptances. The fund may invest a substantial portion of
its assets in smaller capitalization companies, which are generally companies
with a market capitalization of less than $1.5 billion at the time of the
fund's investment.
[Begin callout]
The fund normally invests at least 65% of its total assets in the equity and
debt securities of U.S. and foreign companies in the utilities industries.
[End callout]
For the fund's investment purposes, utilities industries include companies
that are, in the opinion of the manager, primarily engaged in the ownership
or operation of facilities used to generate, transmit or distribute
electricity, telephone communications, cable and other pay television
services, wireless telecommunications, gas or water, or providing internet
connection services.
The fund normally invests at least 65% of its total assets in issuers in at
least three different countries. The fund expects to invest more of its
assets in U.S. securities than in securities of any other single country, but
the fund may invest more than 65% of its total assets in foreign securities.
The fund will limit its investments in Russian securities to 5% of its total
assets. The fund may also buy American, European, and Global Depositary
Receipts. Depositary receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or domestic company.
The fund may buy debt securities that are rated at least Caa by Moody's
Investors Service, Inc. (Moody's) or CCC by Standard & Poor's Corporation
(S&P), or unrated securities that it determines to be of comparable quality.
The fund will not invest more than 5% of its total assets in debt securities
rated below investment grade. Investment grade debt securities are rated in
the top four ratings categories by independent rating organizations such as
S&P or Moody's. The fund will only buy commercial paper rated A-1 or A-2 by
S&P or Prime-1 or Prime-2 by Moody's, or unrated commercial paper that it
determines to be of comparable quality.
The fund may invest in Treasury bills, notes and bonds, which are direct
obligations of the U.S. government, backed by the full faith and credit of
the U.S. Treasury, and in securities issued or guaranteed by federal
agencies. The fund may also invest in securities issued or guaranteed by
foreign governments and their agencies.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in securities of U.S. and foreign companies
in the utilities industries.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
UTILITIES INDUSTRIES Utility company securities are particularly sensitive to
interest rate movements: when interest rates rise, the stock prices of these
companies tend to fall. In addition, utility companies are generally subject
to substantial regulations. While regulations may cause certain companies to
develop more profitable opportunities, others may be forced to defend their
core businesses and may be less profitable.
Electric utilities have historically been subject to the risks associated
with increases in fuel and other operating costs, high interest costs on
borrowings, costs associated with compliance with environmental, nuclear
facility, and other safety regulations, and changes in the regulatory
climate. Increased scrutiny of electric utilities may result in higher costs
and higher capital expenditures, with the risk that regulators may not allow
these costs to be included in rate authorizations.
Increasing competition due to past regulatory changes in the telephone
communications industry continues and, whereas certain companies have
benefited, many companies may be adversely affected in the future.
The cable television industry is regulated in most countries and, although
such companies typically have a local monopoly, emerging technologies and
pro-competitive legislation are combining to threaten these monopolies and
could change the future outlook.
The wireless telecommunications industry is in its early developmental
stages, and is predominantly characterized by emerging, rapidly growing
companies. Gas transmission and distribution companies continue to undergo
significant changes as well. Many companies have diversified into oil and gas
exploration and development, making returns more sensitive to energy prices.
The water supply industry is highly fragmented due to local ownership.
Generally, these companies are more mature and expect little or no per capita
volume growth.
There is no assurance that favorable developments will occur in the utility
industries generally or that investment opportunities will continue to
undergo significant changes or growth.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of smaller companies, the lower degree of liquidity in the
markets for such securities and the greater sensitivity of smaller companies
to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services which for which markets are
not yet established and may never become established.
Smaller companies involve greater risks than larger, more established
companies and should be considered speculative.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
INTEREST RATE When interest rates go up, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these
price changes.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event. Reduced liquidity in the secondary market for certain
securities also may make it more difficult for the fund to obtain market
quotations based on actual trades for the purpose of valuing the fund's
portfolio.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares. The fund, however,
intends to meet certain tax diversification requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 6 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS1
[Insert bar graph]
31.43% -8.79% 27.47% 15.01% 26.96% 6.48%
93 94 95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 12.56%
WORST QUARTER:
Q3 '98 -12.94%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR 5 YEARS (7/2/92)
- ----------------------------------------------------------------
Franklin Global Utilities
Fund - Class A 2 0.33% 11.25% 14.14%
S&P 500(R)Index 3 28.58% 24.06% 21.24%
SINCE
INCEPTION
1 YEAR (5/1/95)
- ----------------------------------------------------------------
Franklin Global Utilities
Fund - Class C 2 3.71% 17.34%
S&P 500(R)Index 3 28.58% 29.33%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- --------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge None 3 4.00% 0.99% 4
(load)
Exchange fee None None None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)[6]
CLASS A 1 CLASS B 2 CLASS C 1
- --------------------------------------------------------------------
Management fees 0.56% 0.56% 0.56%
Distribution and service
(12b-1) fees 5 0.25% 1.00% 1.00%
Other expenses 0.24% 0.24% 0.24%
-------------------------------
Total annual fund operating expenses 1.05% 1.80% 1.80%
-------------------------------
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1999. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
CLASS A $676 1 $890 $1,121 $1,784
CLASS B
Assuming you sold your
shares at the end of the $583 $866 $1,175 $1,919 2
period
Assuming you stayed in the
fund $183 $566 $975 $1,919 2
CLASS C $379 3 $661 $1,065 $2,195
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $281 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
IAN LINK CFA, Vice President of Advisers
Mr. Link has been a manager of the fund since 1995. He joined the Franklin
Templeton Group in 1989.
ALEX PETERS, Portfolio Manager of Advisers
Mr. Peters has been a manager of the fund since 1998. He joined the Franklin
Templeton Group in 1992.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, the fund paid
0.56% of its average daily net assets to the manager.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance for the past five years.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED APRIL 30,
- ---------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 17.36 14.46 14.28 12.23 12.60
----------------------------------------
Net investment income .27 .33 .42 .37 .42
Net realized and
unrealized .31 4.69 1.35 2.39 (.07)
gains (losses)
----------------------------------------
Total from investment
operations .58 5.02 1.77 2.76 .35
----------------------------------------
Dividends from net
investment income (.19) (.37) (.38) (.39) (.36)
Distributions from net
realized gains (.78) (1.75) (1.21) (.32) (.36)
----------------------------------------
Total distributions (.97) (2.12) (1.59) (.71) (.72)
----------------------------------------
Net asset value, end of year 16.97 17.36 14.46 14.28 12.23
----------------------------------------
Total return (%) 1 4.02 37.02 12.94 23.27 3.17
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 199,824 226,594 174,023 167,225 119,250
Ratios to average net
assets: (%)
Expenses 1.05 1.03 1.00 1.04 1.12
Net investment income 1.55 2.02 2.82 2.85 3.47
Portfolio turnover rate (%) 68.50 45.51 47.55 50.51 16.65
CLASS B 2
- -------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of period 15.84
--------
Net investment income .02
Net realized and
unrealized 1.06
gains
--------
Total from investment
operations 1.08
--------
Net asset value, end of 16.92
period
--------
Total return (%) 1 6.82
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
($ x 1,000) 79
Ratios to average net
assets: (%)
Expenses 1.80 3
Net investment income .83 3
Portfolio turnover rate (%) 68.50
CLASS C
- -------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 17.25 14.37 14.24 12.23
--------------------------------
Net investment income .14 .24 .32 .37
Net realized and
unrealized .32 4.66 1.33 2.32
gains
--------------------------------
Total from investment
operations .46 4.90 1.65 2.69
--------------------------------
Dividends from net
investment income (.08) (.27) (.31) (.36)
Distributions from net
realized gains (.78) (1.75) (1.21) (.32)
--------------------------------
Total distributions (.86) (2.02) (1.52) (.68)
--------------------------------
Net asset value, end of year 16.85 17.25 14.37 14.24
--------------------------------
Total return (%) 1 3.19 36.21 12.04 22.63
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 16,807 16,324 8,467 2,727
Ratios to average net
assets: (%)
Expenses 1.80 1.78 1.77 1.81
Net investment income .81 1.29 1.98 2.10
Portfolio turnover rate (%) 68.50 45.51 47.55 50.51
1. Total return does not include sales charges, and is not annualized.
2. For the period January 1, 1999 (effective date) to April 30, 1999.
3. Annualized.
FRANKLIN NATURAL RESOURCES FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is to seek to provide high total return. Total return
consists of both capital appreciation and current dividend and interest
income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests at
least 65% of its assets in the equity and debt securities of U.S. and foreign
companies in the natural resources sector. The fund may also invest up to 35%
of its assets outside the natural resources sector, including in U.S. and
foreign equity and debt securities and up to 10% of its assets in real estate
investment trusts (REITs). Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities. Debt securities
represent an obligation of the issuer to repay a loan of money to it, and
generally provide for the payment of interest. These include bonds, notes
and debentures; commercial paper; and bankers' acceptances. The fund invests
a substantial portion of its assets in smaller capitalization companies,
which are generally companies with a market capitalization of less than $1.5
billion at the time of the fund's investment.
[Begin callout]
The fund normally invests at least 65% of its assets in the equity and debt
securities of U.S. and foreign companies in the natural resources sector.
[End callout]
For the fund's investment purposes, the natural resources sector includes
companies that own, produce, refine, process, and market natural resources
and companies that provide related services. The sector includes the
following industries: integrated oil, oil and gas exploration and production,
gold and precious metals, steel and iron ore production, aluminum production,
forest products, farming products, paper products, chemicals, building
materials, energy services and technology, and environmental services.
The fund expects to invest more of its assets in U.S. securities than in
securities of any other single country, but the fund may invest more than 50%
of its total assets in foreign securities. The fund may also buy American
Depositary Receipts. Depositary receipts are certificates typically issued by
a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company.
The fund may buy debt securities that are rated B or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Corporation (S&P), or
unrated debt that it determines to be of comparable quality. The fund will
not invest more than 15% of its total assets in lower-rated securities (rated
lower than BB by S&P or Ba by Moody's) and unrated securities of comparable
quality. The fund will only buy commercial paper rated A-1 or A-2 by S&P or
Prime-1 or Prime-2 by Moody's, or unrated commercial paper that it determines
to be of comparable quality.
The fund may invest in Treasury bills, notes and bonds, which are direct
obligations of the U.S. government, backed by the full faith and credit of
the U.S. Treasury, and in securities issued or guaranteed by federal
agencies. The fund may also invest in securities issued or guaranteed by
foreign governments and their agencies.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in the equity and debt securities of U.S.
and foreign companies in the natural resources sector.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
NATURAL RESOURCES SECTOR The securities of companies in the natural resources
sector may experience more price volatility than securities of companies in
other industries. Some of the commodities in these industries are subject to
limited pricing flexibility because of similar supply and demand factors.
Others are subject to more broad price fluctuations as a result of the
volatility of the prices for certain raw materials and the instability of
supplies of other materials. These factors can affect the profitability of
companies in the natural resources sector and, as a result, the value of
their securities.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of smaller companies, the lower degree of liquidity in the
markets for such securities and the greater sensitivity of smaller companies
to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services which for which markets are
not yet established and may never become established.
Smaller companies involve greater risks than larger, more established
companies and should be considered speculative.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more
like a debt security when the underlying stock price is low (because it is
assumed it will not be converted). Because its value can be influenced by
many different factors, a convertible security is not as sensitive to
interest rate changes as a similar non-convertible debt security, and
generally has less potential for gain or loss than the underlying stock.
REITS REITs are subject to risks related to the skill of their management,
changes in value of the properties the REITs own, the quality of any credit
extended by the REITs, and general economic and other factors.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
INTEREST RATE When interest rates go up, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these
price changes.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event. Reduced liquidity in the secondary market for certain
securities also may make it more difficult for the fund to obtain market
quotations based on actual trades for the purpose of valuing the fund's
portfolio.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares. The fund, however,
intends to meet certain tax diversification requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 3 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
39.65% 3.67% -26.03%
96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q3 '97 14.88%
WORST QUARTER:
Q3 '98 -19.58%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (6/5/95)
- ---------------------------------------------------------------
Franklin Natural Resources Fund - -30.26% 3.16%
Class A 2
S&P 500(R) Index 3 28.58% 28.55%
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []%.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1
- ---------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75%
Load imposed on purchases 5.75%
Maximum deferred sales charge (load) None 2
Exchange fee 3 $5.00
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A 1
- ---------------------------------------------------------------
Management fees 4 0.62%
Distribution and service
(12b-1) fees 5 0.32%
Other expenses 0.53%
--------------------
Total annual fund operating expenses 4 1.47%
--------------------
1. Before January 1, 1999, Class A shares were designated Class I.
2. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
3. This fee is only for market timers (see page [#]).
4. For the fiscal year ended April 30, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.12% and total annual fund operating expenses were 0.97%. The manager
may end this arrangement at any time upon notice to the fund's Board of
Trustees.
5. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
CLASS A $716 1 $1,013 $1,332 $2,231
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
MICHAEL R. WARD, Portfolio Manager of Advisers
Mr. Ward has been a manager of the fund since April 1999. He joined the
Franklin Templeton Group in 1992.
STEVE LAND, Portfolio Manager of Advisers
Mr. Land has been a manager of the fund since April 1999. He joined the
Franklin Templeton Group in 1997.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, management
fees, before any advance waiver, were 0.62% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.12% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED APRIL 30,
- -------------------------------------------------------------
1999 1998 1997 1996 1
- -------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 15.46 14.07 13.14 10.00
--------------------------------
Net investment income .12 .10 .09 .08
Net realized and
unrealized (2.21) 2.26 1.25 3.22
gains (losses)
--------------------------------
Total from investment
operations (2.09) 2.36 1.34 3.30
--------------------------------
Dividends from net
investment income (.12) (.09) (.09) (.06)
Distributions from net
realized gains -- (.88) (.32) (.10)
--------------------------------
Total distributions (.12) (.97) (.41) (.16)
--------------------------------
Net asset value, end of year 13.25 15.46 14.07 13.14
--------------------------------
Total return (%) 2 (13.42) 17.57 10.23 33.36
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 44,014 62,274 45,386 9,909
Ratios to average net
assets: (%)
Expenses .97 .96 .98 .993
Expenses excluding waiver
and payments by affiliate 1.47 1.31 1.31 1.773
Net investment income .97 .67 .72 1.163
Portfolio turnover rate (%) 74.03 72.93 46.31 59.04
1. For the period June 5, 1995 (effective date) to April 30, 1996.
2. Total return does not include sales charges, and is not annualized.
3. Annualized.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES; YEAR 2000 PROBLEM
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains a fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, a fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of a fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in a fund.
YEAR 2000 PROBLEM Each fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, a fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, a
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. A fund could experience difficulties in effecting transactions if any
of its foreign subcustodians, or if foreign broker-dealers or foreign markets
are not ready for Year 2000.
Each fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, a fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] 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. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- ---------------------------------------------------------------
o Initial sales o No initial o Initial
charge of 5.75% sales charge sales charge of
or less 1%
o Deferred sales o Deferred o Deferred
charge of 1% on sales charge of sales charge of
purchases of $1 4% or less on 1% on shares
million or more shares you sell you sell within
sold within 12 within six years 18 months
months
o Lower annual o Higher annual o Higher
expenses than expenses than annual expenses
Class B or C due Class A (same as than Class A
to lower Class C) due to (same as Class
distribution fees higher B) due to
distribution higher
fees. Automatic distribution
conversion to fees. No
Class A shares conversion to
after eight Class A shares,
years, reducing so annual
future annual expenses do not
expenses. decrease.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. HEALTH CARE FUND AND UTILITIES FUND BEGAN
OFFERING CLASS B SHARES ON JANUARY 1, 1999.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING % OF YOUR NET
PRICE INVESTMENT
- --------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 2.00 2.04
million
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows Biotechnology Fund and
Natural Resources Fund to pay distribution fees of up to 0.35% per year and
Health Care Fund and Utilities Fund to pay distribution fees of up to 0.25%
per year to those who sell and distribute Class A shares and provide other
services to shareholders. Because these fees are paid out of Class A's assets
on an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B - HEALTH CARE FUND AND UTILITIES FUND
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER THIS % IS DEDUCTED
BUYING THEM FROM YOUR PROCEEDS AS A CDSC
- ------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page [#]). After 8 years, your Class B shares automatically convert to Class
A shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows Health Care Fund and
Utilities Fund to pay distribution and other fees of up to 1% per year for
the sale of Class B shares and for services provided to shareholders. Because
these fees are paid out of Class B's assets on an on-going basis, over time
these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
SALES CHARGES - CLASS C - HEALTH CARE FUND AND UTILITIES FUND
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS
WHEN YOU INVEST THIS AMOUNT OF THE OFFERING % OF YOUR NET
PRICE INVESTMENT
- --------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows Health Care Fund and
Utilities Fund to pay distribution and other fees of up to 1% per year for
the sale of Class C shares and for services provided to shareholders. Because
these fees are paid out of Class C's assets on an on-going basis, over time
these fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in
the Franklin Templeton Funds for purposes of calculating the sales charge.
You also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals, institutions and retirement
plans or by investors who reinvest certain distributions and proceeds within
365 days. The CDSC for each class also may be waived for certain redemptions
and distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Plan Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- ----------------------------------------------------------------
INITIAL ADDITIONAL
- ----------------------------------------------------------------
Regular accounts $1,000 $50
- ----------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- ----------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers,
Education IRAs or Roth IRAs)
- ----------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or
Roth IRAs $250 $50
- ----------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- ----------------------------------------------------------------
Full-time employees, officers,
trustees and directors of Franklin
Templeton entities, and their
immediate family members $100 $50
- ----------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- ----------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
Make your check payable Make your check payable
[Insert graphic to the fund. to the fund. Include
of envelope] your account number on
Mail the check and your the check.
BY MAIL signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do
not have a slip,
include a note with
your name, the fund
name, and your account
number.
Mail the check and
deposit slip or note to
Investor Services.
- ----------------------------------------------------------------------
[Insert graphic Call to receive a wire Call to receive a wire
of three control number and wire control number and wire
lightning bolts] instructions. instructions.
Wire the funds and mail To make a same day wire
your signed application investment, please call
BY WIRE to Investor Services. us by 1:00 p.m. pacific
Please include the wire time and make sure your
1-800/632-2301 control number or your wire arrives by 3:00
(or new account number on p.m.
1-650/312-2000 the application.
collect)
To make a same day wire
investment, please call
us by 1:00 p.m. pacific
time and make sure your
wire arrives by 3:00
p.m.
- ----------------------------------------------------------------------
[Insert graphic Call Shareholder Call Shareholder
of two arrows Services at the number Services at the number
pointing in below, or send signed below or our automated
opposite written instructions. TeleFACTS system, or
directions] The TeleFACTS system send signed written
cannot be used to open a instructions.
BY EXCHANGE new account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on information on
1-800/247-1753 exchanges.) exchanges.)
(around-the-clock
access)
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in a fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of Health Care Fund, Utilities Fund and Natural Resources Fund by
transferring money from your paycheck to the fund by electronic funds
transfer. If you are interested, indicate on your application that you would
like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from a fund
in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the funds to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge. Advisor Class shareholders of
another Franklin Templeton Fund also may exchange into Class A of
Biotechnology Fund, Health Care Fund and Utilities Fund without any sales
charge. Advisor Class shareholders who exchange their shares for
Biotechnology Fund, Health Care Fund and Utilities Fund Class A shares and
later decide they would like to exchange into another fund that offers
Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the funds we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
funds against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- ---------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ---------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ---------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] share certificates (if you hold share
certificates) to Investor Services.
BY MAIL Corporate, partnership or trust
accounts may need to send additional
documents.
Specify the fund, the account number
and the dollar value or number of
shares you wish to sell. If you own
both Class A and B shares of Health
Care Fund and Utilities Fund, also
specify the class of shares, otherwise
we will sell your Class A shares first.
Be sure to include all necessary
signatures and any additional
documents, as well as signature
guarantees if required.
A check will be mailed to the name(s)
and address on the account, or
otherwise according to your written
instructions.
- ---------------------------------------------------------------
[Insert graphic of As long as your transaction is for
phone] $100,000 or less, you do not hold share
certificates and you have not changed
BY PHONE your address by phone within the last
15 days, you can sell your shares by
1-800/632-2301 phone.
A check will be mailed to the name(s)
and address on the account. Written
instructions, with a signature
guarantee, are required to send the
check to another address or to make it
payable to another person.
- ---------------------------------------------------------------
[Insert graphic of You can call or write to have
three lightning redemption proceeds of $1,000 or more
bolts] wired to a bank or escrow account. See
the policies above for selling shares
by mail or phone.
Before requesting a bank wire, please
BY WIRE make sure we have your bank account
information on file. If we do not have
this information, you will need to send
written instructions with your bank's
name and address, your bank account
number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by
1:00 p.m. pacific time will be wired
the next business day.
- ---------------------------------------------------------------
[Insert graphic of Obtain a current prospectus for the
two arrows pointing fund you are considering.
in opposite
directions] Call Shareholder Services at the number
below or our automated TeleFACTS
BY EXCHANGE system, or send signed written
instructions. See the policies above
TeleFACTS(R) for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you
access) will need to return them to the fund
before your exchange can be processed.
- ---------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE Each fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The funds' assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the funds'
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS Natural Resources Fund may restrict or refuse exchanges by
market timers. If accepted, each exchange by a market timer will be charged
$5 by Franklin/Templeton Investor Services, Inc., the fund's transfer agent.
Biotechnology Fund, Health Care Fund and Utilities Fund do not allow
investments by market timers. You will be considered a market timer if you
have (i) requested an exchange out of a fund within two weeks of an earlier
exchange request, or (ii) exchanged shares out of a fund more than twice in a
calendar quarter, or (iii) exchanged shares equal to at least $5 million, or
more than 1% of a fund's net assets, or (iv) otherwise seem to follow a
timing pattern. Shares under common ownership or control are combined for
these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies
and reserves certain rights, including:
o The funds may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the funds may change their investment minimums or waive or
lower their minimums for certain purchases.
o The funds may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, each fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
BIOTECHNOLOGY FUND AND NATURAL RESOURCES FUND
CLASS A
- ------------------------------------------
COMMISSION (%) ---
Investment under $50,000 5.00
$50,000 but under $100,000 3.75
$100,000 but under $250,000 2.80
$250,000 but under $500,000 2.00
$500,000 but under $1 1.60
million
$1 million or more up to 1.001
12B-1 FEE TO DEALER 0.252
HEALTH CARE FUND AND UTILITIES FUND
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------
COMMISSION (%) --- 4.00 2.00
Investment under $50,000 5.00 --- ---
$50,000 but under $100,000 3.75 --- ---
$100,000 but under $250,000 2.80 --- ---
$250,000 but under $500,000 2.00 --- ---
$500,000 but under $1 1.60 --- ---
million
$1 million or more up to 1.00 1 --- ---
12B-1 FEE TO DEALER 0.25 0.25 3 1.00 4
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and up to 0.25% on Class A NAV purchases by certain
trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs. For certain retirement plans that do not
qualify to buy Class A shares at NAV but that qualify to buy Class A shares
with a maximum initial sales charge of 4%, a dealer commission of 3.2% may be
paid.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Biotechnology Fund and Natural Resources Fund may pay up to 0.35% to
Distributors or others, out of which 0.10% generally will be retained by
Distributors for its distribution expenses. Biotechnology Fund will not
reimburse Distributors the additional 0.10% during periods when the fund is
closed to new investors.
3. Dealers may be eligible to receive up to 0.25% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
4. Dealers may be eligible to receive up to 0.25% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the funds or your account, you can write to
us at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one
of the following numbers. For your protection and to help ensure we provide
you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- -----------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan
Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional 1-800/321-8563 6:00 a.m. to 5:00 p.m.
Services
TDD (hearing 1-800/851-0637 5:30 a.m. to 5:00 p.m.
impaired)
FOR MORE INFORMATION
You can learn more about each fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about each fund, its investments and policies. It
is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about each fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-6243 FSS2 P 09/99
Prospectus
Franklin Natural Resources Fund
ADVISOR CLASS
INVESTMENT STRATEGY Growth & Income
SEPTEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's goal is to seek to provide high total return. Total return
consists of both capital appreciation and current dividend and interest
income.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund invests at
least 65% of its assets in the equity and debt securities of U.S. and foreign
companies in the natural resources sector. The fund may also invest up to 35%
of its assets outside the natural resources sector, including in U.S. and
foreign equity and debt securities and up to 10% of its assets in real estate
investment trusts (REITs). Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks, preferred stocks and convertible securities. Debt securities
represent an obligation of the issuer to repay a loan of money to it, and
generally provide for the payment of interest. These include bonds, notes
and debentures; commercial paper; and bankers' acceptances. The fund invests
a substantial portion of its assets in smaller capitalization companies,
which are generally companies with a market capitalization of less than $1.5
billion at the time of the fund's investment.
[Begin callout]
The fund normally invests at least 65% of its assets in the equity and debt
securities of U.S. and foreign companies in the natural resources sector.
[End callout]
For the fund's investment purposes, the natural resources sector includes
companies that own, produce, refine, process, and market natural resources
and companies that provide related services. The sector includes the
following industries: integrated oil, oil and gas exploration and production,
gold and precious metals, steel and iron ore production, aluminum production,
forest products, farming products, paper products, chemicals, building
materials, energy services and technology, and environmental services.
The fund expects to invest more of its assets in U.S. securities than in
securities of any other single country, but the fund may invest more than 50%
of its total assets in foreign securities. The fund may also buy American
Depositary Receipts. Depositary receipts are certificates typically issued by
a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company.
The fund may buy debt securities that are rated B or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Corporation (S&P), or
unrated debt that it determines to be of comparable quality. The fund will
not invest more than 15% of its total assets in lower-rated securities (rated
lower than BB by S&P or Ba by Moody's) and unrated securities of comparable
quality. The fund will only buy commercial paper rated A-1 or A-2 by S&P or
Prime-1 or Prime-2 by Moody's, or unrated commercial paper that it determines
to be of comparable quality.
The fund may invest in Treasury bills, notes and bonds, which are direct
obligations of the U.S. government, backed by the full faith and credit of
the U.S. Treasury, and in securities issued or guaranteed by federal
agencies. The fund may also invest in securities issued or guaranteed by
foreign governments and their agencies.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when the securities trading markets or the economies of countries where the
fund invests are experiencing excessive volatility or a prolonged general
decline, or other adverse conditions exist. Under these circumstances, the
fund may be unable to pursue its investment goal, because it may not invest
or may invest substantially less in the equity and debt securities of U.S.
and foreign companies in the natural resources sector.
[Insert graphic of chart with line going up and down] MAIN RISKS
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole.
[Begin callout]
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
NATURAL RESOURCES SECTOR The securities of companies in the natural resources
sector may experience more price volatility than securities of companies in
other industries. Some of the commodities in these industries are subject to
limited pricing flexibility because of similar supply and demand factors.
Others are subject to more broad price fluctuations as a result of the
volatility of the prices for certain raw materials and the instability of
supplies of other materials. These factors can affect the profitability of
companies in the natural resources sector and, as a result, the value of
their securities.
SMALLER COMPANIES Historically, smaller company securities have been more
volatile in price than larger company securities, especially over the short
term. Among the reasons for the greater price volatility are the less certain
growth prospects of smaller companies, the lower degree of liquidity in the
markets for such securities and the greater sensitivity of smaller companies
to changing economic conditions.
In addition, smaller companies may lack depth of management, they may be
unable to generate funds necessary for growth or development or they may be
developing or marketing new products or services which for which markets are
not yet established and may never become established.
Smaller companies involve greater risks than larger, more established
companies and should be considered speculative.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
The fund's investments in developing or emerging markets are subject to all
of the risks of foreign investing generally, and have additional heightened
risks due to a lack of established legal, political, business and social
frameworks to support securities markets. Foreign securities markets,
including emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the
U.S. While short-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
MARKET A security's value may be reduced by market activity or the results
of supply and demand. This is a basic risk associated with all securities.
When there are more sellers than buyers, prices tend to fall. Likewise, when
there are more buyers than sellers, prices tend to go up.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more
like a debt security when the underlying stock price is low (because it is
assumed it will not be converted). Because its value can be influenced by
many different factors, a convertible security is not as sensitive to
interest rate changes as a similar non-convertible debt security, and
generally has less potential for gain or loss than the underlying stock.
REITS REITs are subject to risks related to the skill of their management,
changes in value of the properties the REITs own, the quality of any credit
extended by the REITs, and general economic and other factors.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
INTEREST RATE When interest rates go up, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these
price changes.
LIQUIDITY The fund may invest up to 15% of its net assets in securities with
a limited trading market. Reduced liquidity may have an adverse impact on
market price and the fund's ability to sell particular securities when
necessary to meet the fund's liquidity needs or in response to a specific
economic event. Reduced liquidity in the secondary market for certain
securities also may make it more difficult for the fund to obtain market
quotations based on actual trades for the purpose of valuing the fund's
portfolio.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares. The fund, however,
intends to meet certain tax diversification requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 3 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1,2
[Insert bar graph]
39.65% 3.87% -25.59%
96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q3 '97 15.03%
WORST QUARTER:
Q3 '98 -19.53%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (6/5/95)
- -------------------------------------------------------------------
Franklin Natural Resources Fund - Advisor -25.59% 5.11%
Class 2
S&P 500(R) Index 3 28.58% 28.55%
1. As of June 30, 1999, the fund's year-to-date return was []%.
2. Performance figures reflect a "blended" figure combining the following
methods of calculation: (a) For periods before January 1, 1997, a restated
figure is used based on the fund's Class A performance, excluding the effect
of Class A's maximum initial sales charge and including the effect of the
Class A distribution and service (12b-1) fees; and (b) for periods after
January 1, 1997, an actual Advisor Class figure is used reflecting a
deduction of all applicable charges and fees for that class. This blended
figure assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged
group of widely held common stocks covering a variety of industries. It
includes reinvested dividends. One cannot invest directly in an index, nor is
an index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee 1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Management fees 2 .62%
Distribution and service (12b-1) fees None
Other expenses .53%
----------
Total annual fund operating expenses 2 1.15%
----------
1. This fee is only for market timers (see page [#]).
2. For the fiscal year ended April 30, 1999, the manager had agreed in
advance to limit its management fees. With this reduction, management fees
were 0.12% and total annual fund operating expenses were 0.65%. The manager
may end this arrangement at any time upon notice to the fund's Board of
Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$117 $365 $633 $1,398
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
MICHAEL R. WARD, Portfolio Manager of Advisers
Mr. Ward has been a manager of the fund since April 1999. He joined the
Franklin Templeton Group in 1992.
STEVE LAND, Portfolio Manager of Advisers
Mr. Land has been a manager of the fund since April 1999. He joined the
Franklin Templeton Group in 1997.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, management
fees, before any advance waiver, were 0.62% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.12% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least semiannually in June and December representing its net investment
income. Capital gains, if any, may be distributed annually. The amount of
these distributions will vary and there is no guarantee the fund will pay
dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the financial performance for Advisor Class since its
inception. This information has been audited by PricewaterhouseCoopers LLP.
ADVISOR CLASS YEAR ENDED APRIL 30,
- -------------------------------------------------------------
1999 1998 1997 1
- -------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 15.48 14.07 14.66
----------------------------
Net investment income .19 .23 --
Net realized and unrealized
gains (losses) (1.85) 2.20 (.59)
----------------------------
Total from investment operations
(1.66) 2.43 (.59)
----------------------------
Less distributions from:
Net investment income (.19) (.14) --
Net realized gains -- (.88) --
----------------------------
Total distributions (.19) (1.02) --
----------------------------
Net asset value, end of year 13.63 15.48 14.07
----------------------------
Total return (%) 2 (10.48) 18.11 (4.02)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year ($ x
1,000) 319 892 1,123
Ratios to average net assets:
(%)
Expenses .65 .64 .64 3
Expenses excluding waiver
and payments by affiliate 1.15 1.03 .86 3
Net investment income 1.29 1.02 1.03 3
Portfolio turnover rate (%) 74.03 72.93 46.31
1. For the period January 2, 1997 (effective date) to April 30, 1997.
2. Total return is not annualized.
3. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"]QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors or certified financial planners
with clients invested in any series of Franklin Mutual Series Fund Inc. on
October 31, 1996, or who buy through a broker-dealer or service agent who
has an agreement with Franklin Templeton Distributors, Inc. (Distributors).
Minimum investments: $1,000 initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial ($50
for accounts with an automatic investment plan) and $50 additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments: No
initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section
401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $50 additional. For
minimum investment purposes, the group's investments are added together.
The group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as
$1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds. There are certain other requirements and the group must
have a purpose other than buying fund shares without a sales charge.
Please note that Advisor Class shares of the fund generally are not available
to retirement plans through Franklin Templeton's ValuSelect(R) program.
Retirement plans in the ValuSelect program before January 1, 1998, however,
may invest in the fund's Advisor Class shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of Franklin Natural Resources Franklin Natural Resources
envelope] Fund. Fund. Include your account
number on the check.
BY MAIL Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#] for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You also may exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, you also may
exchange your shares for Class A shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class shares if you otherwise qualify to buy the
fund's Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of three proceeds of $1,000 or more wired to a bank or
lightning bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
sure we have your bank account information on
BY WIRE file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below,
directions] or send signed written instructions. See the
policies above for selling shares by mail or
BY EXCHANGE phone.
If you hold share certificates, you will need
to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares
outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You
will be considered a market timer if you have (i) requested an exchange out
of the fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to make
payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-6243 403 PA 09/99
Prospectus
Franklin U.S. Long-Short Fund
INVESTMENT STRATEGY GROWTH
SEPTEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goals and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Sales Charges
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOALS The fund's principal investment goals are to provide long-term capital
appreciation in both bull and bear (up or down) markets and to maintain
reduced exposure to the overall equity market.
PRINCIPAL INVESTMENTS The fund seeks to achieve its investment goals by
always having both long and short positions in equity securities, primarily
those of U.S. companies. The investment philosophy of the fund is that a
combination of long (outright stock purchases) and short (sales of borrowed
securities) equity positions can provide positive returns in either up or
down markets as well as reduce overall risk. The fund manager constructs the
fund's portfolio on a stock by stock basis looking for stocks with favorable
risk/reward profiles. Every purchase is evaluated by weighing the potential
gains against associated risks. The fund buys stocks "long" that it believes
are positioned for outperformance and sells stocks "short" that it believes
are positioned for underperformance or depreciation in price.
While the fund manager does not attempt to time the direction of the market,
the fund maintains the flexibility to shift its net exposure (the value of
securities held long minus the value of securities held short) depending on
the relative attractiveness of long versus short opportunities in the
market.
The fund invests the substantial majority of its assets (80-100%) in stocks
that trade in the U.S., including American Depositary Receipts of foreign
issuers. The fund may also invest in Canadian equities that are traded in
the U.S. or in Canada. Equity securities include common and preferred
stocks. Equity securities generally entitle the holder to participate in a
company's general operating results. Although the fund anticipates investing
mainly in equities of larger companies, there may be times when the fund may
have significant positions in smaller companies (those with a market
capitalization of less than $1 billion). In addition, the fund may, at
times, hold up to 20% of its assets in cash and cash equivalents and borrow
from banks in an amount up to one-third of the value of its total assets.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
[End callout]
STOCKS. While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole. Although the fund
seeks to minimize the fund's exposure to general equity market risk by using
a short portfolio to offset the fund's long portfolio, the fund cannot
eliminate all risk. Due to the composition of the portfolio, however, you
should expect the fund to fluctuate independently of the overall stock market
as represented by indices such as the S&P 500 and the NASDAQ.
MANAGEMENT. Despite the intent to reduce risk, it is possible that the
fund's long positions will decline in value at the same time that the value
of the securities sold short increases thereby increasing the potential for
loss. It is also possible that the fund manager will misjudge the effect a
particular security or combination of securities will have on the overall
portfolio, which may adversely affect the portfolio's ability to reduce
market risk.
SHORT SALES. Short positions are established by selling a security the fund
does not own to a purchaser at a specified price and delivering a security
that it has borrowed. To complete the short sale transaction, the fund buys
the same security in the market and returns it to the borrower. The fund
makes money when the market price of the security decreases after the sale.
Conversely, if the price of the security goes up after the sale, the fund
will lose money.
There can also be no assurance that the fund will be able to close out a
short position at any particular time or at an acceptable price. A lender
may request the borrowed securities be returned to it on short notice and, if
this occurs at a time when other short sellers of the same security are
receiving similar requests, a "short squeeze" can occur. A short squeeze is
where demand exceeds supply for the stock sold short. The potential
consequence of a short squeeze is that the fund will have to cover its short
sale by purchasing the same security at an unfavorable price. If that
happens, the fund will lose some or all of the potential profit from, or even
incur a loss as a result of, the short sale.
Until the fund replaces a borrowed security, it will maintain daily a
segregated account with a broker or custodian as required by law. The fund
is also required to repay the lender any dividends or interest that accrue
during the period of the loan. Depending on the arrangements made with the
broker or custodian, the fund may or may not receive any payments (including
interest) on collateral deposited with the broker or custodian.
In addition, short selling may produce higher than normal portfolio turnover
and result in increased transaction costs to the fund.
CANADIAN SECURITIES. Securities of companies located in Canada may offer
significant opportunities for gain, but they also offer additional risks that
can increase the potential losses for the fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the funds share
price.
The political, economic and social structures of Canada may be less stable
and more volatile than those in the U.S. In particular, the Canadian economy
is very dependent on the demand, supply and price of natural resources and,
thus, the activities of companies involved in the production and processing
of natural resources. As a result, the price of Canadian securities may
fluctuate depending on events relating to international politics, energy
conservation and the success of exploration projects. The risks of investing
in that country also include the possibility of exchange controls,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets and punitive taxes.
CURRENCY. Investments in Canadian equities are denominated in Canadian
dollars. Changes in the Canadian dollar exchange rate will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
BORROWING/LEVERAGE. When the fund borrows to increase the fund's gross
exposure (combined long and short exposure) and enhance returns, it creates
special risk considerations. Leverage may magnify changes in the fund's net
asset value contributing to increased volatility of returns. The fund's
assets may change in value while the borrowing is outstanding, which may
force the fund to post more collateral. Leverage also creates interest
expense that may reduce overall fund returns.
INVESTMENTS IN SMALLER COMPANIES. Investing in securities of small companies
may involve greater risk than investing in larger company stocks.
Historically, small and mid-size company securities have been more volatile
in price than larger company securities, especially over the short-term.
Among the reasons for the greater price volatility are the less certain
growth prospects of smaller companies, the lower degree of liquidity in the
markets for such securities, and the greater sensitivity of smaller companies
to changing economic conditions.
In addition, these companies may lack depth of management, they may be unable
to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established. Such companies may also be
less actively followed by stock analysts and, therefore, less information may
be available on which to base stock price evaluations.
Therefore, while smaller companies may offer greater opportunities for
capital growth than larger more established companies, they also involve
greater risks and should be considered speculative.
PORTFOLIO TURNOVER. The fund manager will exit a position when he believes
it is appropriate to do so, regardless of how long the fund has held or been
short the securities. It is expected that the fund's turnover rate will
exceed 100% per year. The rate of portfolio turnover will not be a limiting
factor for the fund manager in determining what is in the best interests of
the fund's shareholders. High turnover will increase the fund's transaction
costs and may increase your tax liability.
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. The manager, of course, cannot
audit each company and its major suppliers to verify their Year 2000
readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) as a percentage of
offering price 5.75%
Load imposed on purchases 5.75%
Maximum deferred sales charge (load) None1
Exchange fee2 $5.00
Please see "Sales Charges" on page [#] for an explanation of how and when
these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)3
Management fees4 1.00%
Distribution and service
(12b-1) fees5 0.35%
Other expenses4 0.21%
-----------
Total annual fund operating expenses4 1.56%
===========
1. Except for investments of $1 million or more (see page [#])and purchases
by certain retirement plans without an initial sales charge.
2. This fee is only for market timers (see page [#]).
3. The management fees and distribution and service (12b-1) fees shown are
based on the fund's maximum contractual amount. Other expenses are estimated
for the current fiscal year.
4. The manager and administrator have agreed in advance to waive their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund. With this reduction, management and administration fees
are estimated to be 0% and total fund operating expenses are estimated to be
0% for the current fiscal year. The manager and administrator may end this
arrangement at any time upon notice to the fund's Board of Trustees.
5. Because of the distribution and service (12b-1)fees, over the long-term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes
your investment has a 5% return each year and the fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 YEAR 3 YEARS
- ----------------------------------
$ 725 1 $ 1,039
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94403, is the fund's investment manager. Together, Advisers and its
affiliates manage over $227 billion in assets.
The team responsible for the fund's management is:
TIMOTHY D. CHATARD, Portfolio Manager of Advisers
Mr. Chatard has been a manager of the fund since its inception. He joined the
Franklin Templeton Group in 1996. Previously, he was a financial analyst with
Morgan Stanley & Co. Inc.
The following individual has secondary portfolio management responsibilities:
MICHAEL R. WARD, PORTFOLIO MANAGER of Advisers
Mr. Ward has been a manager of the fund since its inception. He joined the
Franklin Templeton Group in 1992.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. The fee is equal to an annual rate of 1%.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market
links. Many of the systems currently use a two digit date field to represent
the date, and unless these systems are changed or modified, they may not be
able to distinguish the Year 1900 from the Year 2000 (commonly referred to as
the Year 2000 problem). In addition, the fact that the Year 2000 is a leap
year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example,
the fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce
the effects of the Year 2000 problem is also very much dependent upon the
efforts of third parties over which the fund and its manager may have no
control.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least annually representing substantially all of its net investment income
and any net realized capital gains. The amount of this distribution will vary
and there is no guarantee the fund will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record date for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares. Short sales may cause a
greater portion of fund distributions to be taxable as ordinary income and
not as capital gains.
[Begin callout]
Backup Withholding
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on
any gain from the sale or exchange of your shares depends on how long you
have held your shares.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
YOUR ACCOUNT
[Insert graphic of percentage sign] SALES CHARGES
THE SALES CHARGE
MAKES UP THIS % WHICH EQUALS THIS
OF THE OFFERING % OF YOUR NET
WHEN YOU INVEST THIS AMOUNT PRICE INVESTMENT
- --------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 2.00 2.04
million
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy shares without an initial sales charge.
However, there is a 1% contingent deferred sales charge (CDSC) on any shares
you sell within 12 months of purchase.
The CDSC is based on the current value of the shares being sold or their net
asset value when purchased, whichever is less. There is no CDSC on shares
you acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.35% per year to those who sell and distribute
the fund's shares and provide other services to shareholders. Because these
fees are paid out of the fund's assets on an on-going basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of fund shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same sales
charge as if all shares had been purchased at one time. We will reserve a
portion of your shares to cover any additional sales charge that may apply
if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. For purposes of this privilege, the fund's shares are considered
Class A shares.
If you paid a CDSC when you sold your Class A shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Fund shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or
by investors who reinvest certain distributions and proceeds within 365 days.
The CDSC also may be waived for certain redemptions and distribuitons. If you
would like information about available sales charge waivers, call your
investment representative or call Shareholder Services at 1-800/632-2301. For
information about retirement plans, you may call Retirement Plan Services at
1-800/527-2020. A list of available sales charge waivers also may be found in
the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- -----------------------------------------------------------------
INITIAL ADDITIONAL
- -----------------------------------------------------------------
Regular accounts $1,000 $50
- -----------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- -----------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers,
Education IRAs or Roth IRAs)
- -----------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or $250 $50
Roth IRAs
- -----------------------------------------------------------------
Broker-dealer sponsored wrap account $250 $50
programs
- -----------------------------------------------------------------
Full-time employees, officers, trustees
and directors of Franklin Templeton
entities, and their immediate family $100 $50
members
- -----------------------------------------------------------------
Certain Franklin Templeton Funds offer multiple share classes not offered by
this fund. Please note that for selling or exchanging your shares, or for
other purposes, the fund's shares are considered Class A shares.
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- ----------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ----------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- ----------------------------------------------------------------------
Make your check payable Make your check payable
[Insert graphic to Franklin U.S. to Franklin U.S.
of envelope] Long-Short Fund. Long-Short Fund.
Include your account
BY MAIL Mail the check and your number on the check.
signed application to
Investor Services. Fill out the deposit
slip from your account
statement. If you do
not have a slip,
include a note with
your name, the fund
name, and your account
number.
Mail the check and
deposit slip or note to
Investor Services.
- ----------------------------------------------------------------------
[Insert graphic Call to receive a wire Call to receive a wire
of three control number and wire control number and wire
lightning bolts] instructions. instructions.
Wire the funds and mail To make a same day wire
your signed application investment, please call
BY WIRE to Investor Services. us by 1:00 p.m. pacific
Please include the wire time and make sure your
1-800/632-2301 control number or your wire arrives by 3:00
(or new account number on p.m.
1-650/312-2000 the application.
collect)
To make a same day wire
investment, please call
us by 1:00 p.m. pacific
time and make sure your
wire arrives by 3:00
p.m.
- ----------------------------------------------------------------------
[Insert graphic Call Shareholder Call Shareholder
of two arrows Services at the number Services at the number
pointing in below, or send signed below or our automated
opposite written instructions. TeleFACTS system, or
directions] The TeleFACTS system send signed written
cannot be used to open a instructions.
BY EXCHANGE new account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on information on
1-800/247-1753 exchanges.) exchanges.)
(around-the-clock
access)
- ----------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also
have the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into the fund without any sales charge. Advisor Class shareholders
of another Franklin Templeton Fund also may exchange into the fund without
any sales charge.Advisor Class shareholders who exchange their shares for
shares of the fund and later decide they would like to exchange into another
fund that offers Advisor Class may do so.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply.
To sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can
be made over the phone or with a simple letter. Sometimes, however, to
protect you and the fund we will need written instructions signed by all
registered owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified
or cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- ---------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- ---------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- ---------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed
envelope] share certificates (if you hold share
certificates) to Investor Services.
BY MAIL Corporate, partnership or trust
accounts may need to send additional
documents.
Specify the fund, the account number
and the dollar value or number of
shares you wish to sell. Be sure to
include all necessary signatures and
any additional documents, as well as
signature guarantees if required.
A check will be mailed to the name(s)
and address on the account, or
otherwise according to your written
instructions.
- ---------------------------------------------------------------
[Insert graphic of As long as your transaction is for
phone] $100,000 or less, you do not hold share
certificates and you have not changed
BY PHONE your address by phone within the last
15 days, you can sell your shares by
1-800/632-2301 phone.
A check will be mailed to the name(s)
and address on the account. Written
instructions, with a signature
guarantee, are required to send the
check to another address or to make it
payable to another person.
- ---------------------------------------------------------------
[Insert graphic of You can call or write to have
three lightning redemption proceeds of $1,000 or more
bolts] wired to a bank or escrow account. See
the policies above for selling shares
by mail or phone.
Before requesting a bank wire, please
BY WIRE make sure we have your bank account
information on file. If we do not have
this information, you will need to send
written instructions with your bank's
name and address, your bank account
number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by
1:00 p.m. pacific time will be wired
the next business day.
- ---------------------------------------------------------------
[Insert graphic of Obtain a current prospectus for the
two arrows pointing fund you are considering.
in opposite
directions] Call Shareholder Services at the number
below or our automated TeleFACTS
BY EXCHANGE system, or send signed written
instructions. See the policies above
TeleFACTS(R) for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you
access) will need to return them to the fund
before your exchange can be processed.
- ---------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES
P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The fund's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You
will be considered a market timer if you have (i) requested an exchange out
of the fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase
under the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
- ------------------------------------------
COMMISSION (%) ---
Investment under $50,000 5.00
$50,000 but under $100,000 3.75
$100,000 but under $250,000 2.80
$250,000 but under $500,000 2.00
$500,000 but under $1 1.60
million
$1 million or more up to 1.00 1
12B-1 FEE TO DEALER 0.25 2
A dealer commission of up to 1% may be paid on NAV purchases by certain
retirement plans1 and up to 0.25% on NAV purchases by certain trust companies
and bank trust departments, eligible governmental authorities, and
broker-dealers or others on behalf of clients participating in comprehensive
fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. The fund may pay up to 0.35% to Distributors or others, out of which 0.10%
generally will be retained by Distributors for its distribution expenses.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one
of the following numbers. For your protection and to help ensure we provide
you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- -----------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Services
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional 1-800/321-8563 6:00 a.m. to 5:00 p.m.
Services
TDD (hearing 1-800/851-0637 5:30 a.m. to 5:00 p.m.
impaired)
FOR MORE INFORMATION
You can learn more about the fund in the following document:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the SAI, please contact your investment representative or
call us at the number below.
FRANKLIN(R)
TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-6243 []
Prospectus
Franklin Strategic Income Fund
CLASS A, B & C
INVESTMENT STRATEGY INCOME
SEPTEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
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INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goals and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
[insert page #] Financial Highlights
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is capital appreciation over the long term.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its assets in U.S. and foreign debt securities. The fund
shifts its investments among the following general asset classes:
o High yield corporate bonds
o Emerging market bonds
o International bonds
o Convertible securities, including bonds and preferred stocks
o Mortgage securities and other asset-backed securities
o U.S. government bonds
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. The fund may
invest up to 100% of its total assets in debt securities that are rated below
investment grade. Investment grade debt securities are rated in the top four
ratings categories by independent rating organizations such as Standard &
Poor's Corporation (S&P) and Moody's Investors Services, Inc. (Moody's). The
fund generally invests in securities rated at least Caa by Moody's or CCC by
S&P, or unrated securities the fund's manager determines are comparable.
Generally, lower rated securities pay higher yields than more highly rated
securities to compensate investors for the higher risk.
[Begin callout]
The fund invests primarily in U.S. and foreign debt securities.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. These include common stocks, preferred stocks and
convertible securities. The fund may invest up to 35% of its assets in
common stocks.
The fund uses an active asset allocation strategy to try to achieve its goals
of income and capital appreciation. This means the fund allocates its assets
among securities in various market sectors based on the manager's assessment
of changing economic, market, industry, and issuer conditions. The manager
uses a "top-down" analysis of macroeconomic trends combined with a
"bottom-up" fundamental analysis of market sectors, industries, and issuers to
try to take advantage of varying sector reactions to economic events. The
manager will evaluate country risk, business cycles, yield curves, and values
between and within markets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economies of countries
where the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
INTEREST RATE When interest rates go up, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these
price changes.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds" or "high yield debt securities," generally have more
credit risk than higher-rated securities. The principal risks of investing in
these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are
not as strong financially as those with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could prevent them from making
interest and principal payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its
entire investment.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the ratings
assigned by ratings organizations. Prices are often closely linked with
the company's stock prices and typically rise and fall in response to
factors that affect stock prices. In addition, the entire high yield
securities market can experience sudden and sharp price swings due to
changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors. High
yield securities are also generally less liquid than higher-quality bonds.
Many of these securities do not trade frequently, and when they do trade
their prices may be significantly higher or lower than expected. At times,
it may be difficult to sell these securities promptly at an acceptable
price, which may limit the fund's ability to sell securities in response to
specific economic events or to meet redemption requests.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Mortgage securities differ
from conventional debt securities because principal is paid back over the
life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal before the security's maturity date due
to voluntary prepayments, refinancing or foreclosure on the underlying
mortgage loans. To the fund this means a loss of anticipated interest, and a
portion of its principal investment represented by any premium the fund may
have paid. Mortgage prepayments generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities
and extend their life. This could cause the price of the mortgage securities
and the fund's share price to fall and would make the mortgage securities
more sensitive to interest rate changes.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided
to support the securities, if any, may be inadequate to protect investors in
the event of default. Like mortgage securities, asset-backed securities are
subject to prepayment and extension risks.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more
like a debt security when the underlying stock price is low (because it is
assumed it will not be converted). Because its value can be influenced by
many different factors, a convertible security is not as sensitive to
interest rate changes as a similar non-convertible debt security, and
generally has less potential for gain or loss than the underlying stock.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
DEVELOPING OR EMERGING MARKETS. The fund's investments in developing or
emerging markets are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, political, business and social frameworks to support securities
markets. Some of the additional significant risks, include:
o Political and social uncertainty (for example, regional conflicts and risk
of war
o Currency exchange rate volatility
o Pervasiveness of corruption and crime
o Delays in settling portfolio transactions
o Risk of loss arising out of systems of share registration and custody
o Markets that are comparatively smaller and less liquid than developed
markets. While short-term volatility in these markets can be
disconcerting, declines in excess of 50% are not unusual.
o Less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States.
o Currency and capital controls
The definition of developing or emerging markets or countries as used by the
fund's manager may differ from the definition of the same terms as used in
managing other Franklin Templeton funds.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares. The fund, however,
intends to meet certain tax diversification requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each issuer and its major suppliers to verify their Year 2000
readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 4 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
CLASS A ANNUAL TOTAL RETURNS 1
[Insert bar graph]
18.68% 17.05% 10.03% 4.05%
95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 6.20%
WORST QUARTER:
Q3 '98 -4.18%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (5/24/94)
- -------------------------------------------------------------
Franklin Strategic Income Fund - -0.40% 9.98%
Class A2
Lehman Brothers U.S. Aggregate 8.69% 8.79%
Index3
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 1999, the fund's year-to-date return was []% for Class A.
2. Figures reflect sales charges.
All fund performance assumes reinvestment of dividends and capital gains.
3. Source: Standard & Poor's(R) Micropal. The Lehman Brothers U.S. Aggregate
Index includes fixed rate debt issues rated investment grade or higher. All
issues have at least one year to maturity and an outstanding par value of at
least $100 million for U.S. Government issues and $50 million for all
others. The U.S. Aggregate Index is a composite of the Government/Corporate
Index, the Mortgage-Backed Securities Index. Total return includes
reinvestment of interest. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 4.25% 4.00% 1.99%
Load imposed on purchases 4.25% None 1.00%
Maximum deferred sales charge (load) None3 4.00% 0.99%4
Exchange fee5 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS) 6
CLASS A 1 CLASS B 2 CLASS C 1
- -------------------------------------------------------------------------------
Management fees 6 0.55% 0.55% 0.55%
Distribution and service
(12b-1) fees 7 0.25% 0.65% 0.65%
Other expenses 0.19% 0.19% 0.19%
------------------------------------
Total annual fund operating expenses6 0.99% 1.39% 1.39%
====================================
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1999. The distribution and service (12b-1) fees are
based on the maximum fees allowed under Class B's Rule 12b-1 plan.
3. Except for investments of $1 million or more (see page [#]) and purchases
by certain retirement plans without an initial sales charge.
4. This is equivalent to a charge of 1% based on net asset value.
5. This fee is only for market timers (see page [#]).
6. For the fiscal year ended April 30, 1999, the manager had agreed in
advance to limit its management fees and to assume as its own expense certain
expenses otherwise payable by the fund. With this reduction, management fees
were 0.14% and total annual fund operating expenses were 0.58% for Class A,
0.98% for Class B and 0.98% for Class C. The manager may end this arrangement
at any time upon notice to the fund's Board of Trustees.
7. Because of the distribution and service (12b-1) fees, over the long term
you may indirectly pay more than the equivalent of the maximum permitted
initial sales charge.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------
CLASS A $522 1 $727 $949 $1,586
CLASS B
Assuming you sold your shares
at the end of the period $542 $740 $961 $1,560 2
Assuming you stayed in the fund
$142 $440 $761 $1,560 2
CLASS C $338 3 $536 $853 $1,752
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
3. For the same Class C investment, your costs would be $240 if you did not
sell your shares at the end of the first year. Your costs for the remaining
periods would be the same.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $223 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394,
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor. A team from Global Bond Managers provides Advisers
with investment management advice and assistance and is responsible for the
day-to-day management of the fund.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, management
fees, before any advance waiver, were 0.55% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.14% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly, on or about the 15th day of the month, representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund
will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
[Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS
This table presents the fund's financial performance since its inception.
This information has been audited by PricewaterhouseCoopers LLP.
CLASS A YEAR ENDED APRIL 30,
- --------------------------------------------------------------------------------
1999 2 1998 1997 1996 1995 1
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 11.24 10.86 10.77 10.18 10.00
------------------------------------------------
Net investment income .86 .87 .93 .85 .70
Net realized and unrealized
gains (losses) (0.43) .50 .39 .67 .15
------------------------------------------------
Total from investment
operations .43 1.37 1.32 1.52 .85
------------------------------------------------
Distributions from net
investment income (.83) (.90) (.96) (.82) (.67)
Distributions from net
realized gains - (.09) (.27) (.11) -
------------------------------------------------
Total distributions (.83) (.99) (1.23) (.93) (.67)
------------------------------------------------
Net asset value, end of year 10.84 11.24 10.86 10.77 10.18
===============================================
Total return (%) 3 4.23 13.10 12.64 15.59 8.94
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year
($ x 1,000) 247,574 166,633 34,864 13,022 6,736
Ratios to average net
assets: (%)
Expenses .58 .25 .23 .25 .25 4
Expenses excluding waiver
and payments by affiliate .99 1.05 1.05 1.08 1.38 4
Net investment income 7.99 7.65 8.60 8.53 7.93 4
Portfolio turnover rate (%) 48.68 47.47 114.26 73.95 68.43
CLASS B
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 10.76
--------------------------------------
Net investment income .29
Net realized and unrealized
losses .07
Total from investment
operations .36
--------------------------------------
Distributions from net
investment income (.26)
--------------------------------------
Net asset value, end of year 10.86
======================================
Total return (%) 3 3.40
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of period ($ x 1,000) 4,281
Ratios to average net
assets: (%)
Expenses .98 4
Expenses excluding waiver
and payments by affiliate 1.39 4
Net investment income 7.59 4
Portfolio turnover rate (%) 48.68
- --------------------------------------------------------------------------------
CLASS C
- --------------------------------------------------------------------------------
PER SHARE DATA ($)
Net asset value,
beginning of year 11.19
--------------------------------------
Net investment income .76
Net realized and unrealized
losses (.40)
--------------------------------------
Total from investment
operations .36
Distributions from net
investment income (.71)
--------------------------------------
Net asset value, end of year 10.84
======================================
Total return (%)3 3.59
RATIOS/SUPPLEMENTAL DATA
Net assets,
end of period ($ x 1,000) 36,245
Ratios to average net
assets: (%)
Expenses .98
Expenses excluding waiver
and payments by affiliate 1.39
Net investment income 7.59
Portfolio turnover rate (%) 48.68
- --------------------------------------------------------------------------------
1. For the period May 24, 1994 (effective date) to April 30, 1995 for Class A.
2. For the period January 1, 1999 (effective date) to April 30, 1999 for
Class B and for the period May 1, 1998 (effective date) to April 30, 1999 for
Class C.
3. Total return does not include sales charges, and is not annualized.
4. Annualized.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] 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. Your investment
representative can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 4.25% or charge charge of 1%
less
o Deferred sales o Deferred sales o Deferred sales
charge of 1% on charge of 4% or charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six within 18 months
within 12 months years
o Lower annual o Higher annual o Higher annual
expenses than Class expenses than Class expenses than Class
B or C due to lower A (same as Class C) A (same as Class B)
distribution fees due to higher due to higher
distribution fees. distribution fees.
Automatic No conversion to
conversion to Class Class A shares, so
A shares after annual expenses do
eight years, not decrease.
reducing future
annual expenses.
BEFORE JANUARY 1, 1999, CLASS A SHARES WERE DESIGNATED CLASS I AND CLASS C
SHARES WERE DESIGNATED CLASS II. THE FUND BEGAN OFFERING CLASS B SHARES ON
JANUARY 1, 1999.
SALES CHARGES - CLASS A
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either
as a lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC
is the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution fees of up to 0.25% per year to those who sell and distribute
Class A shares and provide other services to shareholders. Because these fees
are paid out of Class A's assets on an on-going basis, over time these fees
will increase the cost of your investment and may cost you more than paying
other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a
CDSC if you sell your shares within six years, as described in the table
above. The way we calculate the CDSC is the same for each class (please see
page [#]). After 8 years, your Class B shares automatically convert to Class
A shares, lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares
at one time is $249,999. We place any investment of $250,000 or more in Class
A shares, since a reduced initial sales charge is available and Class A's
annual expenses are lower.
RETIREMENT PLANS Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class B
shares and for services provided to shareholders. Because these fees are paid
out of Class B's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C
shares you sell within 18 months of purchase. The way we calculate the CDSC
is the same for each class (please see below).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan,
sometimes known as a Rule 12b-1 plan, that allows the fund to pay
distribution and other fees of up to 0.65% per year for the sale of Class C
shares and for services provided to shareholders. Because these fees are paid
out of Class C's assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being
sold or their net asset value when purchased, whichever is less. There is no
CDSC on shares you acquire by reinvesting your dividends or capital gains
distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to
a CDSC. If there are not enough of these to meet your request, we will sell
the shares in the order they were purchased. We will use this same method if
you exchange your shares into another Franklin Templeton Fund (please see
page [#] for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below,
please let us know at the time you make your investment to help ensure you
receive the lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases
in the Franklin Templeton Funds to take advantage of the lower sales charges
for large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar
amount of shares over a 13-month period and lets you receive the same
sales charge as if all shares had been purchased at one time. We will
reserve a portion of your shares to cover any additional sales charge that
may apply if you do not buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR
ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you
may reinvest some or all of the proceeds within 365 days without an initial
sales charge. The proceeds must be reinvested within the same share class,
except proceeds from the sale of Class B shares will be reinvested in Class A
shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit
your account with the amount of the CDSC paid but a new CDSC will apply. For
Class B shares reinvested in Class A, a new CDSC will not apply, although
your account will not be credited with the amount of any CDSC paid when you
sold your Class B shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD)
also may be reinvested without an initial sales charge if you reinvest them
within 365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject
to a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial
sales charge or CDSC by various individuals, institutions and retirement
plans or by investors who reinvest certain distributions and proceeds within
365 days. The CDSC for each class also may be waived for certain redemptions
and distributions. If you would like information about available sales charge
waivers, call your investment representative or call Shareholder Services at
1-800/632-2301. For information about retirement plans, you may call
Retirement Plan Services at 1-800/527-2020. A list of available sales charge
waivers also may be found in the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors
to invest as a group. For sales charge purposes, the group's investments are
added together. There are certain other requirements and the group must have
a purpose other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------
Regular accounts $1,000 $50
- --------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- --------------------------------------------------------------------------
Broker-dealer sponsored wrap account
programs $250 $50
- --------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members
$100 $50
- --------------------------------------------------------------------------
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. Make sure you indicate the share class
you have chosen. If you do not indicate a class, we will place your purchase
in Class A shares. To save time, you can sign up now for services you may
want on your account by completing the appropriate sections of the
application (see the next page).
BUYING SHARES
- ------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- ------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- ------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of Franklin Strategic Income Franklin Strategic Income
envelope] Fund. Fund. Include your account
number on the check.
BY MAIL Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. The minimum investment to open an
account with an automatic investment plan is $50 ($25 for an Education IRA).
To sign up, complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class
A shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your
application that you would like to receive an Automatic Payroll Deduction
Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. Initial sales charges and CDSCs will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A
shares of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class*, generally without paying any additional sales
charges. If you exchange shares held for less than six months, however, you
may be charged the difference between the initial sales charge of the two
funds if the difference is more than 0.25%. If you exchange shares from a
money fund, a sales charge may apply no matter how long you have held the
shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC
will continue to be calculated from the date of your initial investment and
will not be charged at the time of the exchange. The purchase price for
determining a CDSC on exchanged shares will be the price you paid for the
original shares. If you exchange shares subject to a CDSC into a Class A
money fund, the time your shares are held in the money fund will not count
towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will
count towards the eight year period for automatic conversion to Class A
shares.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. If you own both Class A and B shares,
also specify the class of shares, otherwise we
will sell your Class A shares first. Be sure
to include all necessary signatures and any
additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds of $1,000 or more wired to a bank or
escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
BY WIRE sure we have your bank account information on
file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------------
[Insert graphic of two Obtain a current prospectus for the fund you
arrows pointing in are considering.
opposite directions]
Call Shareholder Services at the number below
BY EXCHANGE or our automated TeleFACTS system, or send
signed written instructions. See the policies
TeleFACTS(R) above for selling shares by mail or phone.
1-800/247-1753
(around-the-clock If you hold share certificates, you will need
access) to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). Each class's NAV is calculated
by dividing its net assets by the number of its shares outstanding.
[Begin callout]
When you buy shares, you pay the offering price. The offering price is the
NAV plus any applicable sales charge.
When you sell shares, you receive the NAV minus any applicable contingent
deferred sales charge (CDSC).
[End callout]
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee and UGMA/UTMA accounts) because you sell some of your
shares, we may mail you a notice asking you to bring the account back up to
its applicable minimum investment amount. If you choose not to do so within
30 days, we may close your account and mail the proceeds to the address of
record. You will not be charged a CDSC if your account is closed for this
reason.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You
will be considered a market timer if you have (i) requested an exchange out
of the fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell fund shares may receive
sales commissions and other payments. These are paid by Franklin Templeton
Distributors, Inc. (Distributors) from sales charges, distribution and
service (12b-1) fees and its other resources.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
COMMISSION (%) --- 3.00 2.00
Investment under $100,000 4.00 --- ---
$100,000 but under $250,000 3.25 --- ---
$250,000 but under $500,000 2.25 --- ---
$500,000 but under $1 million 1.85 --- ---
$1 million or more up to 0.75 1 --- ---
12B-1 FEE TO DEALER 0.25 0.15 2 0.65 3
A dealer commission of up to 1% may be paid on Class A NAV purchases by
certain retirement plans1 and up to 0.25% on Class A NAV purchases by certain
trust companies and bank trust departments, eligible governmental
authorities, and broker-dealers or others on behalf of clients participating
in comprehensive fee programs.
1. During the first year after purchase, dealers may not be eligible to
receive the 12b-1 fee.
2. Dealers may be eligible to receive up to 0.15% from the date of purchase.
After 8 years, Class B shares convert to Class A shares and dealers may then
receive the 12b-1 fee applicable to Class A.
3. Dealers may be eligible to receive up to 0.15% during the first year after
purchase and may be eligible to receive the full 12b-1 fee starting in the
13th month.
[Insert graphic of question mark]QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
- ---------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m.
(Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-6243 194 P 09/99
Prospectus
Franklin Strategic Income Fund
ADVISOR CLASS
INVESTMENT STRATEGY INCOME
SEPTEMBER 1, 1999
[Insert Franklin Templeton Ben Head]
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
CONTENTS
THE FUND
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goals and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOALS AND STRATEGIES
GOAL The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is capital appreciation over the long term.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its assets in U.S. and foreign debt securities. The fund
shifts its investments among the following general asset classes:
o High yield corporate bonds
o Emerging market bonds
o International bonds
o Convertible securities, including bonds and preferred stocks
o Mortgage securities and other asset-backed securities
o U.S. government bonds
Debt securities represent an obligation of the issuer to repay a loan of
money to it, and generally provide for the payment of interest. The fund may
invest up to 100% of its total assets in debt securities that are rated below
investment grade. Investment grade debt securities are rated in the top four
ratings categories by independent rating organizations such as Standard &
Poor's Corporation (S&P) and Moody's Investors Services, Inc. (Moody's). The
fund generally invests in securities rated at least Caa by Moody's or CCC by
S&P, or unrated securities the fund's manager determines are comparable.
Generally, lower rated securities pay higher yields than more highly rated
securities to compensate investors for the higher risk.
[Begin callout]
The fund invests primarily in U.S. and foreign debt securities.
[End callout]
Equity securities generally entitle the holder to participate in a company's
general operating results. These include common stocks, preferred stocks and
convertible securities. The fund may invest up to 35% of its assets in
common stocks.
The fund uses an active asset allocation strategy to try to achieve its goals
of income and capital appreciation. This means the fund allocates its assets
among securities in various market sectors based on the manager's assessment
of changing economic, market, industry, and issuer conditions. The manager
uses a "top-down" analysis of macroeconomic trends combined with a
"bottom-up" fundamental analysis of market sectors, industries, and issuers to
try to take advantage of varying sector reactions to economic events. The
manager will evaluate country risk, business cycles, yield curves, and values
between and within markets.
TEMPORARY INVESTMENTS The manager may take a temporary defensive position
when it believes the securities trading markets or the economies of countries
where the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these
circumstances, the fund may be unable to pursue its investment goals.
[Insert graphic of chart with line going up and down] MAIN RISKS
[Begin callout]
Changes in global interest rates affect the prices of the fund's debt
securities. If rates rise, the value of the fund's debt securities will fall
and so too will the fund's share price. This means you could lose money.
[End callout]
INTEREST RATE When interest rates go up, debt security prices fall. The
opposite is also true: debt security prices go up when interest rates fall.
In general, securities with longer maturities are more sensitive to these
price changes.
CREDIT There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial
strength or in a security's credit rating may affect a security's value and,
thus, impact fund performance.
LOWER-RATED SECURITIES. Securities rated below investment grade, sometimes
called "junk bonds" or "high yield debt securities," generally have more
credit risk than higher-rated securities. The principal risks of investing in
these securities include:
o SUBSTANTIAL CREDIT RISK. Companies issuing high yield debt securities are
not as strong financially as those with higher credit ratings. These
companies are more likely to encounter financial difficulties and are more
vulnerable to changes in the economy, such as a recession or a sustained
period of rising interest rates, that could prevent them from making
interest and principal payments.
o DEFAULTED DEBT RISK. If an issuer is not paying or stops paying interest
and/or principal on its securities, payments on the securities may never
resume. These securities may be worthless and the fund could lose its
entire investment.
o VOLATILITY RISK. The prices of high yield debt securities fluctuate more
than higher-quality securities. Prices are especially sensitive to
developments affecting the company's business and to changes in the ratings
assigned by ratings organizations. Prices are often closely linked with
the company's stock prices and typically rise and fall in response to
factors that affect stock prices. In addition, the entire high yield
securities market can experience sudden and sharp price swings due to
changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors. High
yield securities are also generally less liquid than higher-quality bonds.
Many of these securities do not trade frequently, and when they do trade
their prices may be significantly higher or lower than expected. At times,
it may be difficult to sell these securities promptly at an acceptable
price, which may limit the fund's ability to sell securities in response to
specific economic events or to meet redemption requests.
INCOME Since the fund can only distribute what it earns, the fund's
distributions to shareholders may decline when interest rates fall.
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Mortgage securities differ
from conventional debt securities because principal is paid back over the
life of the security rather than at maturity. The fund may receive
unscheduled prepayments of principal before the security's maturity date due
to voluntary prepayments, refinancing or foreclosure on the underlying
mortgage loans. To the fund this means a loss of anticipated interest, and a
portion of its principal investment represented by any premium the fund may
have paid. Mortgage prepayments generally increase when interest rates fall.
Mortgage securities also are subject to extension risk. An unexpected rise in
interest rates could reduce the rate of prepayments on mortgage securities
and extend their life. This could cause the price of the mortgage securities
and the fund's share price to fall and would make the mortgage securities
more sensitive to interest rate changes.
Issuers of asset-backed securities may have limited ability to enforce the
security interest in the underlying assets, and credit enhancements provided
to support the securities, if any, may be inadequate to protect investors in
the event of default. Like mortgage securities, asset-backed securities are
subject to prepayment and extension risks.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more
like a debt security when the underlying stock price is low (because it is
assumed it will not be converted). Because its value can be influenced by
many different factors, a convertible security is not as sensitive to
interest rate changes as a similar non-convertible debt security, and
generally has less potential for gain or loss than the underlying stock.
FOREIGN SECURITIES Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund.
COUNTRY. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund
owns that trade in that country. These movements will affect the fund's share
price and fund performance.
The political, economic and social structures of some countries the fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency and other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
DEVELOPING OR EMERGING MARKETS. The fund's investments in developing or
emerging markets are subject to all of the risks of foreign investing
generally, and have additional heightened risks due to a lack of established
legal, political, business and social frameworks to support securities
markets. Some of the additional significant risks, include:
o Political and social uncertainty (for example, regional conflicts and risk
of war
o Currency exchange rate volatility
o Pervasiveness of corruption and crime
o Delays in settling portfolio transactions
o Risk of loss arising out of systems of share registration and custody
o Markets that are comparatively smaller and less liquid than developed
markets. While short-term volatility in these markets can be
disconcerting, declines in excess of 50% are not unusual.
o Less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the United
States.
o Currency and capital controls
The definition of developing or emerging markets or countries as used by the
fund's manager may differ from the definition of the same terms as used in
managing other Franklin Templeton funds.
COMPANY. Foreign companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in
the U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
CURRENCY To the extent the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
Devaluation of a currency by a country's government or banking authority also
will have a significant impact on the value of any securities denominated in
that currency. Currency markets generally are not as regulated as securities
markets.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or the securities market as a whole.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in the securities of one issuer than a diversified
fund. The fund may be more sensitive to economic, business, political or
other changes affecting similar issuers or securities, which may result in
greater fluctuation in the value of the fund's shares. The fund, however,
intends to meet certain tax diversification requirements.
YEAR 2000 When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
issuers about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot
audit each issuer and its major suppliers to verify their Year 2000
readiness.
If an issuer in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Please see page [#] for more information.
More detailed information about the fund, its policies (including temporary
investments), risks and bond ratings can be found in the fund's Statement of
Additional Information (SAI).
[Begin callout]
Mutual fund shares 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. Mutual fund shares involve investment risks, including the
possible loss of principal.
[End callout]
[Insert graphic of a bull and a bear] PERFORMANCE
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past 4 calendar
years. The table shows how the fund's average annual total returns compare to
those of a broad-based securities market index. Of course, past performance
cannot predict or guarantee future results.
ADVISOR CLASS ANNUAL TOTAL RETURNS 1,2
[Insert bar graph]
18.68% 17.05% 10.03% 4.05%
95 96 97 98
YEAR
[Begin callout]
BEST QUARTER:
Q4 '98 6.20%
WORST QUARTER:
Q3 '98 -4.18%
[End callout]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1998
SINCE
INCEPTION
1 YEAR (5/24/94)
- -------------------------------------------------------------
Strategic Income Fund - Advisor 4.05% 11.01%
Class2
Lehman Brothers U.S. Aggregate 8.69% 8.79%
Index3
1. As of June 30, 1999, the fund's year-to-date return was []%.
2. Before May 28, 1999, Advisor Class shares were not offered. Returns shown
are a restatement of Class A performance to excluding the effect of Class A's
maximum initial sales charge and including the effect of the Class A
distribution and service (12b-1) fees.
3. Source: Standard & Poor's(R) Micropal. The Lehman Brothers U.S. Aggregate
Index includes fixed rate debt issues rated investment grade or higher. All
issues have at least one year to maturity and an outstanding par value of at
least $100 million for U.S. Government issues and $50 million for all
others. The U.S. Aggregate Index is a composite of the Government/Corporate
Index, the Mortgage-Backed Securities Index. Total return includes
reinvestment of interest. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.
[Insert graphic of percentage sign] FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR CLASS
- -------------------------------------------------------------------------------
Maximum sales charge (load) imposed on purchases None
Exchange fee1 $5.00
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)2
ADVISOR CLASS
- -------------------------------------------------------------------------------
Management fees 3 0.55%
Distribution and service (12b-1) fees None
Other expenses 0.19%
---------------------------
Total annual fund operating expenses 3 0.74%
===========================
1. This fee is only for market timers (see page [#]).
2. The fund began offering Advisor Class shares on May 28, 1999. Annual fund
operating expenses are based on the expenses for the fund's Class A shares
for the fiscal year ended April 30, 1999.
3. For the fiscal year ended April 30, 1999, the manager had agreed in
advance to limit its management fees and to assume as its own expense certain
expenses otherwise payable by the fund. With this reduction, management fees
were 0.14% and total annual fund operating expenses were 0.33%. The manager
may end this arrangement at any time upon notice to the fund's Board of
Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds.
The example assumes you invest $10,000 for the periods shown and then sell
all of your shares at the end of those periods. The example also assumes your
investment has a 5% return each year and the fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------
$76 $237 $411 $918
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404, is the fund's investment manager. Together, Advisers and its
affiliates manage over $223 billion in assets.
Under an agreement with Advisers, Templeton Investment Counsel, Inc.
(Investment Counsel), 500 East Broward Blvd., Ft. Lauderdale, FL 33394,
through its Templeton Global Bond Managers division (Global Bond Managers),
is the fund's sub-advisor. A team from Global Bond Managers provides Advisers
with investment management advice and assistance and is responsible for the
day-to-day management of the fund.
The fund pays the manager a fee for managing the fund's assets and making its
investment decisions. For the fiscal year ended April 30, 1999, management
fees, before any advance waiver, were 0.55% of the fund's average daily net
assets. Under an agreement by the manager to limit its fees, the fund paid
0.14% of its average daily net assets to the manager. The manager may end
this arrangement at any time upon notice to the fund's Board of Trustees.
YEAR 2000 PROBLEM The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
[Insert graphic of dollar
signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund intends to pay a dividend at
least monthly, on or about the 15th day of the month, representing its net
investment income. Capital gains, if any, may be distributed annually. The
amount of these distributions will vary and there is no guarantee the fund
will pay dividends.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN(R).
TAX CONSIDERATIONS In general, fund distributions are taxable to you as
either ordinary income or capital gains. This is true whether you reinvest
your distributions in additional fund shares or receive them in cash. Any
capital gains the fund distributes are taxable to you as long-term capital
gains no matter how long you have owned your shares.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale. The individual tax rate on any
gain from the sale or exchange of your shares depends on how long you have
held your shares.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"]QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors with clients invested in any
series of Franklin Mutual Series Fund Inc. on October 31, 1996, or who buy
through a broker-dealer or service agent who has an agreement with
Franklin Templeton Distributors, Inc. (Distributors). Minimum investments:
$1,000 initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin
Templeton and their immediate family members. Minimum investments: $100
initial ($50 for accounts with an automatic investment plan) and $50
additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries
or participants, in the case of certain retirement plans, have full or
shared investment discretion. Minimum investments: No initial or
additional minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds. There are certain other
requirements and the group must have a purpose other than buying fund
shares without a sales charge.
Please note that Advisor Class shares of the fund generally are not available
to retirement plans through Franklin Templeton's ValuSelect(R) program.
Retirement plans in the ValuSelect program before January 1, 1998, however,
may invest in the fund's Advisor Class shares.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
ACCOUNT APPLICATION If you are opening a new account, please complete and
sign the enclosed account application. To save time, you can sign up now for
services you may want on your account by completing the appropriate sections
of the application (see the next page).
BUYING SHARES
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- -------------------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic Franklin Strategic Income Franklin Strategic Income
of envelope] Fund. Fund. Include your account
number on the check.
BY MAIL Mail the check and your
signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- -------------------------------------------------------------------------------
[Insert graphic Call to receive a wire Call to receive a wire
of three control number and wire control number and wire
lightning bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or number on the application.
1-650/312-2000
collect) To make a same day wire
investment, please call us
by 1:00 p.m. pacific time
and make sure your wire
arrives by 3:00 p.m.
- -------------------------------------------------------------------------------
[Insert graphic Call Shareholder Services at Call Shareholder Services at
of two arrows the number below, or send the number below, or send
pointing in signed written instructions. signed written instructions.
opposite (Please see page [#] for (Please see page [#] for
directions] information on exchanges.) information on exchanges.)
BY EXCHANGE
- -------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class of the fund or in Advisor
Class or Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial
sales charges and contingent deferred sales charges (CDSCs) will not apply if
you reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton
Funds within the same class. You also may exchange your Advisor Class shares
for Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust, Templeton Foreign Fund or Templeton Growth Fund, you also may
exchange your shares for Class A shares of those funds (without any sales
charge)* or for shares of Templeton Institutional Funds, Inc.
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee.
Frequent exchanges can interfere with fund management or operations and drive
up costs for all shareholders. To protect shareholders, there are limits on
the number and amount of exchanges you may make (please see "Market Timers"
on page [#]).
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class , you may exchange your
Class A shares for Advisor Class shares if you otherwise qualify to buy the
fund's Advisor Class shares.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. Certain terms and
minimums apply. To sign up, complete the appropriate section of your
application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Requests to sell $100,000 or less can generally be
made over the phone or with a simple letter. Sometimes, however, to protect
you and the fund we will need written instructions signed by all registered
owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud.
You can obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of
record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic
of hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share
of envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise according
to your written instructions.
- -------------------------------------------------------------------
[Insert graphic As long as your transaction is for $100,000 or
of phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your
shares by phone.
1-800/632-2301
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- -------------------------------------------------------------------
[Insert graphic You can call or write to have redemption
of three proceeds of $1,000 or more wired to a bank or
lightning bolts] escrow account. See the policies above for
selling shares by mail or phone.
Before requesting a bank wire, please make
sure we have your bank account information on
BY WIRE file. If we do not have this information, you
will need to send written instructions with
your bank's name and address, your bank
account number, the ABA routing number, and a
signature guarantee.
Requests received in proper form by 1:00 p.m.
pacific time will be wired the next business
day.
- -------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you
of two arrows are considering.
pointing in
opposite Call Shareholder Services at the number below,
directions] or send signed written instructions. See the
policies above for selling shares by mail or
BY EXCHANGE phone.
If you hold share certificates, you will need
to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares
outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If the fund holds securities listed primarily on a foreign exchange
that trades on days when the fund is not open for business, the value of your
shares may change on days that you cannot buy or sell shares.
Requests to buy and sell shares are processed at the NAV next calculated
after we receive your request in proper form.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $250
($50 for employee accounts) because you sell some of your shares, we may mail
you a notice asking you to bring the account back up to its applicable
minimum investment amount. If you choose not to do so within 30 days, we may
close your account and mail the proceeds to the address of record.
STATEMENTS AND REPORTS You will receive confirmations and account statements
that show your account transactions. You also will receive the fund's
financial reports every six months. To reduce fund expenses, we try to
identify related shareholders in a household and send only one copy of the
financial reports. If you need additional copies, please call 1-800/DIAL BEN.
If there is a dealer or other investment representative of record on your
account, he or she also will receive confirmations, account statements and
other information about your account directly from the fund.
STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or
nominee name account of one dealer to another, as long as both dealers have
an agreement with Franklin Templeton Distributors, Inc. We will process the
transfer after we receive authorization in proper form from your delivering
securities dealer.
JOINT ACCOUNTS Unless you specify a different registration, accounts with
two or more owners are registered as "joint tenants with rights of
survivorship" (shown as "Jt Ten" on your account statement). To make any
ownership changes to a joint account, all owners must agree in writing,
regardless of the law in your state.
MARKET TIMERS The fund may restrict or refuse exchanges by market timers. If
accepted, each exchange by a market timer will be charged $5 by
Franklin/Templeton Investor Services, Inc., the fund's transfer agent. You
will be considered a market timer if you have (i) requested an exchange out
of the fund within two weeks of an earlier exchange request, or (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, or (iv) otherwise seem to follow a timing pattern. Shares
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or
lower its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of a fund eligible for sale in your state or
jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the fund reserves the right to
make payments in securities or other assets of the fund, in the case of an
emergency or if the payment by check or wire would be harmful to existing
shareholders.
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the fund promptly.
DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may
receive up to 0.25% of the amount invested. This amount is paid by Franklin
Templeton Distributors, Inc. from its own resources.
[Insert graphic of question mark] QUESTIONS
If you have any questions about the fund or your account, you can write to us
at P.O. Box 997151, Sacramento, CA 95899-9983. You can also call us at one of
the following numbers. For your protection and to help ensure we provide you
with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME, MONDAY
DEPARTMENT NAME TELEPHONE NUMBER THROUGH FRIDAY)
- -------------------------------------------------------------------------------
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
6:30 a.m. to 2:30 p.m. (Saturday)
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 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.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklin-templeton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section,
Washington, DC 20549-6009. You can also visit the SEC's Internet site at
http://www.sec.gov.
Investment Company Act file #811-6243 194 PA 09/99
FRANKLIN STRATEGIC SERIES
Franklin Aggressive Growth Fund - Class A, B & C
Franklin Blue Chip Fund - Class A
Franklin California Growth Fund - Class A, B & C
Franklin Large Cap Growth Fund - Class A, B, & C
Franklin MidCap Growth Fund - Class A
Franklin Small Cap Growth Fund - Class A & C
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended April 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND The fund's investment goal is capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of companies
demonstrating accelerating growth, increasing profitability, or above-average
growth or growth potential compared with the overall economy.
FRANKLIN BLUE CHIP FUND The fund's principal investment goal is long-term
capital appreciation. This goal is fundamental, which means it may not be
changed without shareholder approval.
The fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the fund.
Under normal market conditions, the fund will invest at least 80%, and
intends to try to invest up to 100%, of its total assets in equity securities
of blue chip companies.
The fund may invest up to 10% of total assets in the equity securities of
blue chip companies located outside the U.S. This may include companies in
either developed or emerging markets. Certain companies in emerging markets
meet all the criteria of a blue chip company.
FRANKLIN CALIFORNIA GROWTH FUND The fund's investment goal is capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests at least 65% of its assets in the equity and debt
securities of companies headquartered or conducting a majority of their
operations in the state of California. The fund may invest up to 35% of its
assets in the securities of companies headquartered or conducting a majority
of their operations outside of the state of California. In this way, the
fund tries to benefit from its research into companies and industries within
or beyond its primary region.
The fund expects to invest a significant portion of its assets in small and
medium size companies with market capitalization of up to $8 billion at the
time of its investment.
The fund may invest in securities of companies operating in the real estate
industry, including real estate investment trusts (REITs). The fund
currently intends to limit these investments to no more than 10% of total
assets.
The fund may invest up to 35% of its total assets in debt securities. The
fund may invest in debt securities that the manager believes present an
opportunity for capital appreciation as a result of improvement in the
creditworthiness of the issuer. The receipt of income from debt securities
is incidental to the fund's investment goal. The fund may invest in both
rated and unrated debt securities. The fund may buy securities that are
rated B by Moody's Investors Service (Moody's) or Standard & Poor's
Corporation (S&P) or better, or unrated securities of comparable quality.
The fund will not invest more than 5% of its assets in securities rated below
investment grade.
FRANKLIN LARGE CAP GROWTH FUND The fund's principal investment goal is
long-term capital appreciation. This goal is fundamental, which means it may
not be changed without shareholder approval.
The fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the fund.
Under normal market conditions, the fund will invest at least 80%, and
intends to invest up to 100%, of its total assets in a diversified portfolio
of equity securities of large cap growth companies.
FRANKLIN MIDCAP GROWTH FUND The fund's investment goal is long-term capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of mid-cap growth
companies. Mid-cap growth companies are companies that have a market
capitalization range between $1 and $8 billion that the manager believes are
positioned for rapid growth in revenues or earnings and assets,
characteristics that may provide for significant capital appreciation.
The fund may invest up to 35% of its total assets in equity securities that
are outside the medium market capitalization range but with similar potential
for capital appreciation, or in corporate debt securities. The fund may buy
debt securities rated B or better by Moody's or S&P, or unrated securities of
comparable quality. The fund will not invest more than 5% of its total
assets in securities rated below investment grade.
The fund intends to limit its investment in foreign securities to 5% of its
total assets. The fund may buy securities of issuers in developed emerging
markets.
FRANKLIN SMALL CAP GROWTH FUND The fund's investment goal is long-term
capital growth. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of small cap growth
companies. The fund may also invest up to 35% (measured at the time of
purchase) of its total assets in any combination of (a) equity securities of
larger capitalization companies that the manager believes have strong growth
potential, and (b) relatively well-known, larger companies in mature
industries that the manager believes have the potential for capital
appreciation, if the investment presents a favorable investment opportunity
consistent with the fund's investment goal.
The fund may from time to time make private investments in companies whose
securities are not publicly traded. These investments typically will take
the form of letter stock or convertible preferred stock. Because these
securities are not publicly traded, there is no secondary market for these
securities. The fund will treat these securities as illiquid.
Although the fund may invest up to 25% of its total assets in foreign
securities, including those of developing or emerging markets, the fund
currently intends to limit its investment in foreign securities to 10% of its
total assets.
The fund may invest up to 10% of its total assets in REITs. The fund will
not invest in securities issued without stock certificates of comparable
stock documents. The fund may not invest more than 10% of its net assets in
securities of issuers with less than three years continuous operation.
The fund may invest up to 5% of its total assets in corporate debt securities
that the manager believes have the potential for capital appreciation as a
result of improvement in the creditworthiness of the issuer. The receipt of
income from debt securities is incidental to the fund's investment goal. The
fund may buy both rated and unrated debt securities. The fund will invest in
securities rated B or better by Moody's or S&P or unrated securities of
comparable quality.
Below is more detailed information about some of the various types of
securities the funds may buy and the funds' investment policies and
restrictions.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
CONVERTIBLE SECURITIES Although each fund may invest in convertible
securities without limit, the Aggressive Growth, Blue Chip, and Large Cap
Growth funds currently intend to limit these investments to no more than 5%
of net assets. The California Growth, MidCap Growth, and Small Cap Growth
funds may also invest in enhanced convertible securities.
A convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, a convertible security is not
as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
When issued by an operating company, a convertible security tends to be
senior to common stock, but subordinate to other types of fixed-income
securities issued by that company. When a convertible security issued by an
operating company is "converted," the operating company often issues new
stock to the holder of the convertible security, but if the parity price of
the convertible security is less than the call price, the operating company
may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While each 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.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles
a number of different structures have been created to fit the characteristics
of specific investors and issuers. Examples of these enhanced
characteristics for investors include yield enhancement, increased equity
exposure or enhanced downside protection. From an issuer's perspective,
enhanced structures are designed to meet balance sheet criteria,
interest/dividend payment deductibility and reduced equity dilution. The
following are descriptions of common structures of enhanced convertible
securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS--each
issuer has a different acronym for their version of these securities) are
considered the most equity like of convertible securities. At maturity these
securities are mandatorily convertible into common stock offering investors
some form of yield enhancement in return for some of the upside potential in
the form of a conversion premium. Typical characteristics of mandatories
include: issued as preferred stock, convertible at premium, pay fixed
quarterly dividend (typically 500 to 600 basis points higher than common
stock dividend), and are non-callable for the life of the security (usually
three to five years). An important feature of mandatories is that the number
of shares received at maturity is determined by the difference between the
price of the common stock at maturity and the price of the common stock at
issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPRS, and TECONS)
are, from an investor's viewpoint, essentially convertible preferred
securities, i.e. they are issued as preferred stock convertible into common
stock at a premium and pay quarterly dividends. Through this structure the
company establishes a wholly owned special purpose vehicle whose sole purpose
is to issue convertible preferred stock. The offering proceeds pass-through
to the company who issues the special purpose vehicle a convertible
subordinated debenture with identical terms to the convertible preferred
issued to investors. Benefits to the issuer include increased equity credit
from rating agencies and the deduction of coupon payments for tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into
common stock at maturity and offers investors a higher current dividend than
the underlying common stock. The difference between these structures and
other mandatories is that the participation in stock price appreciation is
capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest
is actually paid, the accrued interest may be deducted for tax purposes.
Because of their put options, these bonds tend to be less sensitive to
changes in interest rates than either long maturity bonds or preferred
stocks. The put options also provide enhanced downside protection while
retaining the equity participation characteristics of traditional convertible
bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. A fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary, to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio. The funds,
however, intend to acquire liquid securities, though there can be no
assurances that this will be achieved.
DEBT SECURITIES represent a loan of money by the purchaser of the securities
to the issuer. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
The funds may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS Each fund may invest in foreign
securities. The Aggressive Growth, Blue Chip, and Large Cap Growth funds
intend to limit their investments in foreign securities to no more than 10%
of total assets. The MidCap Growth fund intends to limit its investments in
foreign securities to no more than 5% if total assets. Although the Small
Cap Growth fund may invest up to 25% of total assets in foreign securities,
it intends to limit its investments to 10% of total assets.
The funds may buy foreign securities traded in the U.S. or directly in
foreign markets. The funds may buy American, European, and Global Depositary
Receipts. Depositary receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities (a) of
a foreign issuer deposited in a U.S. bank or trust company (American
Depositary Receipts, "ADRs"); or (b) of a foreign or U.S. issuer deposited in
a foreign bank or trust company (Global Depositary Receipts, "GDRs" or
European Depositary Receipts, "EDRs").
SMALL AND MID-CAP COMPANIES Market capitalization is defined as the total
market value of a company's outstanding stock. Small cap companies generally
have market capitalization of up to $1.5 billion at the time of the fund's
investment. Mid-cap companies generally have market capitalization of $1 to
$8 billion at the time of the fund's investment.
Small cap companies are often overlooked by investors or undervalued in
relation to their earnings power. Because small cap companies generally are
not as well known to the investing public and have less of an investor
following than larger companies, they may provide greater opportunities for
long-term capital growth as a result of inefficiencies in the marketplace.
These companies may be undervalued because they are part of an industry that
is out of favor with investors, although the individual companies may have
high rates of earnings growth and be financially sound.
Mid-cap companies may offer greater potential for capital appreciation than
larger companies, because mid-cap companies are often growing more rapidly
than larger companies, but tend to be more stable and established than small
cap or emerging companies.
REPURCHASE AGREEMENTS Each fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn
income on this portion of its assets, the fund may enter into repurchase
agreements with certain banks and broker-dealers. Repurchase agreements are
contracts under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed upon price and date. Under a
repurchase agreement, a fund agrees to buy a U.S. government security from
one of these issuers and then to sell the security back to the issuer after a
short period of time (generally, less than seven days) at a higher price. The
bank or broker-dealer must transfer to the fund's custodian securities with
an initial value of at least 102% of the dollar amount invested by the fund
in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceed the repurchase
price. Repurchase agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or restrictions upon a
fund's ability to dispose of the underlying securities. The funds will enter
into repurchase agreements only with parties that meet creditworthiness
standards approved by the funds' board of trustees. These parties are banks
or broker-dealers that have been determined by the manager to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
The Small Cap Growth fund may also enter into reverse repurchase agreements.
Under a reverse repurchase agreement, the fund agrees to sell a security in
its portfolio and then to repurchase the security at an agreed-upon price,
date, and interest payment. The fund will maintain cash or high-grade liquid
debt securities with a value equal to the value of the fund's obligation
under the agreement, including accrued interest, in a segregated account with
the fund's custodian bank. The securities subject to the reverse repurchase
agreement will be marked-to-market daily. Although reverse repurchase
agreements are borrowings under federal securities laws, the Small Cap Growth
fund does not treat them as borrowings for purposes of its investment
restriction #3 below, provided the segregated account is properly maintained.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may
lend certain of its portfolio securities to qualified securities dealers or
other institutional investors. Such loans may not exceed the following
percentages of the value of the fund's total assets, measured at the time of
the most recent loan: Aggressive Growth, Blue Chip, and Large Cap Growth
funds, 33 1/3%; California Growth Fund, 10%; and MidCap Growth and Small Cap
Growth funds, 20%. For each loan the borrower must maintain with the fund's
custodian collateral (consisting of any combination of cash, U.S. government
securities, or irrevocable letters of credit) with a value at least equal to
100% of the current market value of the loaned securities. The fund retains
all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. The fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. The fund will continue to receive any interest or dividends
paid on the loaned securities and will continue to have voting rights with
respect to the securities. However, as with other extensions of credit, there
are risks of delay in recovery or even loss of rights in collateral should
the borrower fail.
SECURITIES INDUSTRY RELATED INVESTMENTS To the extent it is consistent with
their respective investment goals and certain limitations under the
Investment Company Act of 1940, as amended (1940 Act), the funds may invest
their assets in securities issued by companies engaged in securities related
businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered to be
part of the financial services industry. Generally, under the 1940 Act, a
fund may not acquire a security or any interest in a securities related
business to the extent such acquisition would result in the fund acquiring in
excess of 5% of a class of an issuer's outstanding equity securities or 10%
of the outstanding principal amount of an issuer's debt securities, or
investing more than 5% of the value of the fund's total assets in securities
of the issuer. In addition, any equity security of a securities-related
business must be a marginable security under Federal Reserve Board
regulations and any debt security of a securities-related business must be
investment grade as determined by the Board. The funds do not believe that
these limitations will impede the attainment of their investment goals.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The Blue Chip Growth fund may
buy equity securities on a "when-issued" or "delayed delivery" basis. These
transactions are arrangements whereby the fund buys securities with payment
and delivery scheduled for a future time, generally within 15 to 60 days.
If the fund buys securities on a when-issued basis, it will do so for the
purpose of acquiring securities consistent with its investment objective and
polices and not for investment leverage. The fund may sell securities
purchased on a when-issued basis before the settlement date, however, if the
manager believes it is advisable to do so.
When the fund is the buyer in one of these transactions, it relies on the
seller to complete the transaction. If the seller fails to do so, the fund
may miss an advantageous price or yield for the underlying security. When the
fund is the buyer, it will keep cash or high-grade marketable securities in a
segregated account with its custodian bank until payment is made. The amount
held in the account will equal the amount the fund must pay for the
securities at delivery.
STANDBY COMMITMENT AGREEMENTS The Blue Chip Growth fund may buy equity
securities under a standby commitment agreement. If the fund enters into a
standby commitment agreement, it will be obligated, for a set period of time,
to buy a certain amount of a security that may be issued and sold to the fund
at the option of the issuer. The price of the security is set at the time of
the agreement. The fund will receive a commitment fee typically equal to 0.5%
of the purchase price of the security. The fund will receive this fee
regardless of whether the security is actually issued.
The fund may enter into a standby commitment agreement to invest in the
security underlying the commitment at a yield or price that Advisers believes
is advantageous to the fund. The fund will not enter into a standby
commitment if the remaining term of the commitment is more than 45 days. If
the fund enters into a standby commitment, it will keep cash or high-grade
marketable securities in a segregated account with its custodian bank in an
amount equal to the purchase price of the securities underlying the
commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the fund's books on the date the
security can reasonably be expected to be issued. The value of the security
will then be reflected in the calculation of the fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. If the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock 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 end of the contract period. Options, futures,
and options on futures are considered "derivative securities."
Each fund may buy and sell options on securities and (except the Blue Chip
fund) securities indices. The funds may only buy options if the premiums paid
for such options total 5% or less of net assets. Each fund (except the Blue
Chip fund) may also buy and sell securities index futures and options on
securities index futures. The funds will not buy futures if the amount of
initial deposits and premiums paid for open contracts is more than 5% of net
assets (taken at current value).
Each fund (except the California Growth and MidCap Growth funds) may buy and
sell futures contracts for securities and currencies. Each fund may invest in
futures contracts only to hedge against changes in the value of its
securities or those it intends to buy. The funds will not enter into a
futures contract if the amounts paid for open contracts, including required
initial deposits, would exceed 5% of net assets.
OPTIONS. The funds may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter ("OTC")
market. All options written by the funds will be covered. The funds (except
the Blue Chip fund) may also buy or write put and call options on securities
indices. Options written by the Aggressive Growth, Blue Chip, Large Cap
Growth, and MidCap Growth funds will be for portfolio hedging purposes only.
A call option written by the fund is covered if the fund (a) owns the
underlying security that is subject to the call or (b) has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held is (a) equal to or
less than the exercise price of the call written or (b) greater than the
exercise price of the call written if the difference is held in cash or
high-grade debt securities in a segregated account with the fund's custodian
bank.
A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things,
the relationship of the exercise price to the market price and volatility of
the underlying security, the remaining term of the option, supply and demand,
and interest rates.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in
the market value of the underlying security during the option period. If a
call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer
must fulfill the obligation to buy the underlying security at the exercise
price, which will usually exceed the market value of the underlying security
at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same
series as the option previously written. The effect of the purchase is that
the clearing corporation will cancel the writer's position. However, a writer
may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that either a closing purchase or a closing sale transaction may be made at
the time desired by the fund.
Effecting a closing transaction in the case of a written call option allows
the fund to write another call option on the underlying security with a
different exercise price, expiration date or both. In the case of a written
put option, a closing transaction allows the fund to write another covered
put option. Effecting a closing transaction also allows the cash or proceeds
from the sale of any securities subject to the option to be used for other
fund investments. If the fund wants to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to buy the option. Likewise, the fund will realize
a loss from a closing transaction if the price of the transaction is more
than the premium received from writing the option or is less than the premium
paid to buy the option. Increases in the market price of a call option will
generally reflect increases in the market price of the underlying security.
As a result, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the fund.
The writing of covered put options involves certain risks. For example, if
the market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the fund's gain will
be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, the fund may
elect to close the position or take delivery of the security at the exercise
price. The fund's return will be the premium received from the put option
minus the amount by which the market price of the security is below the
exercise price.
A fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. A fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the call option plus any related transaction
costs.
A fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise
price less the premium paid for the option. The ability to buy put options
allows the fund to protect the unrealized gain in an appreciated security in
its portfolio without actually selling the security. In addition, the fund
continues to receive interest or dividend income on the security. The fund
may sell a put option it has previously purchased prior to the sale of the
security underlying the option. The sale of the option will result in a net
gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid for the put option.
Any gain or loss may be wholly or partially offset by a change in the value
of the underlying security that the fund owns or has the right to acquire.
A fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in
exchange traded options. Like exchange traded options, OTC options give the
holder the right to buy, in the case of OTC call options, or sell, in the
case of OTC put options, an underlying security from or to the writer at a
stated exercise price. However, OTC options differ from exchange traded
options in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from
market makers. OTC options are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices, however, than
exchange traded options, and the writer of an OTC option is paid the premium
in advance by the dealer.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price,
options on a stock index give the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of the underlying stock
index is greater than (or less than, in the case of a put) the exercise price
of the option, expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends
on price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stocks.
When a fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of
the underlying stock index. The fund will maintain the account while the
option is open or will otherwise cover the transaction.
FINANCIAL FUTURES. The funds (except the Blue Chip fund) may enter into
contracts for the purchase or sale of futures contracts based upon financial
indices ("financial futures"). Financial futures contracts are commodity
contracts that obligate the long or short holder to take or make delivery of
the cash value of a securities index during a specified future period at a
specified price. A "sale" of a futures contract means the acquisition of a
contractual obligation to deliver such cash value called for by the contract
on a specified date. A "purchase" of a futures contract means the acquisition
of a contractual obligation to take delivery of the cash value called for by
the contract at a specified date. The purpose of the acquisition or sale of a
futures contract is to attempt to protect the fund from fluctuations in price
of portfolio securities without actually buying or selling the underlying
security. Futures contracts have been designed by exchanges designated
"contracts markets" by the Commodity Futures Trading Commission (CFTC) and
must be executed through a futures commission merchant, or brokerage firm,
which is a member of the relevant contract market.
The funds will not engage in transactions in futures contracts or related
options for speculation, but only as a hedge against changes resulting from
market conditions in the values of its securities or securities that they
intend to buy and, to the extent consistent therewith, to accommodate cash
flows. The funds will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one third of
total assets would be represented by futures contracts or related options. In
addition, the funds may not buy or sell futures contracts or buy or sell
related options if, immediately thereafter, the sum of the amount of initial
deposits on existing financial futures and premiums paid on options on
financial futures contracts would exceed 5% of total assets (taken at current
value). To the extent a fund enters into a futures contract or related call
option, it will maintain with its custodian bank, to the extent required by
the rules of the Securities and Exchange Commission (SEC), assets in a
segregated account to cover its obligations with respect to such contract
which will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the market value of such futures
contract or related option.
STOCK INDEX FUTURES. The funds (other than the Blue Chip fund) may buy and
sell stock index futures contracts. A stock index futures contract obligates
the seller to deliver (and the buyer to take) an amount of cash equal to a
specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the
price at which the agreement is made. No physical delivery of the underlying
stocks in the index is made.
The funds may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of their
equity securities that might otherwise result. When a 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 funds (other than the Blue Chip fund) may
buy and sell call and put options on stock index futures to hedge against
risks of market price movements. The need to hedge against these risks will
depend on the extent of diversification of the fund's common stock portfolio
and the sensitivity of such investments to factors influencing the stock
market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day before the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The California Growth and Small Cap
Growth funds 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. These funds reserve 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 funds' investment strategies in employing
futures contracts based on an index of debt securities will be similar to
that used in other financial futures transactions.
The California Growth and Small Cap Growth funds may also buy and write put
and call options on bond index futures and enter into closing transactions
with respect to such options.
FUTURES CONTRACTS FOR SECURITIES AND CURRENCIES. The funds (except the
California Growth and MidCap Growth funds) may buy and sell futures contracts
for securities, and currencies. These funds may also enter into closing
purchase and sale transactions with respect to these futures contracts. The
funds will engage in futures transactions only for bona fide hedging or other
appropriate risk management purposes. All futures contracts entered into by
the funds are traded on U.S. exchanges or boards of trade licensed and
regulated by the CFTC or on foreign exchanges.
When securities prices are falling, a fund may offset a decline in the value
of its current portfolio securities through the sale of futures contracts.
When prices are rising, a fund can attempt to secure better prices than might
be available when it intends to buy securities through the purchase of
futures contracts. Similarly, a fund can sell futures contracts on a
specified currency in an attempt to protect against a decline in the value of
that currency and its portfolio securities denominated in that currency. A
fund can buy futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in that currency that the fund has
purchased or expects to buy.
Positions taken in the futures markets are not normally held to maturity, but
are liquidated through offsetting transactions that may result in a profit or
a loss. While the funds' futures contracts on securities and currencies will
usually be liquidated in this manner, the funds may instead make or take
delivery of the underlying securities or currencies whenever it appears
economically advantageous to do so. A clearing corporation associated with
the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
To the extent a fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund, if required by law, will pay the futures commission
merchant an amount equal to the change in value.
FUTURES CONTRACTS - GENERAL. Although financial futures contracts by their
terms call for the actual delivery or acquisition of securities, or the cash
value of the index, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of
the securities or cash. A contractual obligation is offset by buying (or
selling, as the case may be) on a commodities exchange an identical financial
futures contract calling for delivery in the same month. This transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities or cash. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the funds
will incur brokerage fees when they buy or sell financial futures contracts.
FUTURE DEVELOPMENTS. The funds may take advantage of opportunities in the
area of options, futures, and options on futures and any other derivative
investments that are not presently contemplated for use by the funds or that
are not currently available but which may be developed, to the extent such
opportunities are consistent with the funds' investment goals and legally
permissible for the funds.
FORWARD CURRENCY EXCHANGE TRANSACTIONS In connection with the Blue Chip
fund's investment in foreign securities, it may hold currencies other than
the U.S. dollar and enter into forward currency exchange transactions to
facilitate settlements and to protect against changes in exchange rates. In a
forward currency transaction, the fund agrees to buy or sell a foreign
currency at a set exchange rate. Payment and delivery of the currency occurs
on a future date. There is no assurance that these strategies will be
successful. The fund's investment in foreign currencies and forward currency
exchange transactions will not exceed 10% of its net assets. The Blue Chip
fund may also enter into futures contracts for currencies as discussed above.
The Blue Chip fund may enter into forward currency exchange transactions in
order (i) to "lock-in" the U.S. dollar price of a security in its portfolio
denominated in a foreign currency; (ii) to sell an amount of a foreign
currency approximating the value of some or all of its portfolio securities
denominated in that foreign currency when the manager believes the foreign
currency may decline substantially against the U.S. dollar; or (iii) to buy a
foreign currency for a fixed dollar amount when the manager believes the U.S.
dollar may substantially decline against that foreign currency.
The value of securities denominated in a foreign currency may change during
the time between when a forward transaction is entered into and the time it
settles. It is therefore generally not possible to match precisely the
forward transaction amount and the value of the securities in the fund's
portfolio denominated in the currency involved. Using a forward currency
transaction to protect the value of the fund's portfolio securities against a
decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange
that the fund can achieve at some future time. The precise projection of
short-term currency market movements is not possible and short-term hedging
provides a way to fix the dollar value of only a portion of the fund's
foreign securities.
To limit the potential risks of buying currency under forward currency
transactions, the Blue Chip fund will keep cash, cash equivalents, or readily
marketable high-grade debt securities equal to the amount of the purchase in
a segregated account with its custodian bank to be used to pay for the
commitment. The fund will cover any commitments under these transactions to
sell currency by owning the underlying currency or an absolute right to
acquire the underlying currency. The segregated account will be
marked-to-market daily.
ILLIQUID SECURITIES Each fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Generally, an illiquid security is any
security that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the fund has valued it.
The fund does not consider securities that it acquires outside of the U.S.
and that are publicly traded in the U.S. or on a foreign securities market to
be illiquid assets if: (a) the fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign market, or (b)
current market quotations are readily available. The fund will not acquire
the securities of foreign issuers outside of the U.S. if, at the time of
acquisition, the fund has reason to believe that it could not resell the
securities in a public trading market.
The funds' board of trustees has authorized the funds to invest in restricted
securities. To the extent the manager determines there is a liquid
institutional or other market for these securities, the fund considers them
to be liquid securities. An example of these securities are restricted
securities that may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended,
and for which a liquid institutional market has developed. The funds' board
of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the funds' board of
trustees will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to buy
or sell the security and the number of other potential buyers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the fund invests in restricted securities that
are deemed liquid, the general level of illiquidity in the fund may increase
if qualified institutional buyers become uninterested in buying these
securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the funds'
portfolios in a temporary defensive manner. Under such circumstances, the
funds may invest up to 100% of assets in short-term debt instruments. The
funds may also invest cash, including cash resulting from purchases and sales
of fund shares, temporarily in short-term debt instruments. Short-term debt
instruments include high-grade commercial paper, repurchase agreements, and
other money market equivalents. [To the extent permitted by exemptions
granted under the 1940 Act and the fund's other investment policies and
restrictions, each fund may also invest in shares of one or more money market
funds managed by Franklin Advisers, Inc. or its affiliates.]
CONVERSION TO A MASTER/FEEDER STRUCTURE THE FUNDS CURRENTLY INVEST 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 MIDCAP GROWTH AND BLUE CHIP FUNDS' INVESTMENT GOALS AND
OTHER FUNDAMENTAL POLICIES ALLOW THEM TO INVEST EITHER DIRECTLY IN
SECURITIES OR INDIRECTLY IN SECURITIES THROUGH A MASTER FUND. IN THE
FUTURE, THE FUNDS' BOARD OF DIRECTORS MAY DECIDE TO CONVERT A 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 A FUND CONVERTS TO A MASTER/FEEDER STRUCTURE, ITS
FEES AND TOTAL OPERATING EXPENSES ARE NOT EXPECTED TO INCREASE.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of a fund's outstanding shares or (ii) 67% or
more of a fund's shares present at a shareholder meeting if more than 50% of
a fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Aggressive Growth Fund MAY NOT:
1. Borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the Investment
Company Act of 1940, as amended (1940 Act), or any exemptions therefrom that
may be granted by the SEC, or for temporary or emergency purposes and then in
an amount not exceeding 33 1/3% of the value of the fund's total assets
(including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment goal and policies, and (c) to the extent the entry into a
repurchase agreement is deemed to be a loan. The fund may also make loans to
affiliated investment companies to the extent permitted by the 1940 Act or
any exemptions therefrom that may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the fund may buy
or sell securities of real estate investment trusts may purchase or sell
currencies, may enter into forward contracts and futures contracts on
securities, currencies, and other indices or any other financial instruments,
and may purchase and sell options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages
or pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making
short sales of securities to the extent permitted by the 1940 Act, and any
rule or order thereunder, or SEC staff interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities or
securities of other investment companies).
7. Buy the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities or securities of other investment
companies) if immediately after such investment (a) more than 5% of the value
of the fund's total assets would be invested in such issuer or (b) more than
10% of the outstanding voting securities of such issuer would be owned by the
fund, except that up to 25% of the value of such fund's total assets may be
invested without regard to such 5% and 10% limitations.
It is the present policy of the fund (which may be changed without
shareholder approval) that its borrowings under restriction #1 above may not
exceed 15% of the value of the fund's total assets (including the amount
borrowed).
The Blue Chip Fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except it may borrow
up to 15% of its total assets (including the amount borrowed) to meet
redemption requests that might otherwise require the untimely disposition of
portfolio securities or for other temporary or emergency purposes and may
pledge its assets in connection with these borrowings. The fund may borrow
from banks, other Franklin Templeton Funds or other persons to the extent
permitted by applicable law. The fund will not make any additional
investments while borrowings exceed 5% of its total assets.
2. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. This does not
preclude the fund from obtaining short-term credit necessary for the
clearance of purchases and sales of its portfolio securities.
3. Invest directly in interests in real estate, oil, gas or other mineral
leases, exploration or development programs, including limited partnership
interests. This restriction does not preclude investments in marketable
securities of issuers engaged in these activities.
4. Loan money, except as is consistent with the fund's investment objective,
and except that the fund may (a) buy a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton
Funds to the extent permitted by the 1940 Act and any rules or orders
thereunder.
5. Buy or sell commodities or commodity contracts, except that the fund may
enter into financial futures contracts, options thereon, and forward
contracts.
6. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any industry, except that all or substantially all of the
assets of the fund may be invested in another registered investment company
having the same investment objective and policies as the fund.
7. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that the fund may borrow as permitted by these
restrictions.
ADDITIONAL RESTRICTIONS. The Blue Chip Fund has adopted the following
additional restrictions. These restrictions are not fundamental and may be
changed without shareholder approval. Under these restrictions, the Blue Chip
Fund may not:
1. Invest in any company for the purpose of exercising control or management,
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
objective and policies as the fund.
2. Buy securities on margin or sell securities short, except that the fund
may make margin payments in connection with futures, options and currency
transactions.
3. Buy or retain securities of any company in which officers, trustees or
directors of the fund or Advisers individually own more than one-half of 1%
of the securities of such company, and in the aggregate own more than 5% of
the securities of such company.
4. Buy securities of open-end or closed-end investment companies, except that
securities of an open-end or closed-end investment company may be acquired
(i) in compliance with the 1940 Act, (ii) to the extent that the fund may
invest all or substantially all of its assets in another registered
investment company having the same investment objective and policies as the
fund.
5. Invest more than 5% of its assets in securities of issuers with less than
three years continuous operation, including the operations of any predecessor
companies, except that all or substantially all of the assets of the fund may
be invested in another registered investment company having the same
investment objective and policies as the fund.
6. Hold or purchase the securities of any issuer if, as a result, in the
aggregate, more than 10% of the value of the fund's net assets would be
invested in (i) securities that are not readily marketable or (ii) repurchase
agreements maturing in more than seven days. The fund may, however, invest
all or substantially all of its assets in another registered investment
company having the same investment objective and policies as the fund.
7. Invest directly in warrants (valued at the lower of cost or market) in
excess of 5% of the value of the fund's net assets. No more than 2% of the
value of the fund's net assets may be invested in warrants (valued at the
lower of cost or market) that are not listed on the NYSE or the American
Stock Exchange.
As a diversified fund, with respect to 75% of its total assets, the Blue Chip
Fund may not invest more than 5% in any one issuer nor may it own more than
10% of the outstanding voting securities of any one issuer, except that all
or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and
policies as the fund.
The California Fund MAY NOT:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
may be deemed a loan.
2. Borrow money, except from banks in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or
for other temporary or emergency (but not investment) purposes, in an amount
up to 10% of the value of the fund's total assets (including the amount
borrowed) based on the lesser of cost or market, less liabilities (not
including the amount borrowed) at the time the borrowing is made. While
borrowings exceed 5% of the fund's total assets, the fund will not make any
additional investments.
3. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry.
4. Underwrite securities of other issuers (does not preclude the fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 10% of
its assets in securities with legal or contractual restrictions on resale
(although the fund may invest in such securities to the extent permitted
under the federal securities laws) or which are not readily marketable, or
which have a record of less than three years continuous operation, including
the operations of any predecessor companies, if more than 5% of the fund's
total assets would be invested in such companies.
5. Invest in securities for the purpose of exercising management or control
of the issuer.
6. Maintain a margin account with a securities dealer or invest in
commodities and commodity contracts (except that the fund may engage in
financial futures, including stock index futures, and options on stock index
futures) or lease or acquire any interests, including interest issued by
limited partnerships (other than publicly traded equity securities) in oil,
gas, or other mineral exploration or development programs, or invest in
excess of 5% of its total assets in options unrelated to the fund's
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof.
7. Effect short sales, unless at the time the fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes).
8. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts; the fund may,
however, invest in marketable securities issued by real estate investment
trusts.
9. Invest in the securities of other investment companies, except where there
is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the fund would not own, immediately after the
acquisition, securities of other investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the fund's total assets and iii) together with the securities of
all other investment companies held by the fund, exceed, in the aggregate,
more than 10% of the fund's total assets. To the extent permitted by
exemptions granted under the 1940 Act, the fund may invest in shares of one
or more money market funds managed by Advisers or its affiliates.
10. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if, to the
knowledge of the Trust, one or more of the officers or trustees of the Trust,
or its investment adviser, own beneficially more than one-half of 1% of the
securities of such issuer and all such officers and trustees together own
beneficially more than 5% of such securities.
In addition to these fundamental policies, it is the present policy of the
California Fund (which may be changed without the shareholder approval) not
to pledge, mortgage or hypothecate its assets as security for loans, nor to
engage in joint or joint and several trading accounts in securities, except
that it may participate in joint repurchase arrangements, invest its
short-term cash in shares of the Franklin Money Fund (pursuant to the terms
of any order, and any conditions therein, issued by the SEC permitting such
investments), or combine orders to purchase or sell with orders from other
persons to obtain lower brokerage commissions. The California Fund may not
invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not
listed on either the NYSE or the American Stock Exchange.
The Large Cap Fund MAY NOT:
1. Borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted by the 1940 Act, or any exemptions
therefrom which may be granted by the SEC, or for temporary or emergency
purposes and then in an amount not exceeding 33% of the value of the fund's
total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment goal
and policies, and (c) to the extent the entry into a repurchase agreement is
deemed to be a loan. The fund may also make loans to affiliated investment
companies to the extent permitted by the 1940 Act or any exemptions therefrom
which may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the fund may buy or
sell securities of real estate investment trusts and may enter into financial
futures contracts, options thereon, and forward contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest. Except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages or
pledges, (b) entering into options, futures contracts, forward contracts or
repurchase transactions, or (c) making short sales of securities to the extent
permitted by the 1940 Act and any rule or order thereunder, or SEC staff
interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed by
the U.S. government or any of its agencies or instrumentalities or securities of
other investment companies).
7. Buy the securities of any one issuer (other than the U.S. government or any
of its agencies or instrumentalities or securities of other investment
companies) if immediately after such investment (a) more than 5% of the value of
the fund's total assets would be invested in such issuer or (b) more than 10% of
the outstanding voting securities of such issuer would be owned by the fund,
except that up to 25% of the value of such fund's total assets may be invested
without regard to such 5% and 10% limitations.
The MidCap Fund MAY NOT:
1. Borrow money or mortgage or pledge any of its assets, except it may borrow
up to 10% of its total assets (including the amount borrowed) to meet
redemption requests that might otherwise require the untimely disposition of
portfolio securities or for other temporary or emergency purposes and may
pledge its assets in connection with these borrowings. The fund may borrow
from banks, other Franklin Templeton Funds or other persons to the extent
permitted by applicable law. The fund will not make any additional
investments while borrowings exceed 5% of its total assets.
2. Loan money, except as is consistent with the fund's investment objective,
and except that the fund may (a) buy a portion of an issue of publicly
distributed bonds, debentures, notes and other evidences of indebtedness, (b)
enter into repurchase agreements, (c) lend its portfolio securities, and (d)
participate in an interfund lending program with other Franklin Templeton
Funds to the extent permitted by the 1940 Act and any rules or orders
thereunder.
3. Invest in any company for purposes of exercising control or management,
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
objective and policies as the fund.
4. Buy any securities on margin or sell any securities short, except that it
may use such short-term credits as are necessary for the clearance of
transactions.
5. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition, or reorganization; provided that
all or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and
policies as the fund.
6. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry except that, to the extent this
restriction is applicable, all or substantially all of the assets of the fund
may be invested in another registered investment company having the same
investment objective and policies as the fund.
7. Underwrite securities of other issuers, except insofar as the fund may be
technically deemed an underwriter under the federal securities laws in
connection with the disposition of portfolio securities. This does not
preclude the fund from obtaining short-term credit necessary for the
clearance of purchases and sales of its portfolio securities.
8. Buy or sell securities to the fund's officers and trustees, or any firm of
which any officer or trustee is a member, as principal, or retain securities
of any issuer if, to the knowledge of the fund, one or more of the fund's
officers, trustees, or investment adviser own beneficially more than 1/2 of
1% of the securities of such issuer and all such officers and trustees
together own beneficially more than 5% of such securities.
9. Acquire, lease or hold real estate, provided that this limitation shall
not prohibit the purchase of securities secured by real estate or interests
therein.
10. Buy or sell commodities or commodity contracts, except that the fund may
enter into financial futures contracts, including stock index futures, and
options on stock index futures, or interests in oil, gas, or other mineral
exploration or development programs, or invest in excess of 5% of its total
assets in options unrelated to the fund's transactions in futures, including
puts, calls, straddles, spreads, or any combination thereof.
In addition to these fundamental policies, it is the present policy of the
fund (which may be changed without shareholder approval) not to invest in
real estate limited partnerships (investments in marketable securities issued
by real estate investment trusts are not subject to this restriction). The
MidCap Fund's restriction against investment in interests in oil, gas, or
other mineral leases, exploration or development does not include publicly
traded equity securities.
It is the present policy of the MidCap Fund, which may be changed without
shareholder approval, not to engage in joint or joint and several trading
accounts in securities, except that it may participate in joint repurchase
arrangements, or combine orders to buy or sell with orders from other persons
to obtain lower brokerage commissions. To the extent permitted by exemptions
granted under the 1940 Act, the MidCap Fund may invest in shares of one or
more money market funds managed by Advisers or its affiliates. The MidCap
Fund may not invest in excess of 5% of its total assets, valued at the lower
of cost or market, in warrants, nor more than 2% of its total assets in
warrants not listed on either the NYSE or the American Stock Exchange.
The Small Cap Fund MAY NOT:
1. Purchase the securities of any one issuer (other than obligations of the
U.S., its agencies or instrumentalities) if immediately thereafter, and as a
result of the purchase, the fund would (a) have invested more than 5% of the
value of its total assets in the securities of the issuer, or (b) hold more
than 10% of any voting class of the securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
may be deemed a loan;
3. Borrow money (does not preclude the fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require
the untimely disposition of portfolio securities or for other temporary or
emergency (but not investment) purposes, in an amount up to 10% of the value
of the fund's total assets (including the amount borrowed) based on the
lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made. While borrowings exceed 5% of
the fund's total assets, the fund will not make any additional investments;
4. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry;
5. Underwrite securities of other issuers or invest more than 10% of its
assets in securities with legal or contractual restrictions on resale
(although the fund may invest in such securities to the extent permitted
under the federal securities laws for example, transactions between the fund
and Qualified Institutional Buyers subject to Rule 144A under the Securities
Act of 1933) or which are not readily marketable, or which have a record of
less than three years continuous operation, including the operations of any
predecessor companies, if more than 10% of the fund's total assets would be
invested in such companies;
6. Invest in securities for the purpose of exercising management or control
of the issuer;
7. Maintain a margin account with a securities dealer or invest in
commodities and commodity contracts (except that the fund may engage in
financial futures, including stock index futures, and options on stock index
futures) or lease or acquire any interests, including interests issued by
limited partnerships (other than publicly traded equity securities) in oil,
gas, or other mineral exploration or development programs, or invest in
excess of 5% of its total assets in options unrelated to the fund's
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof;
8. Effect short sales, unless at the time the fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The fund does not currently
intend to employ this investment technique;
9. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts; (the fund may,
however, invest in marketable securities issued by real estate investment
trusts);
10. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the fund would not own, immediately after the
acquisition, securities of the investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the fund's total assets, and iii) together with the securities of
all other investment companies held by the fund, exceed, in the aggregate,
more than 10% of the fund's total assets. The fund may invest in shares of
one or more money market funds managed by Advisers or its affiliates; and
11. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer, if to the
knowledge of the Trust, one or more of the officers or trustees of the Trust,
or Advisers, own beneficially more than one-half of 1% of the securities of
such issuer and all such officers and trustees together own beneficially more
than 5% of such securities.
In addition to these fundamental policies, it is the present policy of the
fund (which may be changed without shareholder approval) not to pledge,
mortgage or hypothecate the fund's assets as security for loans, and not to
engage in joint or joint and several trading accounts in securities, except
that it may participate in joint repurchase arrangements, invest its
short-term cash in shares of the Franklin Money Fund (pursuant to the terms
and conditions of the SEC order permitting such investments), or combine
orders to buy or sell with orders from other persons to obtain lower
brokerage commissions. The fund may not invest in excess of 5% of its net
assets, valued at the lower of cost or market, in warrants, nor more than 2%
of its net assets in warrants not listed on either the NYSE or American Stock
Exchange.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments
in emerging markets. Investments in depositary receipts also involve some or
all of the risks described below.
The political, economic, and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies, and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent the
fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may
diminish a fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain low rated or unrated debt securities may also make it
more difficult for a fund to obtain accurate market quotations for the
purposes of valuing the fund's portfolio. Market quotations are generally
available on many low rated or unrated securities only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities. The ability of a fund to achieve
its investment goal may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would
be the case if the fund were invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, a fund
may incur additional expenses to seek recovery.
BIOTECHNOLOGY COMPANIES The biotechnology industry is subject to extensive
government regulation. The industry will be affected by government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability, and similar matters. For example, in the
past several years, the U.S. Congress has considered legislation concerning
healthcare reform and changes to the U.S. Food and Drug Administration's
(FDA) approval process. If such legislation is passed it may affect the
biotechnology industry. As these factors impact the biotechnology industry,
the value of your shares may fluctuate significantly over relatively short
periods of time.
Because the biotechnology industry is relatively new, investors may be quick
to react to developments that affect the industry. In the past, biotechnology
securities have exhibited considerable volatility in reaction to research and
other developments. In comparison to more developed industries, there may be
a thin trading market in biotechnology securities, and adverse developments
in the biotechnology industry may be more likely to result in decreases in
the value of biotechnology stocks.
Biotechnology companies are often small, start-up ventures whose products are
only in the research stage. Only a limited number of biotechnology companies
have reached the point of approval of products by the FDA and subsequent
commercial production and distribution of such products. Therefore, the
success of investments in the biotechnology industry is often based upon
speculation and expectations about future products, research progress, and
new product filings with regulatory authorities. Such investments are
speculative and may drop sharply in value in response to regulatory or
research setbacks.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government subsidies are
discontinued, the profitability of these companies could be adversely
affected. Stocks of these companies will be affected by government policies
on health care reimbursements, regulatory approval for new drugs and medical
instruments, and similar matters. Health care companies are also subject to
legislative risk, which is the risk of a reform of the health care system
through legislation. Health care companies may face lawsuits related to
product liability issues. Also, many products and services provided by health
care companies are subject to rapid obsolescence. The value of an investment
in the fund may fluctuate significantly over relatively short periods of time.
UNSEASONED COMPANIES To the extent that a fund may invest in smaller
capitalization companies or other companies, it may place greater emphasis
upon investments in relatively new or unseasoned companies that are in their
early stages of development, or in new and emerging industries where the
opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. Any investments in these types of companies, however,
will be limited in the case of issuers that have less than three years
continuous operation, including the operations of any predecessor companies,
to no more than 5% of the California Growth fund's total assets and to no
more than 10% of the Small Cap fund's net assets.
CALIFORNIA COMPANIES Since the California Growth fund mainly invests in
California companies' securities, its performance is dependent on economic,
political and other conditions within California. However, the fund tries to
reduce the effect on its portfolio of fluctuations in economic conditions in
California by investing a significant portion of its assets in companies
whose financial prospects are dependent on the global economy.
Below is a discussion of certain conditions that may affect California
companies. It is not a complete analysis of every material fact that may
affect the economic or political conditions within California and is subject
to change. The information below is based on data available to the fund from
historically reliable sources, but the fund has not independently verified it.
California's economy has been the largest of all the states in the nation.
Like many other states, however, California was significantly affected by the
national recession of the early 1990s, especially in the southern portion of
the state. Most of its job losses during its recession resulted from military
cutbacks and the downturn in the construction industry. Downsizing in the
state's aerospace industry, excess office capacity, and slow growth in
California's export market also contributed to the state's recession.
Since mid-1993, California's economic recovery has been fueled by growth in
the export, entertainment, tourism and computer services sectors. The state's
diverse employment base has reached prerecession levels with manufacturing
accounting for 14.5% of employment (based on 1997 state figures), trade
23.2%, services 30.8%, and government 16.3%. Despite strong employment
growth, California's unemployment rate has remained above the national
average. Recent economic problems in Asia have adversely affected the state's
high tech manufacturing and related industries, resulting in slower growth
than in previous years. Further weakening of the economies of California's
international trade partners could have a negative impact on the state.
REAL ESTATE SECURITIES Investments in real estate securities are subject to
the risks associated with the real estate industry. Economic, regulatory,
and social factors that affect the value of real estate will affect the value
of real estate securities. These factors include overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, variations in rental income,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates. REITs are subject to risks related to the skill
of their management, changes in value of the properties the REITs own, the
quality of any credit extended by the REITs, and general economic and other
factors.
DERIVATIVE SECURITIES The funds' transactions in options, futures, and
options on futures involve certain risks. These risks include, among others,
the risk that the effectiveness of a transaction depends on the degree that
price movements in the underlying securities, index, or currency correlate
with price movements in the relevant portion of the fund's portfolio. The
fund bears the risk that the prices of its portfolio securities will not move
in the same amount as the option or future it has purchased, or that there
may be a negative correlation that would result in a loss on both the
underlying securities and the derivative security.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss
by the fund of margin deposits in the event of bankruptcy of a broker with
whom the fund has an open position.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures
contract at any specific time. Thus, it may not be possible to close an
option or futures position. The inability to close options or futures
positions may have an adverse impact on the fund's ability to effectively
hedge its securities. Furthermore, if the fund is unable to close out a
position and if prices move adversely, the fund will have to continue to make
daily cash payments to maintain its required margin. If the fund does not
have sufficient cash to do this, it may have to sell portfolio securities at
a disadvantageous time. The funds will enter into an option or futures
position only if there appears to be a liquid secondary market for the
options or futures.
Similarly, there can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific time.
Consequently, the fund may be able to realize the value of an OTC option it
has purchased only by exercising it or by entering into a closing sale
transaction with the dealer that issued it. When a 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.
FORWARD CURRENCY EXCHANGE TRANSACTIONS While the Blue Chip fund may enter
into forward currency transactions to reduce currency exchange rate risks,
these transactions involve certain other risks. Forward currency exchange
transactions may limit the potential gain to the fund from a positive change
in the relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates may
result in poorer overall performance for the fund than if it had not entered
into these transactions. Furthermore, there may be imperfect correlation
between the fund's portfolio securities denominated in a particular currency
and forward currency transactions entered into by the fund. This may cause
the fund to sustain losses that will prevent it from achieving a complete
hedge or expose it to the risk of foreign exchange loss.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to delivery and
generally do not earn interest until their scheduled delivery date. There is
the risk that the value or yield of the security at the time of delivery may
be more or less than the price paid for the security or the yield available
when the transaction was entered into.
STANDBY COMMITMENT AGREEMENTS There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the
value of the security may be more or less than its purchase price. Since the
issuance of the security is at the option of the issuer, the Blue Chip fund
may bear the risk of a decline in value of the security and may not benefit
if the security appreciates in value during the commitment period.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the funds, the
funds' manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
OFFICERS AND TRUSTEES
- ------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 for each of the Trust's
eight regularly scheduled meetings plus $1,050 per meeting attended. Board
members who serve on the audit committee of the trust and other funds in the
Franklin Templeton Group of Funds receive a flat fee of $2,000 per committee
meeting attended, a portion of which is allocated to the trust. Members of a
committee are not compensated for any committee meeting held on the day of a
board meeting. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to noninterested board members by the
trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
FRANKLIN
TOTAL FEES RECEIVED TEMPLETON GROUP
TOTAL FEES FROM THE FRANKLIN OF FUNDS ON
RECEIVED TEMPLETON GROUP OF WHICH EACH
NAME FROM THE TRUST 1 FUNDS 2 SERVES 3
- --------------------------------------------------------------------------------
Frank H. Abbott, III $13,935 $159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith E. Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from May 1,
1998, through May 31, 1998, fees at the rate of $300 for each of the Trust's
eight board meetings plus $300 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- ---------------------------------
MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for each fund to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of each fund. Similarly, with respect
to each fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the funds' code of ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES The Aggressive Growth Fund pays the manager a fee computed
at the close of business on the last business day of each month according to
the terms of the management agreement. The MidCap Fund pays the manager a fee
equal to an annual rate of 0.65% of the fund's average daily net assets.
The Blue Chip Fund pays the manager a fee equal to an annual rate of:
o 0.75% of the fund's average daily net assets up to and including $500
million;
o 0.625% of the fund's average daily net assets over $500 million up to
and including $1 billion; and
o 0.50% of the fund's average daily net assets over $1 billion
The California Fund and Small Cap Fund pay the manager a fee equal to an
annual rate of:
o 0.625 of 1% of the average daily net assets of the fund up to and
including $100 million;
o 0.50 of 1% of the value of the average daily net assets over $100
million, up to and including $250 million;
o 0.45 of 1% of the value of average daily net assets over $250 million
up to and including $10 billion;
o 0.44 of 1% of the value of average daily net assets over $10 billion up
to and including $12.5 billion;
o 0.42 of 1% of the value of average daily net assets over $12.5 billion
up to and including $15 billion; and
o 0.40 of 1% of the value of average daily net assets over $15 billion
The Large Cap fund pays the manager a fee equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million and not over $1
billion;
o 0.35% of the value of net assets over $1 billion and not over $1.5
billion;
o 0.30% of the value of net assets over $1.5 billion and not over $6.5
billion;
o 0.275% of the value of net assets over $6.5 billion and not over $11.5
billion;
o 0.25% of the value of net assets over $11.5 billion and not over $16.5
billion;
o 0.24% of the value of net assets over $16.5 billion and not over $19
billion;
o 0.23% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
-------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Blue Chip Fund1 134,052 17,998 0
California Fund 4,066,764 2,866,217 953,389
MidCap Fund 199,753 135,485 68,022
Small Cap Fund 20,630,510 13,566,077 3,859,067
1. For the fiscal years ended April 30, 1999, 1998 and 1997, management fees,
before any advance waiver, totaled $205,441, $91,184 and $25,008,
respectively. Under an agreement by the manager to limit its fees, the fund
paid the management fees shown.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the Blue Chip Fund, California Fund, MidCap Fund
and Small Cap Fund. FT Services is wholly owned by Resources and is an
affiliate of the funds' manager and principal underwriter.
Franklin Templeton Services, Inc. (FT Services) has an agreement with the
Aggressive Growth Fund and the Large Cap Fund to provide certain
administrative services and facilities for each fund. FT Services is wholly
owned by Resources and is an affiliate of the funds' manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES For the Blue Chip Fund, California Fund, MidCap Fund and
Small Cap Fund the manager pays FT Services a monthly fee equal to an annual
rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
The Aggressive Growth Fund and Large Cap Fund pay FT Services a monthly fee
equal to an annual rate of 0.20% of each fund's average daily net assets.
During the last three fiscal years ended April 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
-------------------------------------------------------
1999 1998 19971
- -------------------------------------------------------------------------------
Blue Chip Fund 41,211 808,799 184,878
California Fund 1,124,899 31,322 10,579
MidCap Fund 46,110 15,838 3,786
Small Cap Fund 3,971,753 2,794,347 717,201
1. For the period October 1996 through April 30, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is each fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. Each
fund also will 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 will 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, NY 10286, acts as custodian of each fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- ------------------------------
The manager selects brokers and dealers to execute the funds' 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the funds' 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, also may be considered a factor in the
selection of broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
funds, any portfolio securities tendered by a fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager 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 funds and one or more other
investment companies or clients supervised by the manager 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 the manager, 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 funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended April 30, the funds paid the
following brokerage commissions:
BROKERAGE COMMISSIONS PAID ($)
-------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------
Blue Chip Fund 56,175 48,160 14,667
California Fund 17,062,207 594,357 222,569
MidCap Fund 53,633 31,590 23,231
Small Cap Fund 2,187,594 14,648,944 1,155,691
[For the fiscal year ended [], 19[], the fund [did not pay][paid] brokerage
commissions [of $[] from aggregate portfolio transactions of $[]] to brokers
who provided research services.]
As of [], 199[], the fund did not own securities of its regular
broker-dealers.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that the funds will own more than 5% of the voting securities of one
or more broker-dealers through whom each fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the funds. To the extent the funds place brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the funds, the funds will be required to
adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the funds to adhere to
procedures adopted by the board relating to ensuring that the commissions
paid to such broker-dealers do not exceed what would otherwise be the usual
and customary brokerage commissions for similar transactions.
DISTRIBUTIONS AND TAXES
- ----------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The funds do not pay "interest" or guarantee any fixed rate of
return on an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce a fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a fund's
ordinary income distributions to you, and may cause some or all of a fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Aggressive Growth
Fund and Large Cap Growth Fund intend to elect and qualify during the current
fiscal year to be treated as regulated investment companies under Subchapter
M of the Internal Revenue Code. The Blue Chip Fund, California Growth Fund,
MidCap Growth Fund and Small Cap Growth Fund have elected to be treated as
regulated investment companies under Subchapter M of the Internal Revenue
Code, have qualified as such for their most recent fiscal years, and intend
to so qualify during the current fiscal year. As regulated investment
companies, the funds generally pay no federal income tax on the income and
gains they distribute to you. The board reserves the right not to maintain
the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, a fund will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in
such fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in such fund or in another Franklin
Templeton Fund within 90 days of buying the original shares, the sales charge
that would otherwise apply to your reinvestment may be reduced or
eliminated. The IRS will require you to report gain or loss on the
redemption of your original shares in a fund. In doing so, all or a portion
of the sales charge that you paid for your original shares in a fund will be
excluded from your tax basis in the shares sold (for the purpose of
determining gain or loss upon the sale of such shares). The portion of the
sales charge excluded will equal the amount that the sales charge is reduced
on your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by a fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 100% of the dividends paid by the Blue Chip
Fund, 31.71% of the dividends paid by the California Growth Fund, 100% of the
dividends paid by the MidCap Growth Fund and 37.50% of the dividends paid by
the Small Cap Growth Fund for the most recent fiscal year qualified for the
dividends-received deduction. The Aggressive Growth Fund anticipates that a
portion of the dividends it pays will qualify for the dividends-received
deduction. Under normal market conditions the Large Cap Growth Fund
anticipates that a significant portion of the dividends it pays will qualify
for the dividends received deduction. In some circumstances, you will be
allowed to deduct these qualified dividends, thereby reducing the tax that
you would otherwise be required to pay on these dividends. The
dividends-received deduction will be available only with respect to dividends
designated by such fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex
securities. These investments may be subject to numerous special and complex
tax rules. These rules could affect whether gains and losses recognized by a
fund are treated as ordinary income or capital gain, accelerate the
recognition of income to a fund and/or defer a fund's ability to recognize
losses, and, in limited cases, subject a fund to U.S. federal income tax on
income from certain of its foreign securities. In turn, these rules may
affect the amount, timing or character of the income distributed to you by a
fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ----------------------------------------------------------
Each fund, except the California Fund, is a series of Franklin Strategic
Series, an open-end management investment company, commonly called a mutual
fund. The trust was organized as a Delaware business trust on January 25,
1991, and is registered with the SEC.
Before July 12, 1993, the California Fund was named the Franklin California
250 Growth Fund. On that date, the fund's investment objective and various
investment policies were changed. Consistent with these changes, the fund's
name was changed to the Franklin California Growth Fund.
The MidCap Fund changed its name from FISCO MidCap Growth Fund to Franklin
Institutional MidCap Growth Fund on September 1, 1994, and to its current
name on April 18, 1996.
Certain 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.
The Aggressive Fund currently offers four classes of shares, Class A, Class
B, Class C and Advisor Class. The fund may offer additional classes of shares
in the future. The full title of each class is:
o Franklin Aggressive Growth Fund - Class A
o Franklin Aggressive Growth Fund - Class B
o Franklin Aggressive Growth Fund - Class C
o Franklin Aggressive Growth Fund - Advisor Class
The California Fund currently offers four classes of shares, Class A, Class
B, Class C and Advisor Class. Before January 1, 1999, Class A shares were
designated Class I and Class C shares were designated Class II. The fund
began offering Class B shares on January 1, 1999. The fund may offer
additional classes of shares in the future. The full title of each class is:
o Franklin California Growth Fund - Class A
o Franklin California Growth Fund - Class B
o Franklin California Growth Fund - Class C
o Franklin California Growth Fund - Advisor Class
The Large Cap Fund currently offers four classes of shares, Class A, Class B,
Class C and Advisor Class. The fund may offer additional classes of shares in
the future. The full title of each class is:
o Franklin Large Cap Growth Fund - Class A
o Franklin Large Cap Growth Fund - Class B
o Franklin Large Cap Growth Fund - Class C
o Franklin Large Cap Growth Fund - Advisor Class
The Small Cap Fund currently offers three classes of shares, Class A, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund may offer
additional classes of shares in the future. The full title of each class is:
o Franklin Small Cap Growth Fund - Class A
o Franklin Small Cap Growth Fund - Class C
o Franklin Small Cap Growth Fund - Advisor Class
The Blue Chip Fund and MidCap Fund each offer only one share class. Because
the funds' sales charge structure and Rule 12b-1 plan are similar to those of
Class A shares, shares of the funds are considered Class A shares for
redemption, exchange and other purposes. Before January 1, 1999, Class A
shares were designated Class I. The funds may offer additional classes of
shares in the future.
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
As of June 8, 1999, the principal shareholders of the fund, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- --------------------------------------------------------------------
MIDCAP FUND
Franklin Resources, Inc.
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class A 18%
SMALL CAP FUND
Charles Schwab & Co., Inc.
101 Montgomery St.
San Francisco, CA 94104-4122 Advisor 6%
Class
First Union National Bank Ttee
FBO Willis Corroon Corporation
A/C 1040108756
1525 West WT Harris Blvd.
NC-115
Charlotte, NC 28288 Advisor 6%
Class
The Northern Trust Company Trst
for the Nalco Chemical Co Ret Trst
50 S. LaSalle St.
Chicago, IL 60675 Advisor 6%
Class
Old Second National Bank of Aurora
C/O Trust Operations Division
37 South River St.
Aurora, IL 60506-4173 Advisor 7%
Class
Trust Company of Illinois
45 S. Park Blvd., Ste. 315
Glen Ellyn, IL 60137-6282 Advisor 7%
Class
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.
As of June 8, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund
and class. The board members may own shares in other funds in the Franklin
Templeton Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds 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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Valuemark Funds, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account 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
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A 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, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders who
chose to reinvest their distributions in Class A 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 the fund's
Class A shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying
sales charges. 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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a
broker-dealer or service agent who has entered into an agreement with
Distributors
o Registered securities dealers and their affiliates, for their
investment accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial 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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, each 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.
Each fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- ----------------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases of Class A shares by certain retirement plans
without an initial sales charge: 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC 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 A shares without an initial sales charge also may be
subject to a CDSC 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.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- ---------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the funds when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death
or disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 each 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. 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.
REDEMPTIONS IN KIND Each 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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. 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.
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.
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 funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound
to meet any redemption request in less than the seven day period prescribed
by law. Neither the funds nor their 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
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 also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- ---------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of
the day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. Each fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, each fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 NAV. 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 close of the NYSE. The value of these securities used in computing
the NAV 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 close of the NYSE that will not be reflected in the
computation of the NAV. 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, each fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- ---------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
April 30,:
AMOUNT RECEIVED
IN CONNECTION
TOTAL AMOUNT WITH
COMMISSIONS RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
------------------------------------------------------------------------------
1999
Blue Chip Fund 360,101 49,226 8
California Growth Fund 3,857,071 433,509 125,886
MidCap Fund 290,614 38,279 12,053
Small Cap Fund 15,233,910 1,589,079 828,220
1998
Blue Chip Fund 226,140 25,642 0
California Growth Fund 7,612,566 762,027 10,657
MidCap Fund 259,668 29,262 0
Small Cap Fund 30,947,759 2,943,926 64,163
1997
Blue Chip Fund 76,980 8,755 0
California Growth Fund 4,836,624 518,921 1,701
MidCap Fund 140,519 16,023 0
Small Cap Fund 11,056,311 1,097,126 33,425
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by California Fund and Small Cap Fund under the
Class A plan may not exceed 0.25% per year of Class A's average daily net
assets, payable quarterly. All distribution expenses over this amount will be
borne by those who have incurred them.
Payments by the Aggressive Fund, Blue Chip Fund, Large Cap Fund, MidCap Fund
and Small Cap Fund under the Class A plan may not exceed 0.35% per year of
Class A's average daily net assets, payable quarterly. Of this amount, the
fund may reimburse up to 0.35% to Distributors or others, out of which 0.10%
generally will be retained by Distributors for distribution expenses. All
distribution expenses over this amount will be borne by those who have
incurred them.
The California Fund's Class A plan does not permit unreimbursed expenses
incurred in a particular year to be carried over to or reimbursed in later
years.
THE CLASS B AND C PLANS. Under the Class B and C plans, the funds pay
Distributors up to 0.75% per year of the class's average daily net assets,
payable monthly for the Aggressive Fund, California Fund - Class B, Large Cap
Fund and Small Cap Fund and quarterly for the California Fund - Class C, to
pay Distributors or others for providing distribution and related services
and bearing certain expenses. All distribution expenses over this amount will
be borne by those who have incurred them. The fund also may pay a servicing
fee of up to 0.25% per year of the class's average daily net assets, payable
monthly for the Aggressive Fund, California Fund - Class B, Large Cap Fund
and Small Cap Fund and quarterly for the California Fund - Class C. 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 funds on behalf of customers, and
similar servicing and account maintenance activities.
The expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C 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, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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
noninterested members of the funds' board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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 the manager
or by vote of a majority of the outstanding shares of the class. The Class A
plans also may be terminated by any act that constitutes an assignment of the
underwriting agreement with Distributors. Distributors or any dealer or other
firm also may 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 noninterested board members, 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, 1998, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the funds paid Distributors under the
plans were:
DISTRIBUTORS'
ELIGIBLE EXPENSES AMOUNT PAID
($) BY THE FUND ($)
- -------------------------------------------------------------------
Blue Chip Fund 110,997 82,281
California Fund
Class A 2,176,459 1,782,674
Class B 77,390 3,982
Class C 1,446,655 1,352,080
MidCap Fund 110,173 77,031
Small Cap Fund
Class A 10,974,973 9,218,844
Class C 8,380,334 6,923,739
PERFORMANCE
- --------------------------
Performance quotations are subject to SEC rules. These rules require the use
of standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied
by certain standardized performance information computed as required by the
SEC. Average annual total return quotations used by the funds are based on
the standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 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.
Because the Aggresive Fund and Large Cap Fund are new, they have no performance
history and thus no performance quotations have been provided.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial 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 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 initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended April 30,
1999, were:
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- --------------------------------------------------------------------------------
Class A
Blue Chip Fund 06/03/96 9.50% -- 12.03%
California Fund 10/30/91 0.29% 22.92% 18.96%
MidCap Fund 08/17/93 -11.72% 13.65% 12.18%
Small Cap Fund 02/14/92 -8.99% 19.00% 17.42%
- -------------------------------------------------------------------
INCEPTION SINCE
DATE 1 YEAR INCEPTION
- -------------------------------------------------------------------
Class C
California Fund 09/03/96 3.63% 17.41%
Small Cap Fund 10/02/95 -5.99% 10.24%
The following SEC formula was used to calculate these figures:
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 each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial 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, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended April 30, 1999, were:
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- ---------------------------------------------------------------------------
Class A
Blue Chip Fund 06/03/96 9.50% -- 39.12%
California Fund 10/30/91 0.29% 180.61% 267.75%
MidCap Fund 08/17/93 -11.72% 89.57% 92.60%
Small Cap Fund 02/14/92 -8.99% 138.64% 218.18%
SINCE
INCEPTION
(01/01/99)
- ----------------------------------
Class B
California Fund 1.88%
INCEPTION SINCE
DATE 1 YEAR INCEPTION
- --------------------------------------------------------------
Class C
California Fund 09/03/96 3.63% 53.12%
Small Cap Fund 10/02/95 -5.99% 57.56%
VOLATILITY Occasionally statistics may be used to show a fund's volatility
or risk. Measures of volatility or risk are generally used to compare a
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 funds also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance 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 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.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally the leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks) and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - an
unmanaged capitalization-weighted index designed to measure performance of
the broad domestic economy through changes in the aggregate market value of
500 stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o 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.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o 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.
ADDITIONAL COMPARISONS - AGGRESSIVE FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Russell 3000(R) Growth Index - measures the performance of those Russell
3000 Index companies with higher price-to-book ratios and higher forecasted
growth values. The stocks in this index are also members of either the
Russell 1000 Growth or the Russell 2000 Growth indexes. o Standard &
Poor's(R) MidCap 400 Index - consists of 400 domestic stocks chosen for
market size (median market capitalization of $676 million), liquidity and
industry group representation. It is a market-value weighted index, with
each stock affecting the index in proportion to its market value. This
index, calculated by S&P, is a total return index with dividends
reinvested.
ADDITIONAL COMPARISONS - BLUE CHIP FUND
o 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.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Morgan Stanley Capital International World Index - an arithmetic average
(weighted by market value) index based in US dollars of the performance of
approximately 1,500 securities listed on the stock exchanges of 22
countries including the US, Europe, Canada, Australia, New Zealand and the
Far East with gross dividends reinvested.
ADDITIONAL COMPARISONS - CALIFORNIA FUND
o 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.
o Valueline Index - an unmanaged index which follows the stock of
approximately 1,700 companies.
o Bateman Eichler Hill Richards Western Stock Index - A managed index
representing 215 stocks of companies within the Western United States.
Seventy-five percent of the stocks are Californian companies, the remaining
25% represent companies in: Arizona, Hawaii, Nevada, Oregon and Washington.
o Russell 3000 Index - composed of 3,000 large U.S. companies by market
capitalization, representing approximately 98% of the U.S. equity market.
o Russell 2000 Small Stock Index - consists of the smallest 2,000 companies
in the Russell 3000 Index, representing approximately 11% of the Russell
3000 total market capitalization.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Franklin California 250 Growth Index - consists of the 250 largest
California based companies on an equal weighted basis in order to
approximately diversify and correlate with the business segment weightings
of the actual economy (as provided by the Gross State Product). By doing
so, the Index will have an orientation towards small cap growth companies,
mainly high tech and services related firms. The Index is equally weighted
as opposed to market weighted, meaning each company represents 0.4% of the
total index.
o Bloomberg California Index - a price-weighted index designed to measure the
performance of California's economy. The index was developed with a base
value of 100 as of December 30, 1994.
ADDITIONAL COMPARISONS - LARGE CAP FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Russell 3000(R) Index measures the performance of the 3,000 largest US
companies based on total market capitalization.
o Russell 1000(R) Index measures the performance of the 1,000 largest
companies in the Russell 3000 Index.
o The Wilshire Top 2500 Index consists of the largest 2500 companies in the
Wilshire 5000.
ADDITIONAL COMPARISONS - MIDCAP FUND
o 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.
o The Wilshire 4500 Equity Index - a market value-weighted index of all U.S.
common equity securities with readily available price data (excluding the
S&P 500 securities which together with the 4500 comprise the Wilshire
5000). It is a total return index with dividends reinvested.
o The Wilshire Mid Cap 750 - overlaps both the top 750 and next 1750 of the
Wilshire 2500 universe (the top 2500 companies and 99% of the market
capitalization of the Wilshire 5000). Wilshire includes companies that have
market capitalizations ranging from $300 million to $1.3 billion. The
portfolio contains from 125 to 500 securities.
o The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000
total market capitalization, this is Russell's Small Cap Index.
o The Russell 2500 Index - consists of the bottom 500 securities in the
Russell Index, as ranked by total market capitalization, and all 2,000
securities in the Russell 2000 Index. This Index is a good measure of small
to medium-small stock performance.
o The Russell 3000 Index - consists of 3,000 large U.S. companies, as
determined by market capitalization. This portfolio of securities
represents approximately 98% of the investable U.S. equity market.
o Valueline Index - an unmanaged index which follows the stock of
approximately 1700 companies.
o Standard & Poor's(R) 400 - consists of 400 domestic stocks chosen for
market size, liquidity and industry group representation. It is a
market-value weighted index, with each stock affecting the Index in
proportion to its market value. This index, calculated by S&P, is a total
return index with dividends reinvested.
o Total Return Performance - The example below may be used to illustrate the
fund's performance, when compared to the total return of the Wilshire 5000
Index, Standard and Poor's 500 Index and the Standard and Poor's Midcap
Index:
Annual Performance from 1989 through 1998
S&P S&P WILSHIRE
500 MIDCAP 5000
1989........... 31.69 35.52 29.18
1990........... -3.10 -5.13 -6.18
1991........... 30.47 50.10 34.21
1992........... 7.62 11.91 8.98
1993........... 10.08 13.95 11.30
1994........... 1.32 -3.58 -0.06
1995........... 37.58 30.95 36.47
1996........... 22.96 19.20 21.21
1997........... 33.36 32.25 31.29
1998........... 28.58 19.11 23.43
ADDITIONAL COMPARISONS - SMALL CAP FUND
o 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.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000
total market capitalization, this is Russell's Small Cap Index.
o The Russell 2500 Index - consists of the bottom 500 securities in the
Russell Index, as ranked by total market capitalization, and all 2,000
securities in the Russell 2000 Index. This Index is a good measure of small
to medium-small stock performance.
o The Russell 3000 Index - consists of 3,000 large U.S. companies, as
determined by market capitalization. This portfolio of securities
represents approximately 98% of the investable U.S. equity market.
From time to time, advertisements or information for the funds 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 also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in a
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 any 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 a fund to calculate its figures. In
addition, there can be no assurance that a fund will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- ----------------------------------
The funds 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 funds cannot guarantee that these goals will be met.
The funds are members 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 is one of
the oldest mutual fund organizations and now services more than 4 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, a pioneer in international investing. The Mutual
Series team, 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 $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
You will receive the Small Cap Fund's financial reports every six months. If
you would like to receive an interim report of the fund's portfolio holdings,
please call 1-800/DIAL BEN(R).
DESCRIPTION OF RATINGS
- -----------------------------------
PREFERRED STOCKS RATINGS
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high quality
fixed-income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the A category.
BB, B AND CCC: Preferred stock rated BB, B, and CCC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While these issues will likely
have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in default
on debt instruments.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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
that 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. These 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. These 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 that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a 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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
their promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations for both short-term
debt and commercial paper, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC SERIES
Franklin Aggressive Growth Fund
Franklin Large Cap Growth Fund
Franklin Small Cap Growth Fund
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended April 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- ----------------------------------
FRANKLIN AGGRESSIVE GROWTH FUND The fund's investment goal is capital
appreciation. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of companies
demonstrating accelerating growth, increasing profitability, or above-average
growth or growth potential compared with the overall economy.
FRANKLIN LARGE CAP GROWTH FUND The fund's principal investment goal is
long-term capital appreciation. This goal is fundamental, which means it may
not be changed without shareholder approval.
The fund may also seek current income incidental to long-term capital
appreciation, although this is not a fundamental policy of the fund.
Under normal market conditions, the fund will invest at least 80%, and
intends to invest up to 100%, of its total assets in a diversified portfolio
of equity securities of large cap growth companies.
FRANKLIN SMALL CAP GROWTH FUND The fund's investment goal is long-term
capital growth. This goal is fundamental, which means it may not be changed
without shareholder approval.
The fund normally invests primarily in equity securities of small cap growth
companies. The fund may also invest up to 35% (measured at the time of
purchase) of its total assets in any combination of (a) equity securities of
larger capitalization companies that the manager believes have strong growth
potential, and (b) relatively well-known, larger companies in mature
industries that the manager believes have the potential for capital
appreciation, if the investment presents a favorable investment opportunity
consistent with the fund's investment goal.
The fund may from time to time make private investments in companies whose
securities are not publicly traded. These investments typically will take
the form of letter stock or convertible preferred stock. Because these
securities are not publicly traded, there is no secondary market for these
securities. The fund will treat these securities as illiquid.
Although the fund may invest up to 25% of its total assets in foreign
securities, including those of developing or emerging markets, the fund
currently intends to limit its investment in foreign securities to 10% of its
total assets.
The fund may invest up to 10% of its total assets in REITs. The fund will
not invest in securities issued without stock certificates of comparable
stock documents. The fund may not invest more than 10% of its net assets in
securities of issuers with less than three years continuous operation.
The fund may invest up to 5% of its total assets in corporate debt securities
that the manager believes have the potential for capital appreciation as a
result of improvement in the creditworthiness of the issuer. The receipt of
income from debt securities is incidental to the fund's investment goal. The
fund may buy both rated and unrated debt securities. The fund will invest in
securities rated B or better by Moody's or S&P or unrated securities of
comparable quality.
Below is more detailed information about some of the various types of
securities the funds may buy and the funds' investment policies and
restrictions.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities, warrants,
or rights. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
CONVERTIBLE SECURITIES Although each fund may invest in convertible
securities without limit, the Aggressive Growth and Large Cap Growth funds
currently intend to limit these investments to no more than 5% of net
assets. The Small Cap Growth fund may also invest in enhanced convertible
securities.
A convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, a convertible security is not
as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
When issued by an operating company, a convertible security tends to be
senior to common stock, but subordinate to other types of fixed-income
securities issued by that company. When a convertible security issued by an
operating company is "converted," the operating company often issues new
stock to the holder of the convertible security, but if the parity price of
the convertible security is less than the call price, the operating company
may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While each 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.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles
a number of different structures have been created to fit the characteristics
of specific investors and issuers. Examples of these enhanced
characteristics for investors include yield enhancement, increased equity
exposure or enhanced downside protection. From an issuer's perspective,
enhanced structures are designed to meet balance sheet criteria,
interest/dividend payment deductibility and reduced equity dilution. The
following are descriptions of common structures of enhanced convertible
securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS--each
issuer has a different acronym for their version of these securities) are
considered the most equity like of convertible securities. At maturity these
securities are mandatorily convertible into common stock offering investors
some form of yield enhancement in return for some of the upside potential in
the form of a conversion premium. Typical characteristics of mandatories
include: issued as preferred stock, convertible at premium, pay fixed
quarterly dividend (typically 500 to 600 basis points higher than common
stock dividend), and are non-callable for the life of the security (usually
three to five years). An important feature of mandatories is that the number
of shares received at maturity is determined by the difference between the
price of the common stock at maturity and the price of the common stock at
issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS)
are, from an investor's viewpoint, essentially convertible preferred
securities, i.e. they are issued as preferred stock convertible into common
stock at a premium and pay quarterly dividends. Through this structure the
company establishes a wholly owned special purpose vehicle whose sole purpose
is to issue convertible preferred stock. The offering proceeds pass-through
to the company who issues the special purpose vehicle a convertible
subordinated debenture with identical terms to the convertible preferred
issued to investors. Benefits to the issuer include increased equity credit
from rating agencies and the deduction of coupon payments for tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into
common stock at maturity and offers investors a higher current dividend than
the underlying common stock. The difference between these structures and
other mandatories is that the participation in stock price appreciation is
capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest
is actually paid, the accrued interest may be deducted for tax purposes.
Because of their put options, these bonds tend to be less sensitive to
changes in interest rates than either long maturity bonds or preferred
stocks. The put options also provide enhanced downside protection while
retaining the equity participation characteristics of traditional convertible
bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. A fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary, to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio. The funds,
however, intend to acquire liquid securities, though there can be no
assurances that this will be achieved.
DEBT SECURITIES represent a loan of money by the purchaser of the securities
to the issuer. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
The funds may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS Each fund may invest in foreign
securities. The Aggressive Growth and Large Cap Growth funds intend to limit
their investments in foreign securities to no more than 10% of total assets.
Although the Small Cap Growth fund may invest up to 25% of total assets in
foreign securities, it intends to limit its investments to 10% of total
assets.
The funds may buy foreign securities traded in the U.S. or directly in
foreign markets. The funds may buy American, European, and Global Depositary
Receipts. Depositary receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities (a) of
a foreign issuer deposited in a U.S. bank or trust company (American
Depositary Receipts, "ADRs"); or (b) of a foreign or U.S. issuer deposited in
a foreign bank or trust company (Global Depositary Receipts, "GDRs" or
European Depositary Receipts, "EDRs").
SMALL AND MID-CAP COMPANIES Market capitalization is defined as the total
market value of a company's outstanding stock. Small cap companies generally
have market capitalization of up to $1.5 billion at the time of the fund's
investment. Mid-cap companies generally have market capitalization of $1 to
$8 billion at the time of the fund's investment.
Small cap companies are often overlooked by investors or undervalued in
relation to their earnings power. Because small cap companies generally are
not as well known to the investing public and have less of an investor
following than larger companies, they may provide greater opportunities for
long-term capital growth as a result of inefficiencies in the marketplace.
These companies may be undervalued because they are part of an industry that
is out of favor with investors, although the individual companies may have
high rates of earnings growth and be financially sound.
Mid-cap companies may offer greater potential for capital appreciation than
larger companies, because mid-cap companies are often growing more rapidly
than larger companies, but tend to be more stable and established than small
cap or emerging companies.
REPURCHASE AGREEMENTS Each fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn
income on this portion of its assets, the fund may enter into repurchase
agreements with certain banks and broker-dealers. Repurchase agreements are
contracts under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed upon price and date. Under a
repurchase agreement, a fund agrees to buy a U.S. government security from
one of these issuers and then to sell the security back to the issuer after a
short period of time (generally, less than seven days) at a higher price. The
bank or broker-dealer must transfer to the fund's custodian securities with
an initial value of at least 102% of the dollar amount invested by the fund
in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceed the repurchase
price. Repurchase agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or restrictions upon a
fund's ability to dispose of the underlying securities. The funds will enter
into repurchase agreements only with parties that meet creditworthiness
standards approved by the funds' board of trustees. These parties are banks
or broker-dealers that have been determined by the manager to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
The Small Cap Growth fund may also enter into reverse repurchase agreements.
Under a reverse repurchase agreement, the fund agrees to sell a security in
its portfolio and then to repurchase the security at an agreed-upon price,
date, and interest payment. The fund will maintain cash or high-grade liquid
debt securities with a value equal to the value of the fund's obligation
under the agreement, including accrued interest, in a segregated account with
the fund's custodian bank. The securities subject to the reverse repurchase
agreement will be marked-to-market daily. Although reverse repurchase
agreements are borrowings under federal securities laws, the Small Cap Growth
fund does not treat them as borrowings for purposes of its investment
restriction #3 below, provided the segregated account is properly maintained.
LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may
lend certain of its portfolio securities to qualified securities dealers or
other institutional investors. Such loans may not exceed the following
percentages of the value of the fund's total assets, measured at the time of
the most recent loan: Aggressive Growth and Large Cap Growth funds, 33 1/3%;
and Small Cap Growth fund, 20%. For each loan the borrower must maintain
with the fund's custodian collateral (consisting of any combination of cash,
U.S. government securities, or irrevocable letters of credit) with a value at
least equal to 100% of the current market value of the loaned securities. The
fund retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower. The fund may terminate
the loans at any time and obtain the return of the securities loaned within
five business days. The fund will continue to receive any interest or
dividends paid on the loaned securities and will continue to have voting
rights with respect to the securities. However, as with other extensions of
credit, there are risks of delay in recovery or even loss of rights in
collateral should the borrower fail.
SECURITIES INDUSTRY RELATED INVESTMENTS To the extent it is consistent with
their respective investment goals and certain limitations under the
Investment Company Act of 1940, as amended (1940 Act), the funds may invest
their assets in securities issued by companies engaged in securities related
businesses, including companies that are securities brokers, dealers,
underwriters or investment advisors. These companies are considered to be
part of the financial services industry. Generally, under the 1940 Act, a
fund may not acquire a security or any interest in a securities related
business to the extent such acquisition would result in the fund acquiring in
excess of 5% of a class of an issuer's outstanding equity securities or 10%
of the outstanding principal amount of an issuer's debt securities, or
investing more than 5% of the value of the fund's total assets in securities
of the issuer. In addition, any equity security of a securities-related
business must be a marginable security under Federal Reserve Board
regulations and any debt security of a securities-related business must be
investment grade as determined by the Board. The funds do not believe that
these limitations will impede the attainment of their investment goals.
OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock 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 end of the contract period. Options, futures,
and options on futures are considered "derivative securities."
Each fund may buy and sell options on securities and securities indices. The
funds may only buy options if the premiums paid for such options total 5% or
less of net assets. Each fund may also buy and sell securities index futures
and options on securities index futures. The funds will not buy futures if
the amount of initial deposits and premiums paid for open contracts is more
than 5% of net assets (taken at current value).
Each fund may buy and sell futures contracts for securities and currencies.
Each fund may invest in futures contracts only to hedge against changes in
the value of its securities or those it intends to buy. The funds will not
enter into a futures contract if the amounts paid for open contracts,
including required initial deposits, would exceed 5% of net assets.
OPTIONS. The funds may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter ("OTC")
market. All options written by the funds will be covered. The funds may also
buy or write put and call options on securities indices. Options written by
the Aggressive Growth and Large Cap Growth funds will be for portfolio
hedging purposes only.
A call option written by the fund is covered if the fund (a) owns the
underlying security that is subject to the call or (b) has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held is (a) equal to or
less than the exercise price of the call written or (b) greater than the
exercise price of the call written if the difference is held in cash or
high-grade debt securities in a segregated account with the fund's custodian
bank.
A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same
principal amount as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things,
the relationship of the exercise price to the market price and volatility of
the underlying security, the remaining term of the option, supply and demand,
and interest rates.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the
case of a put option, since the writer may be assigned an exercise notice at
any time prior to the termination of the obligation. Whether or not an option
expires unexercised, the writer retains the amount of the premium. This
amount may, in the case of a covered call option, be offset by a decline in
the market value of the underlying security during the option period. If a
call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer
must fulfill the obligation to buy the underlying security at the exercise
price, which will usually exceed the market value of the underlying security
at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same
series as the option previously written. The effect of the purchase is that
the clearing corporation will cancel the writer's position. However, a writer
may not effect a closing purchase transaction after being notified of the
exercise of an option. Likewise, the holder of an option may liquidate its
position by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that either a closing purchase or a closing sale transaction may be made at
the time desired by the fund.
Effecting a closing transaction in the case of a written call option allows
the fund to write another call option on the underlying security with a
different exercise price, expiration date or both. In the case of a written
put option, a closing transaction allows the fund to write another covered
put option. Effecting a closing transaction also allows the cash or proceeds
from the sale of any securities subject to the option to be used for other
fund investments. If the fund wants to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to buy the option. Likewise, the fund will realize
a loss from a closing transaction if the price of the transaction is more
than the premium received from writing the option or is less than the premium
paid to buy the option. Increases in the market price of a call option will
generally reflect increases in the market price of the underlying security.
As a result, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the fund.
The writing of covered put options involves certain risks. For example, if
the market price of the underlying security rises or otherwise is above the
exercise price, the put option will expire worthless and the fund's gain will
be limited to the premium received. If the market price of the underlying
security declines or otherwise is below the exercise price, the fund may
elect to close the position or take delivery of the security at the exercise
price. The fund's return will be the premium received from the put option
minus the amount by which the market price of the security is below the
exercise price.
A fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. A fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the call option plus any related transaction
costs.
A fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise
price less the premium paid for the option. The ability to buy put options
allows the fund to protect the unrealized gain in an appreciated security in
its portfolio without actually selling the security. In addition, the fund
continues to receive interest or dividend income on the security. The fund
may sell a put option it has previously purchased prior to the sale of the
security underlying the option. The sale of the option will result in a net
gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid for the put option.
Any gain or loss may be wholly or partially offset by a change in the value
of the underlying security that the fund owns or has the right to acquire.
A fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in
exchange traded options. Like exchange traded options, OTC options give the
holder the right to buy, in the case of OTC call options, or sell, in the
case of OTC put options, an underlying security from or to the writer at a
stated exercise price. However, OTC options differ from exchange traded
options in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from
market makers. OTC options are available for a greater variety of securities
and in a wider range of expiration dates and exercise prices, however, than
exchange traded options, and the writer of an OTC option is paid the premium
in advance by the dealer.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price,
options on a stock index give the holder the right to receive, upon exercise
of the option, an amount of cash if the closing level of the underlying stock
index is greater than (or less than, in the case of a put) the exercise price
of the option, expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends
on price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stocks.
When a fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of
the underlying stock index. The fund will maintain the account while the
option is open or will otherwise cover the transaction.
FINANCIAL FUTURES. The funds may enter into contracts for the purchase or
sale of futures contracts based upon financial indices ("financial futures").
Financial futures contracts are commodity contracts that obligate the long or
short holder to take or make delivery of the cash value of a securities index
during a specified future period at a specified price. A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver such
cash value called for by the contract on a specified date. A "purchase" of a
futures contract means the acquisition of a contractual obligation to take
delivery of the cash value called for by the contract at a specified date.
The purpose of the acquisition or sale of a futures contract is to attempt to
protect the fund from fluctuations in price of portfolio securities without
actually buying or selling the underlying security. Futures contracts have
been designed by exchanges designated "contracts markets" by the Commodity
Futures Trading Commission (CFTC) and must be executed through a futures
commission merchant, or brokerage firm, which is a member of the relevant
contract market.
The funds will not engage in transactions in futures contracts or related
options for speculation, but only as a hedge against changes resulting from
market conditions in the values of its securities or securities that they
intend to buy and, to the extent consistent therewith, to accommodate cash
flows. The funds will not enter into any stock index or financial futures
contract or related option if, immediately thereafter, more than one third of
total assets would be represented by futures contracts or related options. In
addition, the funds may not buy or sell futures contracts or buy or sell
related options if, immediately thereafter, the sum of the amount of initial
deposits on existing financial futures and premiums paid on options on
financial futures contracts would exceed 5% of total assets (taken at current
value). To the extent a fund enters into a futures contract or related call
option, it will maintain with its custodian bank, to the extent required by
the rules of the Securities and Exchange Commission (SEC), assets in a
segregated account to cover its obligations with respect to such contract
which will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the market value of such futures
contract or related option.
STOCK INDEX FUTURES. The funds may buy and sell stock index futures
contracts. A stock index futures contract obligates the seller to deliver
(and the buyer to take) an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock index at the close
of the last trading day of the contract and the price at which the agreement
is made. No physical delivery of the underlying stocks in the index is made.
The funds may sell stock index futures contracts in anticipation of or during
a market decline to attempt to offset the decrease in market value of their
equity securities that might otherwise result. When a 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 funds may buy and sell call and put
options on stock index futures to hedge against risks of market price
movements. The need to hedge against these risks will depend on the extent of
diversification of the fund's common stock portfolio and the sensitivity of
such investments to factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day before the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The Small Cap Growth 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 strategies in employing futures contracts based on an index
of debt securities will be similar to that used in other financial futures
transactions.
The Small Cap Growth fund may also buy and write put and call options on bond
index futures and enter into closing transactions with respect to such
options.
FUTURES CONTRACTS FOR SECURITIES AND CURRENCIES. The funds may buy and sell
futures contracts for securities, and currencies. These funds may also enter
into closing purchase and sale transactions with respect to these futures
contracts. The funds will engage in futures transactions only for bona fide
hedging or other appropriate risk management purposes. All futures contracts
entered into by the funds are traded on U.S. exchanges or boards of trade
licensed and regulated by the CFTC or on foreign exchanges.
When securities prices are falling, a fund may offset a decline in the value
of its current portfolio securities through the sale of futures contracts.
When prices are rising, a fund can attempt to secure better prices than might
be available when it intends to buy securities through the purchase of
futures contracts. Similarly, a fund can sell futures contracts on a
specified currency in an attempt to protect against a decline in the value of
that currency and its portfolio securities denominated in that currency. A
fund can buy futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in that currency that the fund has
purchased or expects to buy.
Positions taken in the futures markets are not normally held to maturity, but
are liquidated through offsetting transactions that may result in a profit or
a loss. While the funds' futures contracts on securities and currencies will
usually be liquidated in this manner, the funds may instead make or take
delivery of the underlying securities or currencies whenever it appears
economically advantageous to do so. A clearing corporation associated with
the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
To the extent a fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
"initial margin"), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily.
Should the value of the futures contract decline relative to the fund's
position, the fund, if required by law, will pay the futures commission
merchant an amount equal to the change in value.
FUTURES CONTRACTS - GENERAL. Although financial futures contracts by their
terms call for the actual delivery or acquisition of securities, or the cash
value of the index, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of
the securities or cash. A contractual obligation is offset by buying (or
selling, as the case may be) on a commodities exchange an identical financial
futures contract calling for delivery in the same month. This transaction,
which is effected through a member of an exchange, cancels the obligation to
make or take delivery of the securities or cash. Since all transactions in
the futures market are made, offset or fulfilled through a clearinghouse
associated with the exchange on which the contracts are traded, the funds
will incur brokerage fees when they buy or sell financial futures contracts.
FUTURE DEVELOPMENTS. The funds may take advantage of opportunities in the
area of options, futures, and options on futures and any other derivative
investments that are not presently contemplated for use by the funds or that
are not currently available but which may be developed, to the extent such
opportunities are consistent with the funds' investment goals and legally
permissible for the funds.
ILLIQUID SECURITIES Each fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Generally, an illiquid security is any
security that cannot be disposed of within seven days in the ordinary course
of business at approximately the amount at which the fund has valued it.
The fund does not consider securities that it acquires outside of the U.S.
and that are publicly traded in the U.S. or on a foreign securities market to
be illiquid assets if: (a) the fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign market, or (b)
current market quotations are readily available. The fund will not acquire
the securities of foreign issuers outside of the U.S. if, at the time of
acquisition, the fund has reason to believe that it could not resell the
securities in a public trading market.
The funds' board of trustees has authorized the funds to invest in restricted
securities. To the extent the manager determines there is a liquid
institutional or other market for these securities, the fund considers them
to be liquid securities. An example of these securities are restricted
securities that may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933, as amended,
and for which a liquid institutional market has developed. The funds' board
of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the funds' board of
trustees will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to buy
or sell the security and the number of other potential buyers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent the fund invests in restricted securities that
are deemed liquid, the general level of illiquidity in the fund may increase
if qualified institutional buyers become uninterested in buying these
securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the funds'
portfolios in a temporary defensive manner. Under such circumstances, the
funds may invest up to 100% of assets in short-term debt instruments. The
funds may also invest cash, including cash resulting from purchases and sales
of fund shares, temporarily in short-term debt instruments. Short-term debt
instruments include high-grade commercial paper, repurchase agreements, and
other money market equivalents. [To the extent permitted by exemptions
granted under the 1940 Act and the fund's other investment policies and
restrictions, each fund may also invest in shares of one or more money market
funds managed by Franklin Advisers, Inc. or its affiliates.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of a fund's outstanding shares or (ii) 67% or
more of a fund's shares present at a shareholder meeting if more than 50% of
a fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The Aggressive Growth Fund MAY NOT:
1. Borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the Investment
Company Act of 1940, as amended (1940 Act), or any exemptions therefrom that
may be granted by the SEC, or for temporary or emergency purposes and then in
an amount not exceeding 33 1/3% of the value of the fund's total assets
(including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment goal and policies, and (c) to the extent the entry into a
repurchase agreement is deemed to be a loan. The fund may also make loans to
affiliated investment companies to the extent permitted by the 1940 Act or
any exemptions therefrom that may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the fund may buy
or sell securities of real estate investment trusts may purchase or sell
currencies, may enter into forward contracts and futures contracts on
securities, currencies, and other indices or any other financial instruments,
and may purchase and sell options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages
or pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making
short sales of securities to the extent permitted by the 1940 Act, and any
rule or order thereunder, or SEC staff interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities or
securities of other investment companies).
7. Buy the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities or securities of other investment
companies) if immediately after such investment (a) more than 5% of the value
of the fund's total assets would be invested in such issuer or (b) more than
10% of the outstanding voting securities of such issuer would be owned by the
fund, except that up to 25% of the value of such fund's total assets may be
invested without regard to such 5% and 10% limitations.
It is the present policy of the fund (which may be changed without
shareholder approval) that its borrowings under restriction #1 above may not
exceed 15% of the value of the fund's total assets (including the amount
borrowed).
The Large Cap Fund MAY NOT:
6. Borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the 1940 Act, or
any exemptions therefrom which may be granted by the SEC, or for temporary or
emergency purposes and then in an amount not exceeding 33% of the value of
the fund's total assets (including the amount borrowed).
7. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares.
8. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment goal and policies, and (c) to the extent the entry into a
repurchase agreement is deemed to be a loan. The fund may also make loans to
affiliated investment companies to the extent permitted by the 1940 Act or
any exemptions therefrom which may be granted by the SEC.
9. Purchase or sell real estate and commodities, except that the fund may buy
or sell securities of real estate investment trusts and may enter into
financial futures contracts, options thereon, and forward contracts.
10. Issue securities senior to the fund's presently authorized shares of
beneficial interest. Except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages
or pledges, (b) entering into options, futures contracts, forward contracts
or repurchase transactions, or (c) making short sales of securities to the
extent permitted by the 1940 Act and any rule or order thereunder, or SEC
staff interpretations thereof.
11. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities or
securities of other investment companies).
12. Buy the securities of any one issuer (other than the U.S. government or
any of its agencies or instrumentalities or securities of other investment
companies) if immediately after such investment (a) more than 5% of the value
of the fund's total assets would be invested in such issuer or (b) more than
10% of the outstanding voting securities of such issuer would be owned by the
fund, except that up to 25% of the value of such fund's total assets may be
invested without regard to such 5% and 10% limitations.
The Small Cap Fund MAY NOT:
1. Purchase the securities of any one issuer (other than obligations of the
U.S., its agencies or instrumentalities) if immediately thereafter, and as a
result of the purchase, the fund would (a) have invested more than 5% of the
value of its total assets in the securities of the issuer, or (b) hold more
than 10% of any voting class of the securities of any one issuer;
2. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
may be deemed a loan;
3. Borrow money (does not preclude the fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require
the untimely disposition of portfolio securities or for other temporary or
emergency (but not investment) purposes, in an amount up to 10% of the value
of the fund's total assets (including the amount borrowed) based on the
lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made. While borrowings exceed 5% of
the fund's total assets, the fund will not make any additional investments;
4. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any single industry;
5. Underwrite securities of other issuers or invest more than 10% of its
assets in securities with legal or contractual restrictions on resale
(although the fund may invest in such securities to the extent permitted
under the federal securities laws for example, transactions between the fund
and Qualified Institutional Buyers subject to Rule 144A under the Securities
Act of 1933) or which are not readily marketable, or which have a record of
less than three years continuous operation, including the operations of any
predecessor companies, if more than 10% of the fund's total assets would be
invested in such companies;
6. Invest in securities for the purpose of exercising management or control
of the issuer;
7. Maintain a margin account with a securities dealer or invest in
commodities and commodity contracts (except that the fund may engage in
financial futures, including stock index futures, and options on stock index
futures) or lease or acquire any interests, including interests issued by
limited partnerships (other than publicly traded equity securities) in oil,
gas, or other mineral exploration or development programs, or invest in
excess of 5% of its total assets in options unrelated to the fund's
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof;
8. Effect short sales, unless at the time the fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). The fund does not currently
intend to employ this investment technique;
9. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts; (the fund may,
however, invest in marketable securities issued by real estate investment
trusts);
10. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the fund would not own, immediately after the
acquisition, securities of the investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the fund's total assets, and iii) together with the securities of
all other investment companies held by the fund, exceed, in the aggregate,
more than 10% of the fund's total assets. The fund may invest in shares of
one or more money market funds managed by Advisers or its affiliates; and
11. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer, if to the
knowledge of the Trust, one or more of the officers or trustees of the Trust,
or Advisers, own beneficially more than one-half of 1% of the securities of
such issuer and all such officers and trustees together own beneficially more
than 5% of such securities.
In addition to these fundamental policies, it is the present policy of the
fund (which may be changed without shareholder approval) not to pledge,
mortgage or hypothecate the fund's assets as security for loans, and not to
engage in joint or joint and several trading accounts in securities, except
that it may participate in joint repurchase arrangements, invest its
short-term cash in shares of the Franklin Money Fund (pursuant to the terms
and conditions of the SEC order permitting such investments), or combine
orders to buy or sell with orders from other persons to obtain lower
brokerage commissions. The fund may not invest in excess of 5% of its net
assets, valued at the lower of cost or market, in warrants, nor more than 2%
of its net assets in warrants not listed on either the NYSE or American Stock
Exchange.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
- ------------------------
FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments
in emerging markets. Investments in depositary receipts also involve some or
all of the risks described below.
The political, economic, and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S. The
settlement practices may be cumbersome and result in delays that may affect
portfolio liquidity. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies, and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to domestic issuers in U.S. courts.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent the
fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may
diminish a fund's ability to sell the securities at fair value either to meet
redemption requests or to respond to a specific economic event such as a
deterioration in the creditworthiness of the issuer. Reduced secondary market
liquidity for certain low rated or unrated debt securities may also make it
more difficult for a fund to obtain accurate market quotations for the
purposes of valuing the fund's portfolio. Market quotations are generally
available on many low rated or unrated securities only from a limited number
of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities. The ability of a fund to achieve
its investment goal may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would
be the case if the fund were invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, a fund
may incur additional expenses to seek recovery.
BIOTECHNOLOGY COMPANIES The biotechnology industry is subject to extensive
government regulation. The industry will be affected by government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability, and similar matters. For example, in the
past several years, the U.S. Congress has considered legislation concerning
healthcare reform and changes to the U.S. Food and Drug Administration's
(FDA) approval process. If such legislation is passed it may affect the
biotechnology industry. As these factors impact the biotechnology industry,
the value of your shares may fluctuate significantly over relatively short
periods of time.
Because the biotechnology industry is relatively new, investors may be quick
to react to developments that affect the industry. In the past, biotechnology
securities have exhibited considerable volatility in reaction to research and
other developments. In comparison to more developed industries, there may be
a thin trading market in biotechnology securities, and adverse developments
in the biotechnology industry may be more likely to result in decreases in
the value of biotechnology stocks.
Biotechnology companies are often small, start-up ventures whose products are
only in the research stage. Only a limited number of biotechnology companies
have reached the point of approval of products by the FDA and subsequent
commercial production and distribution of such products. Therefore, the
success of investments in the biotechnology industry is often based upon
speculation and expectations about future products, research progress, and
new product filings with regulatory authorities. Such investments are
speculative and may drop sharply in value in response to regulatory or
research setbacks.
HEALTH CARE COMPANIES The activities of health care companies may be funded
or subsidized by federal and state governments. If government subsidies are
discontinued, the profitability of these companies could be adversely
affected. Stocks of these companies will be affected by government policies
on health care reimbursements, regulatory approval for new drugs and medical
instruments, and similar matters. Health care companies are also subject to
legislative risk, which is the risk of a reform of the health care system
through legislation. Health care companies may face lawsuits related to
product liability issues. Also, many products and services provided by health
care companies are subject to rapid obsolescence. The value of an investment
in the fund may fluctuate significantly over relatively short periods of time.
UNSEASONED COMPANIES To the extent that a fund may invest in smaller
capitalization companies or other companies, it may place greater emphasis
upon investments in relatively new or unseasoned companies that are in their
early stages of development, or in new and emerging industries where the
opportunity for rapid growth is expected to be above average. Securities of
unseasoned companies present greater risks than securities of larger, more
established companies. Any investments in these types of companies, however,
will be limited in the case of issuers that have less than three years
continuous operation, including the operations of any predecessor companies,
to no more than 10% of the Small Cap fund's net assets.
REAL ESTATE SECURITIES REITs are subject to risks related to the skill of
their management, changes in value of the properties the REITs own, the
quality of any credit extended by the REITs, and general economic and other
factors.
DERIVATIVE SECURITIES The funds' transactions in options, futures, and
options on futures involve certain risks. These risks include, among others,
the risk that the effectiveness of a transaction depends on the degree that
price movements in the underlying securities, index, or currency correlate
with price movements in the relevant portion of the fund's portfolio. The
fund bears the risk that the prices of its portfolio securities will not move
in the same amount as the option or future it has purchased, or that there
may be a negative correlation that would result in a loss on both the
underlying securities and the derivative security.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss
by the fund of margin deposits in the event of bankruptcy of a broker with
whom the fund has an open position.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures
contract at any specific time. Thus, it may not be possible to close an
option or futures position. The inability to close options or futures
positions may have an adverse impact on the fund's ability to effectively
hedge its securities. Furthermore, if the fund is unable to close out a
position and if prices move adversely, the fund will have to continue to make
daily cash payments to maintain its required margin. If the fund does not
have sufficient cash to do this, it may have to sell portfolio securities at
a disadvantageous time. The funds will enter into an option or futures
position only if there appears to be a liquid secondary market for the
options or futures.
Similarly, there can be no assurance that a continuous liquid secondary
market will exist for any particular OTC option at any specific time.
Consequently, the fund may be able to realize the value of an OTC option it
has purchased only by exercising it or by entering into a closing sale
transaction with the dealer that issued it. When a 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.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the funds, the
funds' manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
OFFICERS AND TRUSTEES
- -----------------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 for each of the Trust's
eight regularly scheduled meetings plus $1,050 per meeting attended. Board
members who serve on the audit committee of the trust and other funds in the
Franklin Templeton Group of Funds receive a flat fee of $2,000 per committee
meeting attended, a portion of which is allocated to the trust. Members of a
committee are not compensated for any committee meeting held on the day of a
board meeting. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to noninterested board members by the
trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN THE
FRANKLIN
TOTAL FEES RECEIVED TEMPLETON GROUP
TOTAL FEES FROM THE FRANKLIN OF FUNDS ON
RECEIVED TEMPLETON GROUP OF WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
- -------------------------------------------------------------------------------
Frank H. Abbott, III $13,935 $159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith E. Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from May 1,
1998, through May 31, 1998, fees at the rate of $300 for each of the Trust's
eight board meetings plus $300 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------
MANAGER AND SERVICES PROVIDED Each fund's manager is Franklin Advisers, Inc.
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for each fund to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of each fund. Similarly, with respect
to each fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the funds' code of ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES The Aggressive Growth Fund pays the manager a fee computed
at the close of business on the last business day of each month according to
the terms of the management agreement.
The Small Cap Fund pay the manager a fee equal to an annual rate of:
o 0.625 of 1% of the average daily net assets of the fund up to and
including $100 million;
o 0.50 of 1% of the value of the average daily net assets over $100
million, up to and including $250 million;
o 0.45 of 1% of the value of average daily net assets over $250 million
up to and including $10 billion;
o 0.44 of 1% of the value of average daily net assets over $10 billion up
to and including $12.5 billion;
o 0.42 of 1% of the value of average daily net assets over $12.5 billion
up to and including $15 billion; and
o 0.40 of 1% of the value of average daily net assets over $15 billion
The Large Cap fund pays the manager a fee equal to an annual rate of:
o 0.50% of the value of net assets up to and including $500 million;
o 0.40% of the value of net assets over $500 million and not over $1
billion;
o 0.35% of the value of net assets over $1 billion and not over $1.5
billion;
o 0.30% of the value of net assets over $1.5 billion and not over $6.5
billion;
o 0.275% of the value of net assets over $6.5 billion and not over $11.5
billion;
o 0.25% of the value of net assets over $11.5 billion and not over $16.5
billion;
o 0.24% of the value of net assets over $16.5 billion and not over $19
billion;
o 0.23% of the value of net assets over $19 billion and not over $21.5
billion; and
o 0.22% of the value of net assets in excess of $21.5 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of a
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the Small Cap Fund paid the
following management fees:
MANAGEMENT FEES PAID
($)
- -----------------------------------
1999 20,630,510
1998 13,566,077
1997 3,859,067
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the Small Cap Fund. FT Services is wholly owned
by Resources and is an affiliate of the fund's manager and principal
underwriter.
Franklin Templeton Services, Inc. (FT Services) has agreements with the
Aggressive Growth Fund and the Large Cap Fund to provide certain
administrative services and facilities for each funds. FT Services is wholly
owned by Resources and is an affiliate of the funds' manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES For the Small Cap Fund, the manager pays FT Services a
monthly fee equal to an annual rate of:
o 0.15% of each fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
The Aggressive Growth Fund and Large Cap Fund pay FT Services a monthly fee
equal to an annual rate of 0.20% of each fund's average daily net assets.
During the last three fiscal years ended April 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION
FEES PAID ($)
- -----------------------------------
1999 3,971,753
1998 2,794,347
19971 717,201
1. For the period October 1996 through April 30, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is each fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. Each
fund also will 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 will 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, NY 10286, acts as custodian of each fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the funds' independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- --------------------------------
The manager selects brokers and dealers to execute the funds' 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the funds' 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, also may be considered a factor in the
selection of broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the funds tender portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the
funds, any portfolio securities tendered by a fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next
management fee payable to the manager 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 funds and one or more other
investment companies or clients supervised by the manager 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 the manager, 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 funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended April 30, the Small Cap Fund paid
the following brokerage commissions:
BROKERAGE
COMMISSIONS ($)
----------------------------------
1999 2,187,594
1998 14,648,944
1997 1,155,691
[For the fiscal year ended [], 19[], the fund [did not pay][paid] brokerage
commissions [of $[] from aggregate portfolio transactions of $[]] to brokers
who provided research services.]
As of [], 199[], the fund did not own securities of its regular
broker-dealers.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that the funds will own more than 5% of the voting securities of one
or more broker-dealers through whom each fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the funds. To the extent the funds place brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the funds, the funds will be required to
adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the funds to adhere to
procedures adopted by the board relating to ensuring that the commissions
paid to such broker-dealers do not exceed what would otherwise be the usual
and customary brokerage commissions for similar transactions.
DISTRIBUTIONS AND TAXES
- --------------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in any distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce a fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a fund's
ordinary income distributions to you, and may cause some or all of a fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The funds intend to
elect and qualify during the current fiscal year to be treated as regulated
investment companies under Subchapter M of the Internal Revenue Code. As
regulated investment companies, the funds generally pay no federal income tax
on the income and gains they distribute to you. The board reserves the right
not to maintain the qualification of a fund as a regulated investment company
if it determines such course of action to be beneficial to shareholders. In
such case, a fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in
such fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you buy.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by a fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 37.50% of the dividends paid by the Small
Cap Growth Fund for the most recent fiscal year qualified for the
dividends-received deduction. The Aggressive Growth Fund anticipates that a
portion of the dividends it pays will qualify for the dividends-received
deduction. Under normal market conditions the Large Cap Growth Fund
anticipates that a significant portion of the dividends it pays will qualify
for the dividends received deduction. In some circumstances, you will be
allowed to deduct these qualified dividends, thereby reducing the tax that
you would otherwise be required to pay on these dividends. The
dividends-received deduction will be available only with respect to dividends
designated by such fund as eligible for such treatment. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex
securities. These investments may be subject to numerous special and complex
tax rules. These rules could affect whether gains and losses recognized by a
fund are treated as ordinary income or capital gain, accelerate the
recognition of income to a fund and/or defer a fund's ability to recognize
losses, and, in limited cases, subject a fund to U.S. federal income tax on
income from certain of its foreign securities. In turn, these rules may
affect the amount, timing or character of the income distributed to you by a
fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------
Each fund is a diversified series of Franklin Strategic Series, an open-end
management investment company, commonly called a mutual fund. The trust was
organized as a Delaware business trust on January 25, 1991, and is registered
with the SEC.
The Aggressive Fund and Large Cap Fund currently offer four classes of
shares, Class A, Class B, Class C and Advisor Class. Each fund may offer
additional classes of shares in the future. The full title of each class of
each fund is:
o Franklin Aggressive Growth Fund - Class A
o Franklin Aggressive Growth Fund - Class B
o Franklin Aggressive Growth Fund - Class C
o Franklin Aggressive Growth Fund - Advisor Class
o Franklin Large Cap Growth Fund - Class A
o Franklin Large Cap Growth Fund - Class B
o Franklin Large Cap Growth Fund - Class C
o Franklin Large Cap Growth Fund - Advisor Class
The Small Cap Fund currently offers three classes of shares, Class A, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund may offer
additional classes of shares in the future. The full title of each class is:
o Franklin Small Cap Growth Fund - Class A
o Franklin Small Cap Growth Fund - Class C
o Franklin Small Cap Growth Fund - Advisor Class
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect each fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
As of June 8, 1999, the principal shareholders of the fund, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- --------------------------------------------------------------------
MIDCAP FUND
Franklin Resources, Inc.
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class A 18%
SMALL CAP FUND
Charles Schwab & Co., Inc.
101 Montgomery St. Advisor
San Francisco, CA 94104-4122 Class 6%
First Union National Bank Ttee
FBO Willis Corroon Corporation
A/C 1040108756
1525 West WT Harris Blvd
NC-115 Advisor
Charlotte, NC 28288 Class 6%
The Northern Trust Company Trst
for the Nalco Chemical Co Ret Trst
50 S. LaSalle St. Advisor
Chicago, IL 60675 Class 6%
Old Second National Bank of Aurora
C/O Trust Operations Division
37 South River St. Advisor
Aurora, IL 60506-4173 Class 7%
Trust Company of Illinois
45 S. Park Blvd., Ste. 315 Advisor
Glen Ellyn, IL 60137-6282 Class 7%
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.
As of June 8, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund
and class. The board members may own shares in other funds in the Franklin
Templeton Group of Funds.
BUYING AND SELLING SHARES
- ----------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds 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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 each 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. 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.
REDEMPTIONS IN KIND Each 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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. 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.
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.
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 funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound
to meet any redemption request in less than the seven day period prescribed
by law. Neither the funds nor their 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
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 also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- -------------------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
Each fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of
the day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. Each fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, each fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 NAV. 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 close of the NYSE. The value of these securities used in computing
the NAV 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 close of the NYSE that will not be reflected in the
computation of the NAV. 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, each fund may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- -------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of each fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from each fund for acting as
underwriter of the fund's Advisor Class shares.
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.
Because the Aggressive Fund and Large Cap Fund are new, they have no
performance history and thus no performance quotations have been provided.
For periods before January 1, 1997, the Small Cap Fund's Advisor Class shares
standardized performance quotations are calculated by substituting Class A
performance for the relevant time period, excluding the effect of Class A's
maximum initial sales charge, and including the effect of the distribution
and service (Rule 12b-1) fees applicable to the fund's Class A shares. For
periods after January 1, 1997, Advisor Class standardized performance
quotations are calculated as described below.
An explanation of the standardized methods of computing performance mandated
by the SEC and other methods used by the funds 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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each 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 initial sales charge currently in effect.
The Small Cap Fund's average annual total returns for the indicated periods
ended April 30, 1999, were:
SINCE INCEPTION
1 YEAR 5 YEARS (2/14/92)
- ----------------------------------------------------------------
Advisor Class -3.12 20.60 18.51
The following SEC formula was used to calculate these figures:
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 each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at net asset value. Cumulative total return, however, is based on the actual
return for a specified period rather than on the average return over the
periods indicated above. The Small Cap Fund's cumulative total returns for
the indicated periods ended April 30, 1999, were:
SINCE INCEPTION
1 YEAR 5 YEARS (2/14/92)
- ----------------------------------------------------------------
Advisor Class -3.12 155.16% 240.15%
VOLATILITY Occasionally statistics may be used to show a fund's volatility
or risk. Measures of volatility or risk are generally used to compare a
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the
fund as a potential investment for 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.
Each fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally the leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks) and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - an
unmanaged capitalization-weighted index designed to measure performance of
the broad domestic economy through changes in the aggregate market value of
500 stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o 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.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o 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.
ADDITIONAL COMPARISONS - AGGRESSIVE FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Russell 3000(R) Growth Index - measures the performance of those Russell
3000 Index companies with higher price-to-book ratios and higher forecasted
growth values. The stocks in this index are also members of either the
Russell 1000 Growth or the Russell 2000 Growth indexes. o Standard &
Poor's(R) MidCap 400 Index - consists of 400 domestic stocks chosen for
market size (median market capitalization of $676 million), liquidity and
industry group representation. It is a market-value weighted index, with
each stock affecting the index in proportion to its market value. This
index, calculated by S&P, is a total return index with dividends
reinvested.
ADDITIONAL COMPARISONS - LARGE CAP FUND
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Russell 3000(R) Index measures the performance of the 3,000 largest US
companies based on total market capitalization.
o Russell 1000(R) Index measures the performance of the 1,000 largest
companies in the Russell 3000 Index.
o The Wilshire Top 2500 Index consists of the largest 2500 companies in the
Wilshire 5000.
ADDITIONAL COMPARISONS - SMALL CAP FUND
o 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.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000
total market capitalization, this is Russell's Small Cap Index.
o The Russell 2500 Index - consists of the bottom 500 securities in the
Russell Index, as ranked by total market capitalization, and all 2,000
securities in the Russell 2000 Index. This Index is a good measure of small
to medium-small stock performance.
o The Russell 3000 Index - consists of 3,000 large U.S. companies, as
determined by market capitalization. This portfolio of securities
represents approximately 98% of the investable U.S. equity market.
From time to time, advertisements or information for each 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 also may compare each fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in a
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 any 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 a fund to calculate its figures. In
addition, there can be no assurance that a fund will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- ------------------------------------
The funds 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 funds cannot guarantee that these goals will be met.
The funds are members 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 is one of
the oldest mutual fund organizations and now services more than 4 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, a pioneer in international investing. The Mutual
Series team, 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 $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
You will receive the Small Cap Fund's financial reports every six months. If
you would like to receive an interim report of the fund's portfolio holdings,
please call 1-800/DIAL BEN(R).
DESCRIPTION OF RATINGS
- ------------------------------------
PREFERRED STOCKS RATINGS
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating that may be assigned by S&P to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred
stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high quality
fixed-income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the A category.
BB, B AND CCC: Preferred stock rated BB, B, and CCC are regarded, on balance,
as predominately speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest degree of speculation. While these issues will likely
have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in default
on debt instruments.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
PLUS (+) OR MINUS (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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
that 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. These 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. These 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 that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a 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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
their promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations for both short-term
debt and commercial paper, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC SERIES
FRANKLIN BIOTECHNOLOGY DISCOVERY FUND - CLASS A
FRANKLIN GLOBAL HEALTH CARE FUND - CLASS A, B & C
FRANKLIN GLOBAL UTILITIES FUND - CLASS A, B & C
FRANKLIN NATURAL RESOURCES FUND - CLASS A
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the funds' prospectus.
The funds' prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in a
fund. You should read this SAI together with the funds' prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended April 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
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o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
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o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
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o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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GOALS AND STRATEGIES
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FRANKLIN BIOTECHNOLOGY DISCOVERY FUND (BIOTECHNOLOGY FUND)
The fund's investment goal is to seek capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund invests primarily in securities of
biotechnology companies and discovery research firms located in the U.S. and
other countries. The fund normally invests at least 65% of its assets in
equity securities of biotechnology companies. The fund may also invest up to
35% of its assets in debt securities of any type of foreign or U.S. issuer.
FRANKLIN GLOBAL HEALTH CARE FUND (HEALTH CARE FUND)
The investment goal of the fund is to seek capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund invests at least 70% of its total
assets in the equity securities of health care companies located throughout
the world. The fund may also invest up to 30% of its assets in domestic and
foreign debt securities.
FRANKLIN GLOBAL UTILITIES FUND (UTILITIES FUND)
The investment goal of the fund is to seek to provide total return, without
incurring undue risk. This goal is fundamental, which means it may not be
changed without shareholder approval. Total return consists of both capital
appreciation and current dividend and interest income.
Under normal market conditions, the fund invests at least 65% of its total
assets in the equity and debt securities of U.S. and foreign companies in the
utilities industries. The fund may invest up to 35% of its assets in
securities of U.S. and foreign issuers outside the utilities industries.
FRANKLIN NATURAL RESOURCES FUND (NATURAL RESOURCES FUND)
The investment goal of the fund is to seek to provide high total return. This
goal is fundamental, which means it may not be changed without shareholder
approval. Total return consists of both capital appreciation and current
dividend and interest income.
Under normal market conditions, the fund invests at least 65% of its assets
in the equity and debt securities of U.S. and foreign companies in the
natural resources sector. The fund may also invest up to 35% of its assets
outside the natural resources sector, including in U.S. and foreign equity
and debt securities and up to 10% of its assets in real estate investment
trusts (REITs).
Below is a description of the various types of securities the funds may buy
and information about the funds' investment policies.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock. Preferred stockholders typically receive greater dividends
but may receive less appreciation than common stockholders and may have
greater voting rights as well. Equity securities may also include convertible
securities, warrants, and rights. Convertible securities typically are debt
securities or preferred stocks which are convertible into common stock after
certain time periods or under certain conditions. Warrants or rights give the
holder the right to purchase a common stock at a given time for a specified
price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures, and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
debt securities generally declines. These changes in market value will be
reflected in a fund's net asset value.
RATINGS. Various investment services publish ratings of some of the debt
securities in which a fund may invest. These ratings represent the opinions
of the rating services with respect to the issuer's ability to pay interest
and repay principal. They do not purport to reflect the risk of fluctuations
in market value and are not absolute standards of quality. Please see
"Description of Ratings" for a discussion of the ratings.
If the rating on an issue held in a fund's portfolio is changed by the rating
service or the security goes into default, the manager will consider the
event in its evaluation of the overall investment merits of the security but
will not automatically sell the security.
REPURCHASE AGREEMENTS The funds will generally have a portion of their assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the funds may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
The Biotechnology Fund may also invest in tri-party repurchase agreements. In
a tri-party repurchase agreement, the security is maintained at the bank or
broker-dealer's custodian bank, as opposed to being transferred to and
maintained at the fund's custodian.
The funds may also enter into reverse repurchase agreements. Under a reverse
repurchase agreement, a fund agrees to sell a security in its portfolio and
then to repurchase the security at an agreed-upon price, date, and interest
payment. The fund will maintain cash or high-grade liquid debt securities
with a value equal to the value of the fund's obligation under the agreement,
including accrued interest, in a segregated account with the fund's custodian
bank. The securities subject to the reverse repurchase agreement will be
marked-to-market daily. Although reverse repurchase agreements are borrowings
under the Investment Company Act of 1940, the funds do not treat these
arrangements as borrowings under their investment restrictions so long as the
segregated account is properly maintained.
SECURITIES LENDING The funds may lend to banks and broker-dealers portfolio
securities with an aggregate market value of up to 33% of the Natural
Resources Fund's total assets, one third of the Utilities Fund's total
assets, 20% of the Health Care Fund's total assets, or one third of the
Biotechnology Fund's total assets. Such loans must be secured by collateral
(consisting of any combination of cash, U.S. government securities, or
irrevocable letters of credit) in an amount at least equal (on a daily
marked-to-market basis) to the current market value of the securities loaned.
A fund retains all or a portion of the interest received on investment of the
cash collateral or receives a fee from the borrower. A fund may terminate the
loans at any time and obtain the return of the securities loaned within five
business days. A fund will continue to receive any interest or dividends paid
on the loaned securities and will continue to have voting rights with respect
to the securities. However, as with other extensions of credit, there are
risks of delay in recovery or even loss of rights in collateral should the
borrower fail.
BORROWING The funds do not borrow money or mortgage or pledge any of their
assets, except that each fund may enter into reverse repurchase agreements or
borrow for temporary or emergency purposes up to a specified limit. This
limit is 33 1/3% of total assets for the Biotechnology Fund, 10% of total
assets for the Health Care Fund, and 33% of total assets for the Natural
Resources Fund and the Utilities Fund. A fund will not make any additional
investments while its borrowings exceed 5% of its total assets.
GOVERNMENT SECURITIES - NATURAL RESOURCES FUND AND UTILITIES FUND Securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, including U.S. Treasury bills, notes and bonds, as well as
certain agency securities and mortgage-backed securities issued by the
Government National Mortgage Association (GNMA), may carry guarantees which
are backed by the "full faith and credit" of the U.S. government. The
guarantee extends only to the payment of interest and principal due on the
securities and does not provide any protection from fluctuations in either
the securities' yield or value or to the yield or value of the fund's shares.
Other investments in agency securities are not necessarily backed by the
"full faith and credit" of the U.S. government. These include securities
issued by the Federal National Mortgage Association (FNMA), the Federal Home
Loan Mortgage Corporation, the Student Loan Marketing Association and the
Farm Credit Bank.
The Natural Resources Fund and the Utilities Fund may invest in debt
securities issued or guaranteed by foreign governments. These securities are
typically denominated in foreign currencies and are subject to the currency
fluctuation and other risks of foreign securities investments. The foreign
government securities in which the funds intend to invest generally will
include obligations issued by national, state, or local governments or
similar political subdivisions. Foreign government securities also include
debt obligations of supranational entities, including international
organizations designed or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank of
Reconstruction and Development (the World Bank), the European Investment
Bank, the Asian Development Bank and the Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in
multinational currency units. An example of a multinational currency unit is
the European Currency Unit. A European Currency Unit represents specified
amounts of the currencies of certain of the 12-member states of the European
Economic Community. Debt securities of quasi-governmental agencies are issued
by entities owned by either a national or local government or are obligations
of a political unit that is not backed by the national government's full
faith and credit and general taxing powers. Foreign government securities
also include mortgage-related securities issued or guaranteed by national or
local governmental instrumentalities, including quasi-governmental agencies.
UTILITY INDUSTRIES - UTILITIES FUND ONLY Under normal circumstances, the
Utilities Fund will invest at least 65% of its total assets in common stocks,
debt securities and preferred stocks, including preferred or debt securities
convertible into common stocks, of companies in the utility industries. These
companies include ones primarily engaged in the ownership, operation or
manufacture of facilities used to provide electricity, telephone
communications, cable and other pay television services, wireless
telecommunications, gas or water. "Primarily engaged," for this purpose,
means that (1) more than 50% of the company's assets are devoted to the
ownership or operation of one or more facilities as described above or (2)
more than 50% of the company's operating revenues are derived from the
business or combination of businesses described above.
The utility companies in which the Utilities Fund invests may be domestic or
foreign. To meet its objective, the fund may invest in domestic utility
companies that pay higher than average dividends, but have less potential for
capital appreciation. There can be no assurance that the historically
positive relative returns on utility securities will continue to occur in the
future. The manager believes that the average dividend yields of common
stocks issued by foreign utility companies have also historically exceeded
those of foreign industrial companies' common stocks. To meet its objective,
the Utilities Fund may invest in foreign utility companies that pay lower
than average dividends, but have a greater potential for capital appreciation.
HEALTH CARE COMPANIES - HEALTH CARE FUND ONLY Many major developments in
health care come from companies based abroad. Thus, in the opinion of the
manager, a portfolio of only U.S. based health care companies is not
sufficiently diversified to participate in global developments and
discoveries in the field of health care. The manager believes that health
care is becoming an increasingly globalized industry and that many important
investment opportunities exist abroad. Therefore, the manager believes that a
portfolio of global securities may provide a greater potential for investment
participation in present and future opportunities that may present themselves
in the health care related industries. The manager also believes that the
U.S. health care industry may be subject to increasing regulation and
government control, thus a global portfolio may reduce the risk of a single
government's actions on the portfolio. The Health Care Fund concentrates its
investments in a limited group of related industries and is not intended to
be a complete investment program.
FOREIGN SECURITIES The Biotechnology Fund anticipates that under normal
conditions, it will invest more of its assets in U.S. securities than in
securities of any other single country, although the fund may have more than
50% of its total assets in foreign securities. The fund may buy securities of
issuers in developing nations, but it has no present intention of doing so.
The Biotechnology Fund will not invest in securities of foreign issuers that
are issued without stock certificates or other evidences of ownership. The
Biotechnology Fund may invest in securities that are traded on U.S. or
foreign securities exchanges, the National Association of Securities Dealers
Automated Quotation System (NASDAQ) national market system, or in the U.S. or
foreign over-the-counter markets.
The Health Care Fund invests 70% of its assets in securities of issuers in at
least three different countries. The Health Care Fund will not invest more
than 40% of its net assets in any one country other than the U.S. The Health
Care Fund expects that a significant portion of its investments will be in
securities of domestic issuers. The Health Care Fund will not invest in
securities of foreign issuers without stock certificates or comparable
evidence of ownership.
The Natural Resources Fund expects to invest more of its assets in U.S.
securities than in securities of any other single country, but the fund may
invest more than 50% of its total assets in foreign securities.
The Utilities Fund normally invests at least 65% of its total assets in
issuers in at least three different countries. The Utilities Fund expects to
invest more of its assets in U.S. securities than in securities of any other
single country, but the fund may invest more than 65% of its total assets in
foreign securities. The Utilities Fund will limit its investments in Russian
securities to 5% of its total assets.
DEPOSITARY RECEIPTS. The Natural Resources Fund may invest in American
Depositary Receipts (ADRs), and the Utilities Fund, the Health Care Fund, and
the Biotechnology Fund may invest in ADRs, European Depositary Receipts
(EDRs) and Global Depositary Receipts (GDRs) of non-U.S. issuers. Such
depositary receipts are interests in a pool of a non-U.S. company's
securities that have been deposited with a bank or trust company. The bank or
trust company then sells interests in the pool to investors in the form of
depositary receipts. Depositary receipts can be unsponsored or sponsored by
the issuer of the underlying securities or by the issuing bank or trust
company.
ADRs are usually issued by an American bank or trust company and may be
registered for use in U.S. securities markets. Foreign banks or trust
companies typically issue EDRs and GDRs, although U.S. banks or trust
companies also may issue them. The funds consider investments in depositary
receipts to be investments in the equity securities of the issuers into which
the Depositary Receipts may be converted.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risks
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, a fund will avoid currency risks
during the settlement period for either purchases or sales and certain
foreign securities markets trading risks. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange
or on the NASDAQ. The information available for ADRs is subject to the
accounting, auditing, and financial reporting standards of the U.S. market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers may be subject.
Depositary receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs, and there
may not be a correlation between such information and the market value of the
depositary receipts.
CONVERTIBLE SECURITIES Each fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, a convertible security is not
as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the funds use the same criteria to rate a convertible debt security
that they use to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the funds' 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.
ENHANCED CONVERTIBLE SECURITIES - UTILITIES FUND ONLY. In addition to "plain
vanilla" convertibles, a number of different structures have been created to
fit the characteristics of specific investors and issuers. Examples of these
enhanced characteristics for investors include yield enhancement, increased
equity exposure or enhanced downside protection. From an issuer's
perspective, enhanced structures are designed to meet balance sheet criteria,
interest/dividend payment deductibility and reduced equity dilution. The
following are descriptions of common structures of enhanced convertible
securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each
issuer has a different acronym for their version of these securities) are
considered the most equity like of convertible securities. At maturity these
securities are mandatorily convertible into common stock offering investors
some form of yield enhancement in return for some of the upside potential in
the form of a conversion premium. Typical characteristics of mandatories
include: issued as preferred stock, convertible at premium, pay fixed
quarterly dividend (typically 500 to 600 basis points higher than common
stock dividend), and are non-callable for the life of the security (usually
three to five years). An important feature of mandatories is that the number
of shares received at maturity is determined by the difference between the
price of the common stock at maturity and the price of the common stock at
issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPRS, and TECONS)
are, from an investor's viewpoint, essentially convertible preferred
securities, i.e. they are issued as preferred stock convertible into common
stock at a premium and pay quarterly dividends. Through this structure the
company establishes a wholly owned special purpose vehicle whose sole purpose
is to issue convertible preferred stock. The offering proceeds pass-through
to the company who issues the special purpose vehicle a convertible
subordinated debenture with identical terms to the convertible preferred
issued to investors. Benefits to the issuer include increased equity credit
from rating agencies and the deduction of coupon payments for tax purposes.
A company divesting a holding in another company often uses exchangeable
securities. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into
common stock at maturity and offers investors a higher current dividend than
the underlying common stock. The difference between these structures and
other mandatories is that the participation in stock price appreciation is
capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest
is actually paid, the accrued interest may be deducted for tax purposes.
Because of their put options, these bonds tend to be less sensitive to
changes in interest rates than either long maturity bonds or preferred
stocks. The put options also provide enhanced downside protection while
retaining the equity participation characteristics of traditional convertible
bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. The fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary, to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an
issuer. Reduced liquidity in the secondary market for certain securities also
may make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio.
FUTURE DEVELOPMENTS. The fund may invest in other convertible securities or
enhanced convertible securities that are not presently contemplated for use
by the fund or that are not currently available but that may be developed, so
long as the opportunities are consistent with the fund's investment objective
and policies.
Certain issuers of convertible securities may be deemed to be "investment
companies" as defined in the Investment Company Act of 1940, as amended (1940
Act). As a result, the fund's investment in these securities may be limited
by the restrictions contained in the 1940 Act.
ILLIQUID INVESTMENTS Each fund's policy is not to invest more than 15% of its
net assets (10% in the case of the Health Care Fund) in illiquid securities.
Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which
the fund has valued them. The Natural Resources Fund may invest up to 5% of
its net assets in illiquid securities the disposition of which may be subject
to legal or contractual restrictions. The Natural Resources Fund and the
Utilities Fund currently intend to limit their investments in illiquid
securities, including illiquid securities with legal or contractual
restrictions on resale, except for Rule 144A restricted securities, and
including securities which are not readily marketable, to 10% of net assets.
A fund does not consider securities that it acquires outside the U.S. and
that are publicly traded in the U.S. or on a foreign securities exchange or
in a foreign securities market to be illiquid assets so long as the fund
acquires and holds the security with the intention of reselling the security
in the foreign trading market, the fund reasonably believes it can readily
dispose of the security for cash at approximately the amount at which the
fund has valued the security in the U.S. or foreign market, and current
market quotations are readily available.
Subject to these limitations, the board of trustees has authorized each fund
to invest in restricted securities where such investments are consistent with
the fund's investment objective and has authorized such securities to be
considered liquid to the extent the manager determines that there is a liquid
institutional or other market for the securities. An example of these
securities are restricted securities that may be freely transferred among
qualified institutional buyers under Rule 144A of the Securities Act of 1933,
as amended, and for which a liquid institutional market has developed. The
fund's board of trustees will review any determination by the manager to
treat a restricted security as a liquid security on an ongoing basis,
including the manager's assessment of current trading activity and the
availability of reliable price information. In determining whether a
restricted security is properly considered a liquid security, the manager and
the fund's board of trustees will take into account the following factors:
(i) the frequency of trades and quotes for the security; (ii) the number of
dealers willing to buy or sell the security and the number of other potential
buyers; (iii) dealer undertakings to make a market in the security; and (iv)
the nature of the security and marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent a fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the fund may be increased
if qualified institutional buyers become uninterested in buying these
securities or the market for these securities contracts.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS - NATURAL RESOURCES FUND AND
UTILITIES FUND The Natural Resources Fund and the Utilities Fund may buy
securities on a when-issued or delayed delivery basis. These transactions are
arrangements under which a fund buys securities with payment and delivery
scheduled for a future time. The securities are subject to market fluctuation
prior to delivery to the fund and generally do not earn interest until their
scheduled delivery date. Therefore, the value or yields at delivery may be
more or less than the purchase price or the yields available when the
transaction was entered into. Although the funds will generally buy these
securities on a when-issued basis with the intention of acquiring the
securities, they may sell the securities before the settlement date if it is
deemed advisable. When a fund is the buyer, it will maintain, in a segregated
account with its custodian bank, cash or high-grade marketable securities
having an aggregate value equal to the amount of its purchase commitments
until payment is made. In such an arrangement, the fund relies on the seller
to complete the transaction. The seller's failure to do so may cause the fund
to miss a price or yield considered advantageous. The funds are not subject
to any percentage limit on the amount of their assets that may be invested in
when-issued purchase obligations. To the extent a fund engages in when-issued
and delayed delivery transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies, and not for the purpose of investment leverage.
STANDBY COMMITMENT AGREEMENTS - NATURAL RESOURCES FUND AND UTILITIES FUND The
Natural Resources Fund and the Utilities Fund may, from time to time, enter
into standby commitment agreements. These agreements commit a fund, for a
stated period of time, to buy a stated amount of a security that may be
issued and sold to the fund at the option of the issuer. The price and coupon
of the security is fixed at the time of the commitment. When a fund enters
into the agreement, the fund is paid a commitment fee, regardless of whether
the security is ultimately issued, typically equal to approximately 0.5% of
the aggregate purchase price of the security that the fund has committed to
buy. The funds will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and/or price
that is considered advantageous.
The funds will not enter into a standby commitment with a remaining term in
excess of 45 days and will limit their investment in standby commitments so
that the aggregate purchase price of the securities subject to the
commitments with remaining terms exceeding seven days, together with the
value of other portfolio securities deemed illiquid, will not exceed the
respective fund's limit on holding illiquid investments, taken at the time of
acquisition of such commitment or security. Each fund will at all times
maintain a segregated account with its custodian bank of cash, cash
equivalents, U.S. government securities, or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies in an aggregate
amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery
date may be more or less than its purchase price. Since the issuance of the
security underlying the commitment is at the option of the issuer, a fund may
bear the risk of a decline in the value of the security and may not benefit
from an appreciation in the value of the security during the commitment
period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
DERIVATIVE SECURITIES - ALL FUNDS
Although the funds have authority to invest in various types of derivative
securities and engage in hedging transactions, the funds currently do not
intend to invest in derivative securities or engage in hedging transactions.
Hedging is a technique designed to reduce a potential loss to the fund as a
result of certain economic or market risks, including risks related to
fluctuations in interest rates, currency exchange rates between U.S. and
foreign currencies or between different foreign currencies, and broad or
specific market movements.
The BIOTECHNOLOGY FUND may engage in the following types of transactions:
purchase and sell exchange-listed and over-the-counter put and call options
on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options
thereon; and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps or options on
currencies or currency futures. The fund may also use these various
techniques for non-hedging purposes. For example, these techniques may be
used to produce income to the fund where the fund's participation in the
transaction involves the payment of a premium to the fund. The fund may also
use a hedging technique to bet on the fluctuation of certain indices,
currencies, or economic or market changes such as a reduction in interest
rates. No more than 5% of the fund's assets will be exposed to risks of such
types of instruments when entered into for non-hedging purposes.
The HEALTH CARE FUND may write (sell) covered put and call options and buy
put and call options on securities that trade on securities exchanges and in
the over-the-counter market. The fund may buy and sell futures and options on
futures with respect to securities and currencies. Additionally, the fund may
buy and sell futures and options to "close out" futures and options it may
have sold or bought. The fund may seek to protect capital through the use of
forward currency exchange contracts. The fund will not engage in transactions
in futures contracts or related options for speculation but only as a hedge
against changes resulting from market conditions in the values of its
securities or securities that it intends to buy. The fund will not enter into
any stock index or financial futures contract or related option if,
immediately thereafter, more than one-third of the fund's net assets would be
represented by futures contracts or related options. In addition, the fund
may not buy or sell futures contracts or buy or sell related options (except
for closing transactions) if, immediately thereafter, the sum of the amount
of margin deposits on its existing futures and related options positions and
premiums paid for related options would exceed 5% of the market value of the
fund's total assets. The fund will not engage in any stock options or stock
index options if the option premiums paid regarding its open option positions
exceed 5% of the value of the fund's total assets. The fund may buy foreign
currency futures contracts and options if not more than 5% of its assets are
then invested as initial or variation margin deposits on contracts or
options. In instances involving the purchase of futures contracts or related
call options, money market instruments equal to the market value of the
futures contract or related option will be deposited in a segregated account
with the fund's custodian bank to collateralize such long positions.
The NATURAL RESOURCES FUND may write (sell) covered put and call options and
buy put and call options on securities and stock indices that trade on
securities exchanges and in the over-the-counter market. Additionally, the
fund may "close out" options it has entered into. The fund will not engage
in any stock options if the option premiums paid regarding its open option
positions exceed 5% of the value of the fund's total assets. To hedge
against currency exchange rate risks, the fund may enter into forward
currency exchange contracts and currency futures contracts and options on
such futures contracts, and may buy put and call options and write covered
put and call options on currencies traded in U.S. or foreign markets. The
fund also may buy and sell forward contracts (to the extent they are not
deemed commodities) when the manager anticipates that the foreign currency
will appreciate or depreciate in value, but securities denominated in that
currency do not present attractive investment opportunities and are not held
in the fund's portfolio. The fund generally will not enter into a forward
contract with a term of greater than one year.
The UTILITIES FUND may engage in various portfolio strategies to seek to
hedge its portfolio against adverse movements in the equity, debt and
currency markets. The fund may deal in forward foreign currency exchange
transactions and foreign currency options and futures and options on such
futures. The fund will not buy foreign currency futures contracts if more
than 5% of its assets are then invested as initial or variation margin
deposits on such contracts or related options. The fund may also write (i.e.,
sell) covered put and call options on its portfolio securities, buy put and
call options on securities and engage in transactions in stock index options
and financial futures, including stock and bond index futures and related
options on such futures. The fund does not currently intend to write put
options. 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. The fund will not enter into any futures contract or related options
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial deposits and premiums on open contracts and options
would exceed 5% of its total assets (taken at current value). The fund will
not engage in any securities options or securities index options if the
option premiums paid regarding its open option positions exceed 5% of the
value of its total assets. Although certain risks are involved in options and
futures transactions, the manager believes that, because the fund will write
only covered options on portfolio securities, and engage in other options and
futures transactions only for hedging purposes, the options and futures
portfolio strategies of the fund will not subject the fund to the risks
frequently associated with the speculative use of options and futures
transactions. While the fund's use of hedging strategies is intended to
reduce the volatility of the net asset value of fund shares, the fund's net
asset value will fluctuate. There can be no assurance that the fund's hedging
transactions will be effective. Furthermore, the fund will only engage in
hedging activities from time to time and may not necessarily be engaging in
hedging activities when movement in the equity, debt and currency markets
occurs.
The funds' transactions in options, futures contracts, and forward contracts
may be limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company. These transactions are also
subject to special tax rules that may affect the amount, timing, and
character of certain distributions to shareholders. For more information,
please see "Additional Information on Distributions and Taxes."
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - ALL FUNDS. The funds may enter
into forward foreign currency exchange contracts (Forward Contract(s)) to
attempt to minimize the risk to the fund from adverse changes in the
relationship between currencies or to enhance income. A Forward Contract is
an obligation to buy or sell a specific currency for an agreed price at a
future date and is individually negotiated and privately traded by currency
traders and their customers.
A fund may enter into a Forward Contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock-in" the U.S. dollar price of that security.
Additionally, when a fund believes that a foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a Forward
Contract to sell an amount of that foreign currency approximating the value
of some or all of the fund's portfolio securities denominated in that foreign
currency. Similarly, when a fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
To limit potential risks in connection with the purchase of currency under
Forward Contracts, cash, cash equivalents or readily marketable high grade
debt securities equal to the amount of the purchase will be held aside or in
a segregated account with the relevant fund's custodian bank to be used to
pay for the commitment, or the fund will cover any commitments under these
contracts to sell currency by owning the underlying currency (or an absolute
right to acquire the currency). The segregated account will be
marked-to-market on a daily basis.
Forward Contracts may limit the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between
foreign currencies. Unanticipated changes in currency exchange rates also may
result in poorer overall performance for a fund than if it had not entered
into Forward Contracts.
FOREIGN CURRENCY FUTURES - ALL FUNDS. The funds may buy and sell foreign
currency futures contracts to hedge against changes in the level of future
currency rates. These contracts involve an agreement to buy or sell a
specific currency at a future date at a price set in the contract. Assets
will be held aside or in a segregated account with the fund's custodian bank
as required to cover the fund's obligations under its foreign currency
futures contracts.
OPTIONS ON FOREIGN CURRENCIES - ALL FUNDS. The funds may buy and write put
and call options on foreign currencies traded on U.S. and foreign exchanges
or over-the-counter, for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities or other assets to be
acquired. As with other kinds of options, the writing of an option on foreign
currency will only be a partial hedge, up to the amount of the premium
received, and a 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, a fund may forfeit the entire amount of the premium plus related
transaction costs.
A decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of the securities,
even if their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio securities, the
funds may buy put options on the foreign currency. If the value of the
currency does decline, a fund will have the right to sell the currency for a
fixed amount in dollars and will thereby offset, in whole or part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the funds may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to a fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, a fund could sustain losses on
transactions in foreign currency options that would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
The funds may write options on foreign currencies for the same types of
hedging purposes. For example, where a fund anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of buying a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the decline in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of buying a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a fund could write
a put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the fund would be required to buy or sell the underlying
currency at a loss, which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, a fund also may be
required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements in exchange rates.
The funds may write covered call options on foreign currencies. A call option
written on a foreign currency is "covered" if the fund owns the underlying
foreign currency covered by the call or has an absolute and immediate right
to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its
custodian bank) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the fund has a call on the
same foreign currency and in
the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written
or (b) greater than the exercise price of the call written if the difference
is maintained by the fund in cash, U.S. government securities, or other high
grade liquid debt securities in a segregated account with its custodian bank.
The funds may also write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the fund
owns or has the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate. In such
circumstances, a fund collateralizes the option by maintaining in a
segregated account with the fund's custodian bank, cash or U.S. government
securities or other high grade liquid debt securities in an amount not less
than the value of the underlying foreign currency in U.S. dollars
marked-to-market daily.
OPTIONS AND FINANCIAL FUTURES - ALL FUNDS. The funds may write covered put
and call options and buy put and call options on stocks, stocks indices, and
bonds that trade on securities exchanges and in the over-the-counter market.
Each fund except the Natural Resources Fund may buy and sell futures and
options on futures with respect to stock and bond indices. Additionally, the
funds may engage in "close-out" transactions with respect to futures and
options.
WRITING CALL OPTIONS - ALL FUNDS. Call options written by a fund give the
holder the right to buy the underlying securities from the fund at a stated
exercise price. A call option written by a fund is "covered" if the fund owns
the underlying security that is subject to the call or has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held is (a) equal to or
less than the exercise price of the call written or (b) greater than the
exercise price of the call written if the difference is maintained by the
fund in cash and high grade debt securities in a segregated account with its
custodian bank. The premium paid by the buyer of an option will reflect,
among other things, the relationship of the exercise price to the market
price and volatility of the underlying security, the remaining term of the
option, supply and demand, and interest rates.
With regard to certain options, the writer of an option may have no control
over when the underlying securities must be sold, in the case of a call
option, because the writer may be assigned an exercise notice at any time
before the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount may,
in the case of a covered call option, be offset by a decline in the market
value of the underlying security during the option period. If a call option
is exercised, the writer experiences a profit or loss from the sale of the
underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. The effect of the purchase is that the clearing
corporation will cancel the writer's position. A writer may not effect a
closing purchase transaction, however, after being notified of the exercise
of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction" by selling
an option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected.
Effecting a closing transaction in the case of a written call option will
allow a fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. Also, effecting
a closing transaction will allow the cash or proceeds from the concurrent
sale of any securities subject to the option to be used for other fund
investments. If a fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction before or at the same time as the sale of the security.
A 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. A 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 - ALL FUNDS. Each fund may buy call options on securities
that it intends to purchase in order to limit the risk of a substantial
increase in the market price of such security. Each fund may also buy call
options on securities held in its portfolio and on which it has written call
options. A call option gives the holder the right to buy the underlying
securities from the option writer at a stated exercise price. Before its
expiration, a call option may be sold in a closing sale transaction. Profit
or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the call option plus related transaction costs.
WRITING PUT OPTIONS - ALL FUNDS. The funds may write covered put options. A
put option gives the buyer of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security at the exercise price
during the option period. The option may be exercised at any time before its
expiration date. The operation of put options in other respects, including
their related risks and rewards, is substantially identical to that of call
options.
If a fund writes put options, it will do so on a covered basis. This means
that the fund would maintain, in a segregated account, cash, U.S. government
securities, or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding. The
rules of the clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price. A fund would
generally write covered put options when the manager wants to buy the
underlying security or currency for the fund's portfolio at a price lower
than the current market price of the security or currency. In this event, the
fund would write a put option at an exercise price that, reduced by the
premium received on the option, reflects the lower price it is willing to
pay. Since the fund would also receive interest on debt securities maintained
to cover the exercise price of the option, this technique could be used to
enhance current return during periods of market uncertainty. The risk in such
a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received.
BUYING PUT OPTIONS - ALL FUNDS. Each fund may buy a put option on an
underlying security or currency owned by the fund as a hedging technique in
order to protect against an anticipated decline in the value of the security
or currency (a "protective put"). Such hedge protection is provided only
during the life of the put option when a 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 manager 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.
A 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, a 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, a 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 premium paid by a fund when buying a put option will be recorded as an
asset in the fund's statement of assets and liabilities. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed. The asset will be extinguished upon expiration of the option, the
writing of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
OVER-THE-COUNTER (OTC) OPTIONS - ALL FUNDS. Each fund intends to write
covered put and call options and buy put and call options that trade in the
over-the-counter market to the same extent that it will engage in exchange
traded options. OTC options, however, differ from exchange traded options in
certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options
are available, however, for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange traded options,
and the writer of an OTC option is paid the premium in advance by the dealer.
The funds understand the current position of the staff of the U.S. Securities
and Exchange Commission (SEC) to be that purchased OTC options are illiquid
securities and that the assets used to cover the sale of an OTC option are
considered illiquid. The funds and the manager disagree with this position.
Nevertheless, pending a change in the staff's position, each fund will treat
OTC options and "cover" assets as subject to the fund's limitation on
illiquid securities.
OPTIONS ON STOCK INDICES - ALL FUNDS. The funds may buy call and put options
on stock indices in order to hedge against the risk of market or
industry-wide stock price fluctuations. Call and put options on stock indices
are similar to options on securities except that, rather than the right to
buy or sell stock at a specified price, options on a stock index give the
holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the underlying stock index is greater than (or less
than, in the case of puts) the exercise price of the option. This amount of
cash is equal to the difference between the closing price of the index and
the exercise price of the option, expressed in dollars multiplied by a
specified number. Thus, unlike stock options, all settlements are in cash,
and gain or loss depends on price movements in the stock market generally (or
in a particular industry or segment of the market) rather than price
movements in individual stocks.
When a fund writes an option on a stock index, the fund will establish a
segregated account containing cash or high quality fixed-income securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index and will maintain the account while the option is
open or it will otherwise cover the transaction.
FUTURES CONTRACTS - ALL FUNDS EXCEPT THE NATURAL RESOURCES FUND. The funds
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, a fund must
allocate cash or securities as a deposit payment (initial deposit). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the fund would provide or receive cash
that reflects any decline or increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same
month. Such a transaction, which is effected through a member of an exchange,
cancels the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
a fund will incur brokerage fees when it buys or sells futures contracts.
A fund will generally not engage in transactions in futures contracts or
related options for speculation but only as a hedge against changes resulting
from market conditions in the values of its securities or securities that it
intends to buy. The purpose of the acquisition or sale of a futures contract
is to attempt to protect the fund from fluctuations in price of portfolio
securities without actually buying or selling the underlying security. To the
extent a fund enters into a futures contract, it will maintain with its
custodian bank, to the extent required by the rules of the SEC, assets in a
segregated account to cover its obligations with respect to such contract
which will consist of cash, cash equivalents, or high quality debt securities
from its portfolio in an amount equal to the difference between the
fluctuating market value of such futures contract and the aggregate value of
the initial and variation margin payments made by the fund with respect to
such futures contracts.
STOCK INDEX FUTURES - ALL FUNDS EXCEPT THE NATURAL RESOURCES FUND. 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.
Each 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 a fund is not fully
invested in stocks and anticipates a significant market advance, it may
purchase stock index futures in order to gain rapid market exposure that may
in part or entirely offset increases in the cost of common stocks that it
intends to buy.
OPTIONS ON STOCK INDEX FUTURES - ALL FUNDS EXCEPT THE NATURAL RESOURCES FUND.
The funds may buy and sell call and put options on stock index futures to
hedge against risks of market-side price movements. The need to hedge against
such risks will depend on the extent of diversification of the fund's common
stock portfolio and the sensitivity of such investments to factors
influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on
securities except that, rather than the right to buy or sell stock at a
specified price, options on stock index futures give the holder the right to
receive cash. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less
than, in the case of a put, the exercise price of the option on the futures
contract. If an option is exercised on the last trading day before the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS - ALL FUNDS EXCEPT THE NATURAL
RESOURCES FUND. The funds may purchase and sell futures contracts based on an
index of debt securities and options on such futures contracts to the extent
they currently exist and, in the future, may be developed. The funds reserve
the right to conduct futures and options transactions based on an index which
may be developed in the future to correlate with price movements in certain
categories of debt securities. Each 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 funds also may buy and write put and call options on bond index futures
and enter into closing transactions with respect to such options.
FUTURE DEVELOPMENTS - ALL FUNDS EXCEPT THE NATURAL RESOURCES FUND. Each fund
may take advantage of opportunities in the area of options and futures
contracts and options on futures contracts and any other derivative
investments that are not presently contemplated for use by the fund or which
are not currently available but which may be developed, to the extent such
opportunities are both consistent with the fund's investment goal and legally
permissible for the fund.
SHORT SALES The Biotechnology Fund may engage in two types of short sale
transactions, "naked short sales" and "short sales against the box." In a
naked short sale transaction, the fund sells a security that it does not own
to a purchaser at a specified price. In order to complete the short sale
transaction, the fund must (1) borrow the security to deliver the security to
the purchaser, and (2) buy the same security in the market in order to return
it to the borrower. In buying the security to replace the borrowed security,
the fund expects to buy the security in the market for less than the amount
it earned on the short sale, thereby yielding a profit. No securities will be
sold short if, after the sale, the total market value of all the
Biotechnology Fund's open naked short positions would exceed 50% of its
assets.
The Biotechnology Fund may also sell securities "short against the box"
without limit. In a short sale against the box, the fund actually holds in
its portfolio the securities which it has sold short. In replacing the
borrowed securities in the transaction, the fund may either buy securities in
the open market or use those in its portfolio.
PRIVATE INVESTMENTS Consistent with their respective investment goals and
policies, the Health Care Fund and the Biotechnology Fund may from time to
time make private investments in companies whose securities are not publicly
traded. These investments typically will take the form of letter stock or
convertible preferred stock. Because these securities are not publicly
traded, there is no secondary market for the securities. The Health Care Fund
and the Biotechnology Fund will treat these securities as illiquid.
TEMPORARY INVESTMENTS. Each fund may invest its cash temporarily in
short-term debt instruments, including U.S. government securities, CDs,
high-grade commercial paper, repurchase agreements, and other money market
equivalents, and the shares of money market funds managed by the manager that
invest primarily in short-term debt securities. The funds will make these
temporary investments with cash they hold to maintain liquidity or pending
investment. In the event of a general decline in the market prices of stocks
in which a fund invests, or when the manager anticipates such a decline, the
fund may invest its portfolio in a temporary defensive manner. Under such
circumstances, a fund may invest up to 100% of its assets in short-term debt
instruments.
INVESTMENT RESTRICTIONS Each fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
Biotechnology Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
may be deemed a loan.
2. Borrow money, except in the form of reverse repurchase agreements or from
banks in order to meet redemption requests that might otherwise require the
untimely disposition of portfolio securities or for other temporary or
emergency (but not investment) purposes, in an amount up to 10% of the value
of the fund's total assets (including the amount borrowed) based on the
lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made, and except to facilitate
portfolio transactions in which the fund is permitted to engage to the extent
such transactions may be deemed to constitute borrowing under this
restriction. While borrowings exceed 5% of the fund's total assets, the fund
will not make any additional investments.
3. Underwrite securities of other issuers or invest more than 15% of its
assets in illiquid securities.
4. Invest in securities for the purpose of exercising management or control
of the issuer.
5. Invest in the securities of other investment companies, except in
accordance with the federal securities laws. To the extent permitted by
exemptions granted under the Investment Company Act of 1940, as amended (1940
Act), the fund may invest in shares of one or more money market funds managed
by Franklin Advisers, Inc. (Advisers) or its affiliates.
6. Concentrate its investments in any industry except that the fund will
invest at least 25% of its total assets in equity securities of biotechnology
companies.
Biotechnology Fund presently has the following additional restrictions, which
are not fundamental and may be changed without shareholder approval.
Biotechnology Fund may not:
1. Pledge, mortgage or hypothecate the fund's assets as security for loans,
nor to engage in joint or joint and several trading accounts in securities,
except that it may: (i) participate in joint repurchase arrangements; (ii)
invest in shares of one or more money market funds managed by Advisers or its
affiliates, to the extent permitted by exemptions granted under the 1940 Act;
or (iii) combine orders to buy or sell with orders from other persons to
obtain lower brokerage commissions.
Health Care Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
may be deemed a loan.
2. Borrow money (does not preclude the fund from obtaining such short-term
credit as may be necessary for the clearance of purchases and sales of its
portfolio securities), except in the form of reverse repurchase agreements or
from banks in order to meet redemption requests that might otherwise require
the untimely disposition of portfolio securities or for other temporary or
emergency (but not investment) purposes, in an amount up to 10% of the value
of the fund's total assets (including the amount borrowed) based on the
lesser of cost or market, less liabilities (not including the amount
borrowed) at the time the borrowing is made. While borrowings exceed 5% of
the fund's total assets, the fund will not make any additional investments.
3. Underwrite securities of other issuers or invest more than 10% of its
assets in securities with legal or contractual restrictions on resale
(although the fund may invest in such securities to the extent permitted
under the federal securities laws, for example, transactions between the fund
and Qualified Institutional Buyers subject to Rule 144A under the Securities
Act of 1933) or which are not readily marketable, or which have a record of
less than three years continuous operation, including the operations of any
predecessor companies, if more than 10% of the fund's total assets would be
invested in such companies.
4. Invest in securities for the purpose of exercising management or control
of the issuer.
5. Maintain a margin account with a securities dealer or invest in
commodities and commodity contracts (except that the fund may engage in
financial futures, including stock index futures, and options on stock index
futures) or lease or acquire any interests, including interests issued by
limited partnerships (other than publicly traded equity securities) in oil,
gas, or other mineral exploration or development programs, or invest in
excess of 5% of its total assets in options unrelated to the fund's
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof.
6. Effect short sales, unless at the time the fund owns securities
equivalent in kind and amount to those sold (which will normally be for
deferring recognition of gains or losses for tax purposes). The fund does not
currently intend to employ this investment technique.
7. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts (the fund may,
however, invest in marketable securities issued by real estate investment
trusts).
8. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the fund would not own, immediately after the
acquisition, securities of the investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the fund's total assets and iii) together with the securities of
all other investment companies held by the fund, exceed, in the aggregate,
more than 10% of the fund's total assets. The fund may invest in shares of
one or more money market funds managed by Advisers or its affiliates
consistent with the terms of the exemptive order issued by the SEC.
9. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer, if to the
knowledge of the trust, one or more of the officers or trustees of the trust,
or its investment adviser, own beneficially more than one-half of 1% of the
securities of such issuer and all such officers and trustees together own
beneficially more than 5% of such securities.
10. Concentrate in any industry except that the fund will invest at least
25% of total assets in the group of health care industries consisting of
pharmaceuticals, biotechnology, health care services, medical supplies and
medical technology.
Health Care Fund presently has the following additional restrictions, which
are not fundamental and may be changed without shareholder approval.
Health Care Fund may not:
1. Pledge, mortgage or hypothecate the fund's assets as security for loans,
nor to engage in joint or joint and several trading accounts in securities,
except that it may participate in joint repurchase arrangements, invest its
short term cash in shares of the Franklin Money Fund, or combine orders to
purchase or sell with orders from other persons to obtain lower brokerage
commissions.
2. Invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not
listed on either the New York Stock Exchange or the American Stock Exchange.
3. Purchase the securities of any issuer if, as to 75% of the assets of the
fund at the time of the purchase, more than 10% of the voting securities of
any issuer would be held by the fund.
It is also the policy of Health Care Fund that it may, consistent with its
objective, invest a portion of its assets, as permitted by the 1940 Act and
the rules adopted thereunder, in securities or other obligations issued by
companies engaged in securities related businesses, including companies that
are securities brokers, dealers, underwriters or investment advisers.
Natural Resources Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors, or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
or similar transaction may be deemed a loan;
2. Borrow money or mortgage or pledge any of its assets, except in the form
of reverse repurchase agreements or from banks for temporary or emergency
purposes in an amount up to 33% of the value of the fund's total assets
(including the amount borrowed) based on the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made. While borrowings exceed 5% of the fund's total assets, the fund will
not make any additional investments;
3. Underwrite securities of other issuers (does not preclude the fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of
its assets in illiquid securities with legal or contractual restrictions on
resale (although the fund may invest in Rule 144A restricted securities to
the full extent permitted under the federal securities laws); except that all
or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and
policies as the fund;
4. Invest in securities for the purpose of exercising management or control
of the issuer; except that all or substantially all of the assets of the fund
may be invested in another registered investment company having the same
investment objective and policies as the fund;
5. Effect short sales, unless at the time the fund owns securities
equivalent in kind and amount to those sold (which will normally be for
deferring recognition of gains or losses for tax purposes);
6. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts (the fund may,
however, invest up to 10% of its assets in marketable securities issued by
real estate investment trusts);
7. Invest directly in interests in oil, gas or other mineral leases,
exploration or development programs;
8. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the fund would not own, immediately after the
acquisition, securities of the investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the fund's total assets and iii) together with the securities of
all other investment companies held by the fund, exceed, in the aggregate,
more than 10% of the fund's total assets; except that all or substantially
all of the assets of the fund may be invested in another registered
investment company having the same investment objective and policies as the
fund. Pursuant to available exemptions from the 1940 Act, the fund may invest
in shares of one or more money market funds managed by Advisers, or its
affiliates;
9. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if one or more of
the officers or trustees of the trust, or its investment adviser, own
beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities;
10. Concentrate in any industry, except that under normal circumstances the
fund will invest at least 25% of total assets in the securities issued by
domestic and foreign companies operating within the natural resources sector;
except that all or substantially all of the assets of the fund may be
invested
in another registered investment company having the same investment objective
and policies as the fund; and
11. Invest more than 10% of its assets in securities of companies which have
a record of less than three years continuous operation, including the
operations of any predecessor companies; except that all or substantially all
of the assets of the fund may be invested in another registered investment
company having the same investment objective and policies as the fund.
Natural Resources Fund presently has the following additional restrictions,
which are not fundamental and may be changed without shareholder approval.
Natural Resources Fund may not:
1. Engage in joint or joint and several trading accounts in securities,
except that it may: (i) participate in joint repurchase arrangements; (ii)
invest in shares of one or more money market funds managed by Advisers or its
affiliates, to the extent permitted by exemptions granted under the 1940 Act;
or (iii) combine orders to buy or sell with orders from other persons to
obtain lower brokerage commissions.
2. Invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not
listed on either the NYSE or the American Stock Exchange.
Utilities Fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors, or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
may be deemed a loan;
2. Borrow money or mortgage or pledge any of its assets, except in the form
of reverse repurchase agreements or from banks for temporary or emergency
purposes in an amount up to 33% of the value of the fund's total assets
(including the amount borrowed) based on the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made. While borrowings exceed 5% of the fund's total assets, the fund will
not make any additional investments;
3. Underwrite securities of other issuers (does not preclude the fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of
its assets in securities with legal or contractual restrictions on resale
(although the fund may invest in such securities to the extent permitted
under the federal securities laws) or which are not readily marketable, if
more than 15% of the fund's total assets would be invested in such companies;
4. Invest in securities for the purpose of exercising management or control
of the issuer;
5. Maintain a margin account with a securities dealer or invest in
commodities and commodity contracts (except that the fund may engage in
financial futures, including stock index futures, and options on stock index
futures) or lease or acquire any interests, including interests issued by
limited partnerships (other than publicly traded equity securities), in oil,
gas, or other mineral exploration or development programs, or invest in
excess of 5% of its total assets in options unrelated to the fund's
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof;
6. Effect short sales, unless at the time the fund owns securities
equivalent in kind and amount to those sold (which will normally be for
deferring recognition of gains or losses for tax purposes). The fund does not
currently intend to employ this investment technique;
7. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts (the fund may,
however, invest in marketable securities issued by real estate investment
trusts);
8. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the fund would not own, immediately after the
acquisition, securities of the investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the fund's total assets and iii) together with the securities of
all other investment companies held by the fund, exceed, in the aggregate,
more than 10% of the fund's total assets. Pursuant to available exemptions
from the 1940 Act, the fund may invest in shares of one or more money market
funds managed by Advisers or its affiliates;
9. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if, to the
knowledge of the trust, one or more of the officers or trustees of the trust,
or its investment adviser, own beneficially more than one-half of 1% of the
securities of such issuer and all such officers and trustees together own
beneficially more than 5% of such securities;
10. Concentrate in any industry, except that the fund will invest at least
25% of total assets in the equity and debt securities issued by domestic and
foreign companies in the utilities industries; and
11. Invest more than 10% of its assets in securities of companies which have
a record of less than three years continuous operation, including the
operations of any predecessor companies.
Utilities Fund presently has the following additional restrictions, which are
not fundamental and may be changed without shareholder approval.
Utilities Fund may not:
1. Engage in joint or joint and several trading accounts in securities,
except that it may: (i) participate in joint repurchase arrangements; (ii)
invest in shares of one or more money market funds managed by Advisers or its
affiliates, to the extent permitted by exemptions granted under the 1940 Act;
or (iii) combine orders to buy or sell with orders from other persons to
obtain lower brokerage commissions.
2. Invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not
listed on either the NYSE or the American Stock Exchange.
It is also the policy of the fund that it may, consistent with its objective,
invest a portion of its assets, as permitted by the 1940 Act and the rules
adopted thereunder, in securities or other obligations issued by companies
engaged in securities related businesses, including such companies that are
securities brokers, dealers, underwriters or investment advisers.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The funds,
therefore, may encounter difficulty in obtaining market quotations for
purposes of valuing their portfolios and calculating their net asset values.
Foreign markets have substantially less volume than the NYSE, and securities
of some foreign companies are less liquid and more volatile than securities
of comparable U.S. companies. Commission rates in foreign countries, which
are generally fixed rather than subject to negotiation as in the U.S., are
likely to be higher. In many foreign countries there is less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
a fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's
system of share registration and custody; (b) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce
a judgment;
(c) pervasiveness of corruption, insider trading, and crime in the Russian
economic system; (d) currency exchange rate volatility and the lack of
available currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (f) controls on foreign investment and local practices
disfavoring foreign investors and limitations on repatriation of invested
capital, profits, and dividends, and on the fund's ability to exchange local
currencies for U.S. dollars; (g) the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support
the economic reform programs implemented since the dissolution of the Soviet
Union and could follow radically different political and/or economic policies
to the detriment of investors, including non-market-oriented policies such as
the support of certain industries at the expense of other sectors or
investors, a return to the centrally planned economy that existed prior to
the dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalization,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many
Russian securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including
large amounts of inter-company debt which may create a payments crisis on a
national scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or,
in the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by the fund due to
the underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in
certain industries, thereby limiting the number of investment opportunities
in Russia; (o) the risk that pending legislation would confer to Russian
courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes
before and internationally-accepted third-country arbitrator; and (p) the
difficulty in obtaining information about the financial condition of Russian
issuers, in light of the different disclosure and accounting standards
applicable to Russian companies.
There is little long-term historical data on Russian securities markets
because they are relatively new, and a substantial proportion of securities
transactions in Russia is privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems,
settlement, clearing, and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares are held
through depositories that meet the requirements of the Investment Company Act
of 1940) is defined according to entries in the company's share register and
normally evidenced by extracts from the register or by formal share
certificates. However, there is no central registration system for
shareholder, and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not
necessarily subject to effective state supervision, nor are they licensed
with any governmental entity, and it is possible for a fund to lose its
registration through fraud, negligence, or even mere oversight. While each
fund will endeavor to ensure that its interest continues to be appropriately
recorded either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability, and it is
possible that subsequent illegal amendment or other fraudulent act may
deprive the fund of its ownership rights or improperly dilute its interests.
In addition, while applicable Russian regulations impose liability on
registrars for losses resulting from their errors, it may be difficult for
the fund to enforce any rights it may have against the registrar or issuer of
the securities in the event of loss of share registration. Furthermore,
although a Russian public enterprise with more than 500 shareholders is
required by law to contract out the maintenance of its shareholder register
to an independent entity that meet certain criteria, in practice this
regulation has not always been strictly enforced. Because of this lack of
independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged
in recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent a fund from
investing in the securities of certain Russian companies deemed suitable by
the manager. Further, this also could cause a delay in the sale of Russian
company securities by a fund if a potential purchaser is deemed unsuitable,
which may expose the fund to potential loss on the investment.
The manager endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover
service charges) may be incurred, particularly when a fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent the
funds from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The funds may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the funds may invest may also have
fixed or managed currencies that are not free-floating against the U.S.
dollar. Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which a fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through each fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board of trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The board of
trustees also considers the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories.
However, in the absence of willful misfeasance, bad faith, or gross
negligence on the part of the manager, any losses resulting from the holding
of a fund's portfolio securities in foreign countries and/or with securities
depositories will be at the risk of the shareholders. No assurance can be
given that the appraisal of the risks by the fund's board of trustees will
always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
While the Health Care Fund may invest in foreign securities, it is generally
not its intention to invest in foreign equity securities of an issuer that
meets the definition in the Internal Revenue Code of a passive foreign
investment company (PFIC). However, to the extent that the a fund invests in
these securities, the fund may be subject to both an income tax and an
additional tax in the form of an interest charge with respect to its
investment. To the extent possible, the Health Care fund will avoid the taxes
by not investing in PFIC securities or by adopting other tax strategies for
any PFIC securities it does buy.
DEPOSITARY RECEIPTS Depositary receipts reduce but do not eliminate all the
risk inherent in investing in the securities of non-U.S. issuers. To the
extent that a fund acquires depositary Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the depositary receipt to issue and service such depositary
receipts, there may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
CURRENCY Some of the funds' investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on a fund, each
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
HEDGING TRANSACTIONS A fund's ability to hedge effectively all or a portion
of its securities through transactions in options on securities and stock
indexes, stock index futures, financial futures and related options depends
on the degree to which price movements in the underlying index or underlying
debt securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as such securities will not duplicate the
components of any index or underlying securities, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both the securities and
the hedging instrument. Accordingly, successful use by the funds of options
on securities and stock indexes, stock index futures, financial futures and
related options will be subject to the manager's ability to predict correctly
movements in the direction of the securities markets generally or of a
particular segment. This requires different skills and techniques than
predicting changes in the price of individual stocks.
In addition, adverse market movements could cause a fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss
by a fund of margin deposits in the event of bankruptcy of a broker with whom
the fund has an open position in a futures contract or option.
Positions in stock index and securities options, stock index futures, and
financial futures and related options may be closed out only on an exchange
that provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular option or futures contract or
related option at any specific time. Thus, it may not be possible to close an
option or futures position. If a fund were unable to close out a futures or
option position, and if prices moved adversely, the fund would have to
continue to make daily cash payments to maintain its required margin, and, if
the fund had insufficient cash, it might have to sell portfolio securities at
a disadvantageous time. In addition, a fund might be required to deliver the
stocks underlying futures or options contracts it holds. The inability to
close options or futures positions could also have an adverse impact on a
fund's ability to effectively hedge its securities. Each 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, a
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 a fund writes an OTC option, it generally can
close out that option before its expiration only by entering into a closing
purchase transaction with the dealer to which the fund originally wrote it.
If a covered call option writer cannot effect a closing transaction, it
cannot sell the underlying security until the option expires or the option is
exercised. Therefore, a covered call option writer of an OTC option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, a secured put writer of an OTC option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a buyer of a put
or call option might also find it difficult to terminate its position on a
timely basis in the absence of a liquid secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
that any person may hold or control in a particular futures contract. Trading
limits are also imposed on the maximum number of contracts that any person
may trade on a particular trading day. An exchange may order the liquidation
of positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The funds do not believe that these trading and
positions limits will have an adverse impact on the funds' strategies for
hedging their securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the natures of those markets, are subject to distortions.
First, all participants in the futures market are subject to initial deposit
and variation margin requirements. Rather than meeting additional variation
margin requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or
taking delivery. To the extent participants decide to make or take delivery,
liquidity in the futures market could be reduced, thus producing distortion.
Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility
of distortion, a correct forecast of general interest rate trends by the
manager may still not result in a successful transaction.
Although each fund believes that the use of futures contracts will benefit
the fund, if the manager's 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 a fund has
hedged against the possibility of an increase in interest rates that would
adversely affect the price of bonds held in its portfolio and interest rates
decrease instead, the fund will lose part or all of the benefit of the
increased value of its bonds which it has hedged because it will have
offsetting losses in its futures positions. In addition, in these situations,
if a 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. A fund may have to sell securities at a time when it may be
disadvantageous to do so.
Each 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. Each fund expects that normally it will buy securities upon
termination of long futures contracts and long call options on future
contracts, but under unusual market conditions it may terminate any of these
positions without a corresponding purchase of securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority
to regulate forward contracts. In this event, the funds' ability to use
forward contracts may be restricted. The use of foreign currency forward
contracts will not eliminate fluctuations in the underlying U.S. dollar
equivalent value of, or rates of return on, a fund's foreign currency
denominated portfolio securities and the use of such techniques will subject
the fund to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition,
a fund may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the fund's ability to use
such contracts to hedge or cross-hedge its assets. Also, with regard to the
funds' use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to
the U.S. dollar will continue. Thus, at any time, poor correlation may exist
between movements in the exchange rates of the foreign currencies in which a
fund's assets that are the subject of such cross-hedges are denominated.
FOREIGN CURRENCY FUTURES. By entering into these contracts, a fund is able to
protect against a loss resulting from an adverse change in the relationship
between the U.S. dollar and a foreign currency occurring between the trade
and settlement dates of the fund's securities transaction. These contracts
also tend to limit the potential gains that might result from a positive
change in such currency relationships.
OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an OTC
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related
transaction costs, this entire amount could be lost. Moreover, the option
writer and a trader of forward contracts could lose amounts substantially in
excess of their initial investments, due to the margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on these
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (OCC), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the OTC market, potentially
permitting a fund to liquidate open positions at a profit before exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
are subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the OTC market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would result in
undue burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or prohibitions
on exercise.
In addition, forward contracts and options on foreign currencies may be
traded on foreign exchanges. Such transactions are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
currencies. The value of these positions also could be adversely affected by
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions,
(iii) delays in a fund's ability to act upon economic events occurring in
foreign markets during non-business hours in the U.S., (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the U.S., and (v) less trading volume.
HIGH YIELD 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 funds invest. Accordingly, an investment in a 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
a 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,
a 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 a fund. These securities
are typically not callable for a period of time, usually for three to five
years from the date of issue. However, if an issuer calls its securities
during periods of declining interest rates, the manager may find it necessary
to replace the securities with lower-yielding securities, which could result
in less net investment income for a 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 a fund to manage the timing of its income. Under the Internal
Revenue Code and U.S. Treasury regulations, a 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, a 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 a 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 funds 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 a 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. A fund may also incur special costs in
disposing of restricted securities, although a fund will generally not incur
any costs when the issuer is responsible for registering the securities.
The funds may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. The manager will carefully review their credit and other
characteristics. The funds have no arrangement with their 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 a fund's net asset value.
The funds rely on the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
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.
UTILITY INDUSTRIES Utility companies in the U.S. and in foreign countries are
generally subject to regulation. In the U.S., most utility companies are
regulated by state and/or federal authorities. This regulation is intended to
ensure appropriate standards of service and adequate capacity to meet public
demand. Prices are also regulated, with the intention of protecting the
public while ensuring that the rate of return earned by utility companies is
sufficient to allow them to attract capital in order to grow and continue to
provide appropriate services. There can be no assurance that such pricing
policies or rates of return will continue in the future.
The nature of regulation of utility industries is evolving both in the U.S.
and in foreign countries. Changes in regulation in the U.S. increasingly
allow utility companies to provide services and products outside their
traditional geographic areas and lines of business, creating new areas of
competition within the industries. Furthermore, the manager believes that the
emergence of competition will result in utility companies potentially earning
more than their traditional regulated rates of return. Although certain
companies may develop more profitable opportunities, others may be forced to
defend their core businesses and may be less profitable. The manager seeks to
take advantage of favorable investment opportunities that are expected to
arise from these structural changes. Of course, there can be no assurance
that favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such
regulation may or may not be comparable to that in the U.S. Foreign
regulatory systems vary from country to country and may evolve in ways
different from regulation in the U.S.
The Utilities Fund's investment policies are designed to enable it to
capitalize on evolving investment opportunities throughout the world. For
example, the rapid growth of certain foreign economies will necessitate
expansion of capacity in the utility industries in those countries. Although
many foreign utility companies currently are government-owned, the manager
believes that in order to attract significant capital for growth, foreign
governments are likely to seek global investors through the privatization of
their utility industries. Privatization, which refers to the trend toward
investor ownership of assets rather than government ownership, is expected to
occur in newer, faster-growing economies and also in more mature economies.
In addition, the economic unification of European markets is expected to
improve economic growth, reduce costs and increase competition in Europe,
which will result in opportunities for investment by the Utilities Fund in
European utility industries. Of course, there is no assurance that these
favorable developments will occur or that investment opportunities for the
fund in foreign markets will increase.
The revenues of domestic and foreign utility companies generally reflect the
economic growth and developments in the geographic areas in which they do
business. The manager takes into account anticipated economic growth rates
and other economic developments when selecting securities of utility
companies. Further descriptions of some of the anticipated opportunities and
risks of specific segments within the global utility industries are set forth
below.
ELECTRIC. The electric utility industry consists of companies that are
engaged principally in the generation, transmission, and sale of electric
energy, although many also provide other energy-related services. Domestic
electric utility companies in general have recently been favorably affected
by lower fuel and financing costs and the full or near completion of major
construction programs. In addition, many of these companies recently have
generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated
businesses. Some electric utilities have also taken advantage of the right to
sell power outside of their traditional geographic areas. Electric utility
companies have historically been subject to the risks associated with
increases in fuel and other operating costs, high interest costs on borrowing
needed for capital construction programs, costs associated with compliance
with environmental, nuclear and other safety regulations and changes in the
regulatory climate. For example, in the U.S., the construction and operation
of nuclear power facilities are subject to increased scrutiny by, and
evolving regulations of, the Nuclear Regulatory Commission. Increased
scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that regulators may disallow inclusion of these
costs in rate authorizations.
TELEPHONE COMMUNICATIONS. The telephone communications industry is a distinct
utility industry segment that is subject to different risks and
opportunities. Companies that provide telephone services and access to
telephone networks compose the largest portion of this segment. The telephone
industry is large and highly concentrated. Telephone companies in the U.S.
are still experiencing the effects of the break-up of American Telephone &
Telegraph Company, which occurred in 1984. Since that time the number of
local and long-distance companies and the competition among such companies
has increased. In addition, since 1984, companies engaged in telephone
communication services have expanded their non-regulated activities into
other businesses, including cellular telephone services, cable television,
data processing, equipment retailing and software services. This expansion
has provided significant opportunities for certain telephone companies to
increase their earnings and dividends at faster rates than have been allowed
in traditional regulated businesses. Increasing competition and other
structural changes, however, could adversely affect the profitability of such
utilities.
CABLE AND OTHER PAY TELEVISION SERVICES. Cable and pay television companies
produce and distribute programming over private networks. Cable television
continues to be a growth industry throughout most of the world. The industry
is regulated in most countries, but regulation is typically less restrictive
than regulation of the electric and telephone utility industries. Cable
companies usually enjoy local monopolies, although emerging technologies and
pro-competition legislation are presenting substantial challenges to these
monopolies and could slow growth rates.
WIRELESS TELECOMMUNICATIONS. The wireless telecommunications segment includes
those companies that provide alternative telephone and communications
services. These technologies may include cellular, paging, satellite,
microwave, and private communication networks, and other emerging
technologies. The wireless telecommunications industry is in the early
development stage and is characterized by emerging, rapidly growing companies.
GAS. Gas transmission companies and gas distribution companies are also
undergoing significant changes. In the U.S., interstate transmission
companies are regulated by the Federal Energy Regulatory Commission, which is
reducing its regulation of the industry. Many companies have diversified into
oil and gas exploration and development, making returns more sensitive to
energy prices. In the recent decade, gas utility companies have been
adversely affected by disruption in the oil industry and have also been
affected by increased concentration and competition.
WATER. Water supply utilities are companies that collect, purify, distribute,
and sell water. In the U.S. and around the world, the industry is highly
fragmented because local authorities own most of the supplies. Companies in
this industry are generally mature and are experiencing little or no per
capita volume growth.
GENERAL. There can be no assurance that the positive developments noted
above, including those relating to business growth and changing regulation,
will occur or that risk factors, other than those noted above, will not
develop in the future.
BIOTECHNOLOGY COMPANIES The Health Care Fund and the Biotechnology Fund may
invest in biotechnology companies. These companies are primarily small,
start-up ventures whose fortunes to date have risen mainly on the strength of
expectations about future products, not actual products. Although numerous
biotechnology products are in the research stage by many companies, only a
handful have reached the point of approval by the U.S. Food and Drug
Administration and subsequent commercial production and distribution. Shares
of biotechnology companies may advance on the strength of new product filings
with governmental authorities and research progress, but may also drop
sharply in response to regulatory or research setbacks.
ILLIQUID SECURITIES The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer
discounts and other selling expenses than the sale of securities eligible for
trading on national securities exchanges or in the OTC markets. Restricted
securities often sell at a price lower than similar securities that are not
subject to restrictions on resale.
144A SECURITIES Subject to its liquidity limitation, each fund may invest in
certain unregistered securities which may be sold under Rule 144A of the
Securities Act of 1933 (144A securities). Due to changing market or other
factors, 144A securities may be subject to a greater possibility of becoming
illiquid than securities that have been registered with the SEC for sale. In
addition, a fund's purchase of 144A securities may increase the level of the
security's illiquidity, as some institutional buyers may become disinterested
in purchasing such securities after the fund has purchased them.
REPURCHASE AGREEMENTS The use of repurchase agreements involves certain
risks. For example, if the other party to a repurchase agreement defaults on
its obligation to repurchase the underlying security at a time when the value
of the security has declined, the fund may incur a loss upon disposition of
the security. If the other party to the agreement becomes insolvent and
subject to liquidation or reorganization under the bankruptcy code or other
laws, a court may determine that the underlying security is collateral for
the loan by the fund not within the control of the fund, and therefore the
realization by the fund on the collateral may be automatically stayed.
Finally, it is possible that the fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor
of the other party to the agreement. While the manager acknowledges these
risks, it is expected that if repurchase agreements are otherwise deemed
useful to the fund, these risks can be controlled through careful monitoring
procedures.
REITS An investment in REITs includes the possibility of a decline in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants, and increases in interest rates. The value of
securities of companies that service the real industry will also be affected
by these risks.
In addition, equity REITs are affected by changes in the value of the
underlying property owned by the trusts, while mortgage REITs are affected by
the quality of the properties to which they have extended credit. Equity and
mortgage REITs are dependent upon the REITs management skill. REITs may not
be diversified and are subject to the risks of financing projects.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors each fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 per month plus $1,050 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON GROUP
RECEIVED THE FRANKLIN OF FUNDS ON
FROM THE TEMPLETON GROUP WHICH EACH
NAME TRUST1 OF FUNDS2 Serves3
- -----------------------------------------------------------------------
Frank H. Abbott, III $13,935 $159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith E. Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon S. Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from April 30,
1998, through May 31, 1998, fees at the rate of $300 for each of the trust's
eight meetings, plus $300 per meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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
funds or other funds in the Franklin Templeton Group of Funds. Certain
officers or board members who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The funds' manager is Franklin Advisers, Inc.
(Advisers). The manager is a wholly owned subsidiary of Franklin Resources,
Inc. (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.
The manager provides investment research and portfolio management services,
and selects the securities for the funds to buy, hold or sell. The manager
also selects the brokers who execute the funds' portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the funds, the manager and
its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the funds. Similarly, with respect
to the funds, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the funds or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the funds' code of ethics.
Under the funds' code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES. Each fund pays the manager a fee equal to an annual rate of:
o 0.625 of 1% of the value of average daily net assets up to and including
$100 million;
o 0.50 of 1% of the value of average daily net assets over $100 million up
to and including $250 million;
o 0.45 of 1% of the value of average daily net assets over $250 million up
to and including $10 billion;
o 0.44 of 1% of the value of average daily net assets over $10 billion up
to and including $12.5 billion;
o 0.42 of 1% of the value of average daily net assets over $12.5 billion
up to and including $15 billion;
o 0.40 of 1% of the value of average daily net assets over $15 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
funds' shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the funds paid the following
management fees:
MANAGEMENT FEES PAID ($)
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Biotechnology Fund 445,914 161,2681 N/A
Health Care Fund 824,463 1,141,626 873,754
Natural Resources Fund 52,805 159,204 83,520
Utilities Fund 1,225,638 1,179,477 1,007,080
1. For the period September 15, 1997, to April 30, 1998
Under an agreement by the manager to limit its fees, the funds paid the
management fees shown above. For the three fiscal years ended April 30,
management fees, before any advance waiver, totaled:
MANAGEMENT FEES BEFORE WAIVER ($)
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Biotechnology Fund 445,914 196,5831 N/A
Health Care Fund 824,463 1,141,626 873,754
Natural Resources Fund 256,117 357,984 175,237
Utilities Fund 1,225,638 1,179,477 1,007,080
1. For the period September 15, 1997, to April 30, 1998.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with Biotechnology Fund and the manager, on behalf
of Health Care Fund, Natural Resources Fund and Utilities Fund, to provide
certain administrative services and facilities for the funds. FT Services is
wholly owned by Resources and is an affiliate of the funds' manager and
principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES Biotechnology Fund and the manager (on behalf of the
remaining funds) pay FT Services a monthly fee equal to an annual rate of:
o 0.15% of a fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended April 30, Biotechnology Fund and the
manager (on behalf of the remaining funds) paid FT Services the following
administration fees:
ADMINISTRATION FEES PAID ($)
- -------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------
Biotechnology Fund 108,947 47,5081 N/A
Health Care Fund 209,933 303,965 141,388
Natural Resources 61,469 85,915 32,992
Fund
Utilities Fund 327,173 314,531 157,925
1. For the period September 15, 1997, to April 30, 1998.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the funds' shareholder servicing agent
and acts as the funds' transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
fund also will 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
funds. The amount of reimbursements for these services per benefit plan
participant fund account per year will not exceed the per account fee payable
by the funds to Investor Services in connection with maintaining shareholder
accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
The manager selects brokers and dealers to execute the funds' 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager and its affiliates may use
this research and data in their investment advisory capacities with other
clients. If the funds' 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, also may be considered a factor in the
selection of broker-dealers to execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when a fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of a 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 the manager 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 funds and one or more other
investment companies or clients supervised by the manager 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 the manager, 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 funds are concerned. In other cases it is possible
that the ability to participate in volume transactions may improve execution
and reduce transaction costs to the funds.
During the last three fiscal years ended April 30, the fund paid the
following brokerage commissions:
Brokerage Commissions Paid ($)
- ------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------
Biotechnology Fund 28,350 61,0031 N/A
Health Care Fund 246,149 178,330 200,754
Natural Resources Fund 143,235 154,303 120,604
Utilities Fund 468,206 229,415 339,618
1. For the period September 15, 1997, through April 30, 1998.
For the fiscal year ended April 30, 1999, the funds paid brokerage
commissions from aggregate portfolio transactions to brokers who provided
research services as follows:
Brokerage Aggregate
Commission Portfolio
Transactions
- -----------------------------------------------------
Biotechnology Fund
Health Care Fund
Natural Resources Fund [] []
Utilities Fund [] []
[For the fiscal year ended [], 19[], the fund [did not pay][paid] brokerage
commissions [of $[] from aggregate portfolio transactions of $[]] to brokers
who provided research services.]
As of [], 199[], the fund did not own securities of its regular
broker-dealers.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own more than 5% of the voting securities of one or
more broker-dealers through whom such fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the fund. To the extent the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to
adhere to certain rules relating to the payment of commissions to an
affiliated broker-dealer. These rules require the fund to adhere to
procedures adopted by the board relating to ensuring that the commissions
paid to such broker-dealers do not exceed what would otherwise be the usual
and customary brokerage commissions for similar transactions.
DISTRIBUTIONS AND TAXES
- -------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The funds do not pay "interest" or guarantee any fixed rate of
return on an investment in their shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The funds receive income generally in
the form of dividends and interest on their investments. This income, less
expenses incurred in the operation of a fund, constitutes a fund's net
investment income from which dividends may be paid to you. Any distributions
by a fund from such income will be taxable to you as ordinary income, whether
you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The funds may derive capital gains and losses
in connection with sales or other dispositions of their portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in a fund. Any net capital gains realized by a fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce a fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce a fund's
ordinary income distributions to you, and may cause some or all of a fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The funds will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, a fund may
designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As regulated
investment companies, the funds generally pay no federal income tax on the
income and gains they distribute to you. The board reserves the right not to
maintain the qualification of a fund as a regulated investment company if it
determines such course of action to be beneficial to shareholders. In such
case, a fund will be subject to federal, and possibly state, corporate taxes
on its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of such fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires a fund to distribute to you by December 31 of
each year, at a minimum, the following amounts: 98% of its taxable ordinary
income earned during the calendar year; 98% of its capital gain net income
earned during the twelve month period ending October 31; and 100% of any
undistributed amounts from the prior year. Each fund intends to declare and
pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in
such fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in a fund, and
then reinvest the sales proceeds in such fund or in another Franklin
Templeton Fund within 90 days of buying the original shares, the sales charge
that would otherwise apply to your reinvestment may be reduced or
eliminated. The IRS will require you to report gain or loss on the
redemption of your original shares in a fund. In doing so, all or a portion
of the sales charge that you paid for your original shares in a fund will be
excluded from your tax basis in the shares sold (for the purpose of
determining gain or loss upon the sale of such shares). The portion of the
sales charge excluded will equal the amount that the sales charge is reduced
on your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by a fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 0.20% of the dividends paid by the
Biotechnology Fund, 71.28% of the dividends paid by the Global Utilities Fund
and 70.46% of the dividends paid by the Natural Resources Fund for the most
recent fiscal year qualified for the dividends-received deduction. In some
circumstances, you will be allowed to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with
respect to dividends designated by such fund as eligible for such treatment.
All dividends (including the deducted portion) must be included in your
alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES The funds may invest in complex
securities. These investments may be subject to numerous special and complex
tax rules. These rules could affect whether gains and losses recognized by a
fund are treated as ordinary income or capital gain, accelerate the
recognition of income to a fund and/or defer a fund's ability to recognize
losses , and, in limited cases, subject a fund to U.S. federal income tax on
income from certain of its foreign securities. In turn, these rules may
affect the amount, timing or character of the income distributed to you by a
fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -------------------------------------------------------------------------------
Each fund is a non-diversified series of Franklin Strategic Series, an
open-end management investment company, commonly called a mutual fund. The
trust was organized as a Delaware business trust on January 25, 1991, and is
registered with the SEC.
Biotechnology Fund currently offers one class of shares, Class A. Health
Care Fund and Utilities Fund currently offer three classes of shares, Class
A, Class B, and Class C and Natural Resources Fund offers two classes of
shares, Class A and Advisor Class. Before January 1, 1999, Class A shares
were designated Class I and Class C shares were designated Class II. Health
Care Fund and Utilities Fund began offering Class B shares on January 1,
1999. The funds may offer additional classes of shares in the future. The
full title of each class is:
o Franklin Biotechnology Discovery Fund - Class A
o Franklin Global Health Care Fund - Class A
o Franklin Global Health Care Fund - Class B
o Franklin Global Health Care Fund - Class C
o Franklin Global Utilities Fund - Class A
o Franklin Global Utilities Fund - Class B
o Franklin Global Utilities Fund - Class C
o Franklin Natural Resources Fund - Class A
o Franklin Natural Resources Fund - Advisor Class
Shares of each class represent proportionate interests in each fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
As of June 7, 1999, the principal shareholders of the funds, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE
(%)
- -------------------------------------------------------
HEALTH CARE FUND
Franklin Resources, Inc.
555 Airport Blvd.
Burlingame, CA 94010 Class B 7.31
PaineWebber
FBO Keith Gordon
Roberta Gordon JTWROS
1960 Partridge Lane
Highland Park, IL 60035-2133 Class B 44.51
UTILITIES FUND
Franklin Resources, Inc.
555 Airport Blvd.
Burlingame, CA 94010 Class B 19.70
Franklin Templeton Trust
Company
Custodian for the Rollover
IRA of Anthony J. Messina
55 S. Hale St. 302
Palatine, IL 60067-6277 Class B 8.68
Key Clearing Corp.
4900 Tiedeman Road
Brooklyn, OH 44144 Class B 5.13
Patricia H. Gulbrandsen
9412 Hale Pl.
Silver Springs, MD Class B 12.96
20910-1307
PaineWebber FBO CDN KF38125
FBO Michael W. Brady IRA
P.O Box 1108
New York, NY 10268-1108 Class B 9.91
Franklin Templeton Trust
Company
Custodian for the Rollover
IRA of Barbara Cohrssen
2970 Pine St.
San Francisco, CA 94115 Class B 18.45
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.
As of June 7, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund
and class. The board members may own shares in other funds in the Franklin
Templeton Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------------------------------------------------------
The funds continuously offer their shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer
orders and accounts with the funds. This reference is for convenience only
and does not indicate a legal conclusion of capacity. Banks and financial
institutions that sell shares of the funds may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the funds should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the funds 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.
When you buy shares, if you submit a check or a draft that is returned unpaid
to a fund we may impose a $10 charge against your account for each returned
item.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Valuemark Funds, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account 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
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A 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 funds, 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, although any such plan that purchased a fund's Class
A shares at a reduced sales charge under the group purchase privilege before
February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton
Fund. The distributions generally must be reinvested in the same share
class. Certain exceptions apply, however, to Class C shareholders who chose
to reinvest their distributions in Class A shares of a fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in a fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating
Rate Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o Any state or local government or any instrumentality, department,
authority or agency thereof that has determined a fund is a legally
permissible investment and that can only buy fund shares without paying
sales charges. Please consult your legal and investment advisors to
determine if an investment in a fund is permissible and suitable for you
and the effect, if any, of payments by the fund on arbitrage rebate
calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial sales charge. We may enter into a special
arrangement with a securities dealer, based on criteria established by the
funds, 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 CDSC 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.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the funds' 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.
The funds' Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- ------------------------------------------------------------
Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the funds' prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases of Class A shares by certain retirement plans
without an initial sales charge: 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC 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 A shares without an initial sales charge also may be
subject to a CDSC 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.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B
SHARES WITHIN THIS MANY YEARS THIS % IS DEDUCTED
AFTER BUYING THEM FROM YOUR PROCEEDS
AS A CDSC
- ------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the funds when an account falls below the minimum
required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans
or employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, a 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 each 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. The funds 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. The funds do 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.
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.
GENERAL INFORMATION If dividend checks are returned to a 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 funds
nor their affiliates will be liable for any loss caused by your failure to
cash such checks. The funds are 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound
to meet any redemption request in less than the seven day period prescribed
by law. Neither the funds nor their 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 the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay
certain financial institutions that maintain omnibus accounts with the funds
on behalf of numerous beneficial owners for recordkeeping operations
performed with respect to such owners. For each beneficial owner in the
omnibus account, a fund may reimburse Investor Services an amount not to
exceed the per account fee that the fund normally pays Investor Services.
These financial institutions also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority
to control your account, each 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.
PRICING SHARES
- -------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The funds calculate the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther
King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, each fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, each fund values those securities at the last quoted sale price of
the day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. Each fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, each fund values them according to the broadest and most
representative market as determined by the manager.
Each fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of
business of the NYSE on each day that the NYSE is open. Trading in European
or Far Eastern securities generally, or in a particular country or countries,
may not take place on every NYSE business day. Furthermore, trading takes
place in various foreign markets on days that are not business days for the
NYSE and on which the fund's NAV is not calculated. Thus, the calculation of
the fund's NAV does not take place contemporaneously with the determination
of the prices of many of the portfolio securities used in the calculation
and, if events materially affecting the values of these foreign securities
occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV 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 close of the NYSE that will not be reflected in the
computation of the NAV. 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 funds may use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- -------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the funds' shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
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. Each fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the funds' shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
April 30:
Total Amount Amount
Commissions Retained by Received in
Received Distributors Connection
($) ($) with
Redemptions
and
Repurchases ($)
-----------------------------------------------------------------
1999
Biotechnology Fund 952,419 121,172 2,150
Health Care Fund 419,582 43,356 37,292
Natural Resources Fund 275,313 36,544 4,269
Utilities Fund 406,701 48,417 10,473
1998
Biotechnology Fund1 2,427,478 272,305 0
Health Care Fund 1,264,914 123,956 0
Natural Resources Fund 584,114 66,612 0
Utilities Fund 544,344 55,047 2,786
1997
Health Care Fund 3,331,378 362,830 0
Natural Resources Fund 742,239 16,002 0
Utilities Fund 456,380 43,795 4,607
1. For the period September 15, 1997 to April 30, 1998.
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the funds for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, each fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by Biotechnology Fund and Natural Resources Fund
under the Class A plan may not exceed 0.35% per year of Class A's average
daily net assets, payable quarterly. Of this amount, each fund may reimburse
up to 0.35% to Distributors or others, out of which 0.10% generally will be
retained by Distributors for distribution expenses. Payments by Health Care
Fund and Utilities Fund under the Class A plan may not exceed 0.25% per year
of Class A's average daily net assets, payable quarterly. All distribution
expenses over this amount will be borne by those who have incurred them.
Health Care Fund's and Utilities Fund's Class A plan does not permit
unreimbursed expenses incurred in a particular year to be carried over to or
reimbursed in later years.
THE CLASS B AND C PLANS. Under the Class B and C plans, Health Care Fund and
Utilities Fund pay Distributors up to 0.75% per year of the class's average
daily net assets to pay Distributors or others for providing distribution and
related services and bearing certain expenses. All distribution expenses over
this amount will be borne by those who have incurred them. Health Care Fund
and Utilities Fund also may pay a servicing fee of up to 0.25% per year of
the class's average daily net assets. Under the Class B plan, the fee is
payable monthly. Under the Class C plan, the fee is payable quarterly. 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 expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C 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, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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 the manager
or by vote of a majority of the outstanding shares of the class. The Class A
plan of Health Care Fund and Utilities Fund also may be terminated by any act
that constitutes an assignment of the underwriting agreement with
Distributors. Distributors or any dealer or other firm also may 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 noninterested board members, 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, 1999, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the funds paid Distributors under the
plans were:
DISTRIBUTORS' AMOUNT PAID
ELIGIBLE EXPENSES ($) BY THE FUND ($)
- ---------------------------------------------------------------
Biotechnology Fund 226,713 221,974
Health Care Fund
Class A 374,669 301,077
Class B 7,465 238
Natural Resources 242,225 135,940
Fund
Utilities Fund
Class A 571,531 509,595
Class B 1,008 136
Class C 177,411 162,462
For the fiscal year ended April 30, 1999, the amounts paid by Health Care
Fund - Class C pursuant to the plan were:
($)
- ----------------------------------------------
Advertising 4,582
Printing and mailing 8,093
prospectuses
other than to current
shareholders
Payments to underwriters 2,400
Payments to broker-dealers 171,617
Other 4,940
------------
Total 191,632
------------
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 a 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 funds
are based on the standardized methods of computing performance mandated by
the SEC. Performance figures reflect Rule 12b-1 fees from the date of the
plan's implementation. An explanation of these and other methods used by the
funds 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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial 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 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 initial sales charge currently in effect.
When considering the average annual total return quotations for Class A and C
shares, you should keep in mind that the maximum initial sales charge
reflected in each quotation is a one time fee charged on all direct
purchases, which will have its greatest impact during the early stages of
your investment. This charge will affect actual performance less the longer
you retain your investment in the fund. The average annual total returns for
the indicated periods ended April 30, 1999, were:
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- -----------------------------------------------------------------
Biotechnology Fund 09/15/97 -16.55% -- -6.34%
Health Care Fund - Class A 02/14/92 -32.10% 9.56% 7.87%
Health Care Fund - Class C 09/03/96 -29.83% -- -5.77%
Natural Resources Fund 06/05/95 -18.38% -- 9.20%
Utilities Fund - Class A 07/02/92 -1.97% 14.05% 14.57%
Utilities Fund - Class C 05/01/95 1.21% -- 17.71%
The following SEC formula was used to calculate these figures:
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 each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial 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, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended April 30, 1999, were:
INCEPTION SINCE
DATE 1 YEAR 5 YEARS INCEPTION
- -------------------------------------------------------------------
Biotechnology Fund 09/15/97 -16.55% -- -10.08%
Health Care Fund - Class A 02/14/92 -32.10% 57.85% 72.61%
Health Care Fund - Class C 09/03/96 -29.83% -- -14.60
Natural Resources Fund 06/05/95 -18.38% -- 41.03%
Utilities Fund - Class A 07/02/92 -1.97% 92.93% 153.07%
Utilities Fund - Class C 05/01/95 1.21% -- 92.00%%
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 applicable maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders of the
class during the base period. The yields for the 30-day period ended April
30, 1999, were:
CURRENT YIELD
- --------------------------------------------------
Natural Resources Fund 0.79%
Utilities Fund - Class A 0.94%
Utilities Fund - Class C 0.28%
The following SEC formula was used to calculate these figures:
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. Amounts paid to shareholders are reflected in
the quoted current distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current maximum
offering price. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended April 30,
1999, were:
CURRENT
DISTRIBUTION
RATE
- ----------------------------------------------------
Natural Resources Fund 0.83%
Utilities Fund - Class A 1.05%
Utilities Fund - Class C 0.46%
VOLATILITY Occasionally statistics may be used to show a fund's volatility
or risk. Measures of volatility or risk are generally used to compare a
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 funds also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
Sales literature referring to the use of the funds as a potential investment
for 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 funds may include in their advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 funds may
satisfy your investment goal, advertisements and other materials about the
funds may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
unmanaged capitalization-weighted index designed to measure performance of
the broad domestic economy through changes in the aggregate market value of
500 stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o 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.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o 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.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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.
o The American Stock Exchange - an equal-dollar weighted index designed to
measure the performance of a cross section of companies in the
biotechnology industry that are primarily involved in the use of biological
processes to develop products or provide services.
From time to time, advertisements or information for the funds may include a
discussion of certain attributes or benefits to be derived from an investment
in the funds. 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 also may compare the funds' performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in a
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 funds' 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 funds to calculate their figures. In
addition, there can be no assurance that the funds will continue their
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The funds 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 a fund cannot guarantee that these goals will be met.
Each 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 is one of
the oldest mutual fund organizations and now services more than 4 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, a pioneer in international investing. The Mutual
Series team, 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 $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. Each fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the funds are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS
- -------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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
that 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. These 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. These 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 that are speculative to a high
degree. These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
their promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations for both short-term
debt and commercial paper, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN NATURAL RESOURCES FUND
FRANKLIN STRATEGIC SERIES
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended April 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
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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.
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GOAL AND STRATEGIES
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The investment goal of the fund is to seek to provide high total return. This
goal is fundamental, which means it may not be changed without shareholder
approval. Total return consists of both capital appreciation and current
dividend and interest income.
Under normal market conditions, the fund invests at least 65% of its assets
in the equity and debt securities of U.S. and foreign companies in the
natural resources sector. The fund may also invest up to 35% of its assets
outside the natural resources sector, including in U.S. and foreign equity
and debt securities and up to 10% of its assets in real estate investment
trusts (REITs).
Below is a description of the various types of securities the fund may buy
and information about the fund's investment policies.
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. The purchaser of an equity security typically
receives an ownership interest in the company as well as certain voting
rights. The owner of an equity security may participate in a company's
success through the receipt of dividends, which are distributions of earnings
by the company to its owners. Equity security owners may also participate in
a company's success or lack of success through increases or decreases in the
value of the company's shares as traded in the public trading market for such
shares. Equity securities generally take the form of common stock or
preferred stock. Preferred stockholders typically receive greater dividends
but may receive less appreciation Equity securities may also include
convertible securities, warrants, and rights. Convertible securities
typically are debt securities or preferred stocks which are convertible into
common stock after certain time periods or under certain conditions. Warrants
or rights give the holder the right to purchase a common stock at a given
time for a specified price.
DEBT SECURITIES A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividend to holders of its equity securities. Bonds,
notes, debentures, and commercial paper differ in the length of the issuer's
payment schedule, with bonds carrying the longest repayment schedule and
commercial paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
debt securities generally declines. These changes in market value will be
reflected in the fund's net asset value.
RATINGS. Various investment services publish ratings of some of the debt
securities in which the fund may invest. These ratings represent the opinions
of the rating services with respect to the issuer's ability to pay interest
and repay principal. They do not purport to reflect the risk of fluctuations
in market value and are not absolute standards of quality. Please see
"Description of Ratings" for a discussion of the ratings.
If the rating on an issue held in the fund's portfolio is changed by the
rating service or the security goes into default, the manager will consider
the event in its evaluation of the overall investment merits of the security
but will not automatically sell the security.
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
The fund may also enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the fund agrees to sell a security in its portfolio and
then to repurchase the security at an agreed-upon price, date, and interest
payment. The fund will maintain cash or high-grade liquid debt securities
with a value equal to the value of the fund's obligation under the agreement,
including accrued interest, in a segregated account with the fund's custodian
bank. The securities subject to the reverse repurchase agreement will be
marked-to-market daily. Although reverse repurchase agreements are borrowings
under the Investment Company Act of 1940, the fund does not treat these
arrangements as borrowings under their investment restrictions so long as the
segregated account is properly maintained.
SECURITIES LENDING The fund may lend to banks and broker-dealers portfolio
securities with an aggregate market value of up to 33% of its total assets.
Such loans must be secured by collateral (consisting of any combination of
cash, U.S. government securities, or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current
market value of the securities loaned. The fund retains all or a portion of
the interest received on investment of the cash collateral or receives a fee
from the borrower. The fund may terminate the loans at any time and obtain
the return of the securities loaned within five business days. The fund will
continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.
However, as with other extensions of credit, there are risks of delay in
recovery or even loss of rights in collateral should the borrower fail.
BORROWING The fund does not borrow money or mortgage or pledge any of its
assets, except that the fund may enter into reverse repurchase agreements or
borrow for temporary or emergency purposes up to 33% of total assets. The
fund will not make any additional investments while its borrowings exceed 5%
of its total assets.
GOVERNMENT SECURITIES Securities issued or guaranteed by the U.S. government
or its agencies or instrumentalities, including U.S. Treasury bills, notes
and bonds, as well as certain agency securities and mortgage-backed
securities issued by the Government National Mortgage Association (GNMA), may
carry guarantees which are backed by the "full faith and credit" of the U.S.
government. The guarantee extends only to the payment of interest and
principal due on the securities and does not provide any protection from
fluctuations in either the securities' yield or value or to the yield or
value of the fund's shares. Other investments in agency securities are not
necessarily backed by the "full faith and credit" of the U.S. government.
These include securities issued by the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation, the Student Loan
Marketing Association and the Farm Credit Bank.
The fund may invest in debt securities issued or guaranteed by foreign
governments. These securities are typically denominated in foreign currencies
and are subject to the currency fluctuation and other risks of foreign
securities investments. The foreign government securities in which the fund
intends to invest generally will include obligations issued by national,
state, or local governments or similar political subdivisions. Foreign
government securities also include debt obligations of supranational
entities, including international organizations designed or supported by
governmental entities to promote economic reconstruction or development and
international banking institutions and related government agencies. Examples
include the International Bank of Reconstruction and Development (the World
Bank), the European Investment Bank, the Asian Development Bank and the
Inter-American Development Bank.
Foreign government securities also include debt securities of
"quasi-governmental agencies" and debt securities denominated in
multinational currency units. An example of a multinational currency unit is
the European Currency Unit. A European Currency Unit represents specified
amounts of the currencies of certain of the 12-member states of the European
Economic Community. Debt securities of quasi-governmental agencies are issued
by entities owned by either a national or local government or are obligations
of a political unit that is not backed by the national government's full
faith and credit and general taxing powers. Foreign government securities
also include mortgage-related securities issued or guaranteed by national or
local governmental instrumentalities, including quasi-governmental agencies.
FOREIGN SECURITIES The fund expects to invest more of its assets in U.S.
securities than in securities of any other single country, but the fund may
invest more than 50% of its total assets in foreign securities.
AMERICAN DEPOSITARY RECEIPTS (ADRS). The Natural Resources Fund may invest in
ADRs. Depositary receipts are interests in a pool of a non-U.S. company's
securities that have been deposited with a bank or trust company. The bank or
trust company then sells interests in the pool to investors in the form of
Depositary receipts. Depositary receipts can be unsponsored or sponsored by
the issuer of the underlying securities or by the issuing bank or trust
company.
ADRs are usually issued by an American bank or trust company and may be
registered for use in U.S. securities markets. The fund considers investments
in ADRs to be investments in the equity securities of the issuers into which
the ADR may be converted.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risks
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales and certain
foreign securities markets trading risks. In general, there is a large,
liquid market in the U.S. for ADRs quoted on a national securities exchange
or on the National Association of Securities Dealers Automated Quotation
System (NASDAQ). The information available for ADRs is subject to the
accounting, auditing, and financial reporting standards of the U.S. market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers may be subject.
ADRs may be issued under sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities traded in
the form of depositary receipts. In unsponsored programs, the issuer may not
be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from
an issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a
correlation between such information and the market value of the depositary
receipts.
CONVERTIBLE SECURITIES The fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, a convertible security is not
as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by
an investment bank. When issued by an operating company, a convertible
security tends to be senior to common stock, but subordinate to other types
of fixed-income securities issued by that company. When a convertible
security issued by an operating company is "converted," the operating company
often issues new stock to the holder of the convertible security but, if the
parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
ILLIQUID INVESTMENTS The fund's policy is not to invest more than 15% of its
net assets in illiquid securities. The fund may invest up to 5% of its net
assets in illiquid securities, the disposition of which may be subject to
legal or contractual restrictions. The fund currently intends to limit its
investments in illiquid securities, including illiquid securities with legal
or contractual restrictions on resale, except for Rule 144A restricted
securities, and including securities which are not readily marketable, to 10%
of the fund's net assets.
The fund does not consider securities that it acquires outside the U.S. and
that are publicly traded in the U.S. or on a foreign securities exchange or
in a foreign securities market to be illiquid assets so long as the fund
acquires and holds the security with the intention of reselling the security
in the foreign trading market, the fund reasonably believes it can readily
dispose of the security for cash at approximately the amount at which the
fund has valued the security in the U.S. or foreign market, and current
market quotations are readily available.
Subject to these limitations, the board of trustees has authorized the fund
to invest in restricted securities where such investments are consistent with
the fund's investment goal and has authorized such securities to be
considered liquid to the extent the manager determines that there is a liquid
institutional or other market for the securities. An example of these
securities are restricted securities that may be freely transferred among
qualified institutional buyers under Rule 144A of the Securities Act of 1933,
as amended, and for which a liquid institutional market has developed. The
board of trustees will review any determination by the manager to treat a
restricted security as a liquid security on an ongoing basis, including the
manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the manager and the board of trustees
will take into account the following factors: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to buy or sell
the security and the number of other potential buyers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer). To
the extent the fund invests in restricted securities that are deemed liquid,
the general level of illiquidity in the fund may be increased if qualified
institutional buyers become uninterested in buying these securities or the
market for these securities contracts.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The fund may buy securities on a
when-issued or delayed delivery basis. These transactions are arrangements
under which the fund buys securities with payment and delivery scheduled for
a future time. The securities are subject to market fluctuation prior to
delivery to the fund and generally do not earn interest until their scheduled
delivery date. Therefore, the value or yields at delivery may be more or less
than the purchase price or the yields available when the transaction was
entered into. Although the fund will generally buy these securities on a
when-issued basis with the intention of acquiring the securities, it may sell
the securities before the settlement date if it is deemed advisable. When the
fund is the buyer, it will maintain, in a segregated account with its
custodian bank, cash or high-grade marketable securities having an aggregate
value equal to the amount of its purchase commitments until payment is made.
In such an arrangement, the fund relies on the seller to complete the
transaction. The seller's failure to do so may cause the fund to miss a price
or yield considered advantageous. The fund is not subject to any percentage
limit on the amount of its assets that may be invested in when-issued
purchase obligations. To the extent the fund engages in when-issued and
delayed delivery transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with its investment goal and
policies, and not for the purpose of investment leverage.
STANDBY COMMITMENT AGREEMENTS The fund may, from time to time, enter into
standby commitment agreements. These agreements commit the fund, for a stated
period of time, to buy a stated amount of a security that may be issued and
sold to the fund at the option of the issuer. The price and coupon of the
security is fixed at the time of the commitment. When the fund enters into
the agreement, the fund is paid a commitment fee, regardless of whether the
security is ultimately issued, typically equal to approximately 0.5% of the
aggregate purchase price of the security that the fund has committed to buy.
The fund will enter into such agreements only for the purpose of investing in
the security underlying the commitment at a yield and/or price that is
considered advantageous to the fund.
The fund will not enter into a standby commitment with a remaining term in
excess of 45 days and will limit its investment in standby commitments so
that the aggregate purchase price of the securities subject to the
commitments with remaining terms exceeding seven days, together with the
value of other portfolio securities deemed illiquid, will not exceed the
fund's limit on holding illiquid investments, taken at the time of
acquisition of such commitment or security. The fund will at all times
maintain a segregated account with its custodian bank of cash, cash
equivalents, U.S. government securities, or other high grade liquid debt
securities denominated in U.S. dollars or non-U.S. currencies in an aggregate
amount equal to the purchase price of the securities underlying the
commitment.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery
date may be more or less than its purchase price. Since the issuance of the
security underlying the commitment is at the option of the issuer, the fund
may bear the risk of a decline in the value of the security and may not
benefit from an appreciation in the value of the security during the
commitment period.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can
reasonably be expected to be issued, and the value of the security will
thereafter be reflected in the calculation of the fund's net asset value. The
cost basis of the security will be adjusted by the amount of the commitment
fee. In the event the security is not issued, the commitment fee will be
recorded as income on the expiration date of the standby commitment.
DERIVATIVE SECURITIES
Although the fund has authority to invest in various types of derivative
securities and engage in hedging transactions, the fund does not currently
intend to invest in derivative securities or engage in hedging transactions.
Hedging is a technique designed to reduce a potential loss to the fund as a
result of certain economic or market risks, including risks related to
fluctuations in interest rates, currency exchange rates between U.S. and
foreign currencies or between different foreign currencies, and broad or
specific market movements.
The fund may write (sell) covered put and call options and buy put and call
options on securities and stock indices that trade on securities exchanges
and in the over-the-counter market. Additionally, the fund may "close out"
options it has entered into. The fund will not engage in any stock options
if the option premiums paid regarding its open option positions exceed 5% of
the value of the fund's total assets. To hedge against currency exchange
rate risks, the fund may enter into forward currency exchange contracts and
currency futures contracts and options on such futures contracts, and may buy
put and call options and write covered put and call options on currencies
traded in U.S. or foreign markets. The fund also may buy and sell forward
contracts (to the extent they are not deemed commodities) when the manager
anticipates that the foreign currency will appreciate or depreciate in value,
but securities denominated in that currency do not present attractive
investment opportunities and are not held in the fund's portfolio. The fund
generally will not enter into a forward contract with a term of greater than
one year.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The fund may enter into forward
foreign currency exchange contracts (Forward Contract(s)) to attempt to
minimize the risk to the fund from adverse changes in the relationship
between currencies or to enhance income. A Forward Contract is an obligation
to buy or sell a specific currency for an agreed price at a future date and
is individually negotiated and privately traded by currency traders and their
customers.
The fund may enter into a Forward Contract, for example, when it enters into
a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock-in" the U.S. dollar price of that security.
Additionally, when the manager believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
fund may enter into a Forward Contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or
all of the fund's portfolio securities denominated in that foreign currency.
The precise matching of the Forward Contract amounts and the value of the
securities involved is not generally possible because the future value of
such securities in foreign currencies changes as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using Forward Contracts to
protect the value of the fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange that the fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the fund's foreign
assets.
The fund may engage in cross-hedging by using Forward Contracts in one
currency to hedge against fluctuations in the value of securities denominated
in a different currency if the manager determines that there is a pattern of
correlation between the two currencies. The fund may also buy and sell
Forward Contracts (to the extent they are not deemed "commodities") for
non-hedging purposes when the manager anticipates that the foreign currency
will appreciate or depreciate in value, but securities denominated in that
currency do not present attractive investment opportunities and are not held
in the fund's portfolio.
The fund's custodian bank will place cash or liquid high grade debt
securities (i.e., securities rated in one of the top three ratings categories
by Moody's or S&P or, if unrated, deemed by the manager to be of comparable
credit quality) into a segregated account of the fund in an amount equal to
the value of the fund's total assets committed to the consummation of Forward
Contracts requiring the fund to buy foreign currencies. If the value of the
securities placed in the segregated account declines, additional cash or
securities is placed in the account on a daily basis so that the value of the
account equals the amount of the fund's commitments with respect to its
contracts. The segregated account is marked-to-market on a daily basis.
Although the Commodity Futures Trading Commission (the CFTC) does not
presently regulate the contracts, the CFTC may in the future assert authority
to regulate these contracts. If this happens, the fund's ability to use
Forward Contracts may be restricted.
FOREIGN CURRENCY FUTURES. The fund may buy and sell foreign currency futures
contracts to hedge against changes in the level of future currency rates.
These contracts involve an agreement to buy or sell a specific currency at a
future date at a price set in the contract. Assets will be held aside or in a
segregated account with the fund's custodian bank as required to cover the
fund's obligations under its foreign currency futures contracts.
OPTIONS ON FOREIGN CURRENCIES. The fund may buy and write put and call
options on foreign currencies traded on U.S. and foreign exchanges or
over-the-counter, for hedging purposes to protect against declines in the
U.S. dollar value of foreign portfolio securities or other assets to be
acquired. As with other kinds of options, the writing of an option on foreign
currency will only be a partial hedge, up to the amount of the premium
received, and the fund could be required to buy or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may be an effective hedge against fluctuations in
exchange rates although, in the event of rate movements adverse to the fund's
position, the fund may forfeit the entire amount of the premium plus related
transaction costs.
A decline in the dollar value of a foreign currency in which portfolio
securities are denominated will reduce the dollar value of the securities,
even if their value in the foreign currency remains constant. In order to
protect against such diminutions in the value of portfolio securities, the
fund may buy put options on the foreign currency. If the value of the
currency does decline, the fund will have the right to sell the currency for
a fixed amount in dollars and will thereby offset, in whole or part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, the funds may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to the fund deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in
the direction or to the extent anticipated, the fund could sustain losses on
transactions in foreign currency options that would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
The fund may write options on foreign currencies for the same types of
hedging purposes. For example, where the fund anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of buying a put option,
write a call option on the relevant currency. If the expected decline occurs,
the option will most likely not be exercised, and the decline in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of buying a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the fund could
write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the fund to hedge such
increased cost up to the amount of the premium. As in the case of other types
of options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium, and only if rates move
in the expected direction. If this does not occur, the option may be
exercised and the fund would be required to buy or sell the underlying
currency at a loss, which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, the fund also may be
required to forego all or a portion of the benefits that might otherwise have
been obtained from favorable movements in exchange rates.
The fund may write covered call options on foreign currencies. A call option
written on a foreign currency is "covered" if the fund owns the underlying
foreign currency covered by the call or has an absolute and immediate right
to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its
custodian bank) upon conversion or exchange of other foreign currency held in
its portfolio. A call option is also covered if the fund has a call on the
same foreign currency and in the same principal amount as the call written
where the exercise price of the call held is (a) equal to or less than the
exercise price of the call written or (b) greater than the exercise price of
the call written if the difference is maintained by the fund in cash, U.S.
government securities, or other high grade liquid debt securities in a
segregated account with its custodian bank.
The fund may also write call options on foreign currencies that are not
covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the fund
owns or has the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate. In such
circumstances, the fund collateralizes the option by maintaining in a
segregated account with the fund's custodian bank, cash or U.S. government
securities or other high grade liquid debt securities in an amount not less
than the value of the underlying foreign currency in U.S. dollars
marked-to-market daily.
OPTIONS ON SECURITIES AND STOCK INDICES. The fund may write (sell) covered
put and call options and buy put and call options on securities and stock
indices that trade on securities exchanges and in the over-the-counter
market. Additionally, the fund may "close out" options it has entered into.
The fund will not engage in any stock options if the option premiums paid
regarding its open option positions exceed 5% of the value of the fund's
total assets.
WRITING CALL OPTIONS. Call options written by the fund give the holder the
right to buy the underlying securities from the fund at a stated exercise
price. A call option written by the fund is "covered" if the fund owns the
underlying security that is subject to the call or has an absolute and
immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated
account by its custodian bank) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the fund
holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the
fund in cash and high grade debt securities in a segregated account with its
custodian bank. The premium paid by the buyer of an option will reflect,
among other things, the relationship of the exercise price to the market
price and volatility of the underlying security, the remaining term of the
option, supply and demand, and interest rates.
With regard to certain options, the writer of an option may have no control
over when the underlying securities must be sold, in the case of a call
option, because the writer may be assigned an exercise notice at any time
before the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount may,
in the case of a covered call option, be offset by a decline in the market
value of the underlying security during the option period. If a call option
is exercised, the writer experiences a profit or loss from the sale of the
underlying security.
The writer of an option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. The effect of the purchase is that the clearing
corporation will cancel the writer's position. A writer may not effect a
closing purchase transaction, however, after being notified of the exercise
of an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction" by selling
an option of the same series as the option previously purchased. There is no
guarantee that either a closing purchase or a closing sale transaction can be
effected.
Effecting a closing transaction in the case of a written call option will
allow the fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. Also, effecting
a closing transaction will allow the cash or proceeds from the concurrent
sale of any securities subject to the option to be used for other fund
investments. If the fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction before or at the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is
more than the premium paid to buy the option. The fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
buy the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be
offset in whole or in part by appreciation of the underlying security owned
by the fund.
BUYING CALL OPTIONS. The fund may buy call options on securities that it
intends to purchase in order to limit the risk of a substantial increase in
the market price of such security. The fund may also buy call options on
securities held in its portfolio and on which it has written call options. A
call option gives the holder the right to buy the underlying securities from
the option writer at a stated exercise price. Before its expiration, a call
option may be sold in a closing sale transaction. Profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the call option plus related transaction costs.
WRITING PUT OPTIONS. The fund may write covered put options. A put option
gives the buyer of the option the right to sell, and the writer (seller) the
obligation to buy, the underlying security at the exercise price during the
option period. The option may be exercised at any time before its expiration
date. The operation of put options in other respects, including their related
risks and rewards, is substantially identical to that of call options.
If the fund writes put options, it will do so on a covered basis. This means
that the fund would maintain in a segregated account cash, U.S. government
securities, or other liquid, high-grade debt securities in an amount not less
than the exercise price at all times while the put option is outstanding. The
rules of the clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price. The fund would
generally write covered put options when the manager wants to buy the
underlying security or currency for the fund's portfolio at a price lower
than the current market price of the security or currency. In this event, the
fund would write a put option at an exercise price that, reduced by the
premium received on the option, reflects the lower price it is willing to
pay. Since the fund would also receive interest on debt securities maintained
to cover the exercise price of the option, this technique could be used to
enhance current return during periods of market uncertainty. The risk in such
a transaction would be that the market price of the underlying security or
currency would decline below the exercise price less the premiums received.
BUYING PUT OPTIONS. The fund may buy a put option on an underlying security
or currency owned by the fund as a hedging technique in order to protect
against an anticipated decline in the value of the security or currency (a
"protective put"). Such hedge protection is provided only during the life of
the put option when the fund, as the holder of the put option, is able to
sell the underlying security or currency at the put exercise price,
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in
order to protect unrealized appreciation of a security or currency when the
manager 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 premium paid by the fund when buying a put option will be recorded as an
asset in the fund's statement of assets and liabilities. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed. The asset will be extinguished upon expiration of the option, the
writing of an identical option in a closing transaction, or the delivery of
the underlying security or currency upon the exercise of the option.
OVER-THE-COUNTER (OTC) OPTIONS. The fund intends to write covered put and
call options and buy put and call options that trade in the over-the-counter
market to the same extent that it will engage in exchange traded options. OTC
options, however, differ from exchange traded options in certain material
respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk
of non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options
are available, however, for a greater variety of securities, and in a wider
range of expiration dates and exercise prices, than exchange traded options,
and the writer of an OTC option is paid the premium in advance by the dealer.
The fund understands the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to
cover the sale of an OTC option are considered illiquid. The fund and the
manager disagree with this position. Nevertheless, pending a change in the
staff's position, the fund will treat OTC options and "cover" assets as
subject to the fund's limitation on illiquid securities.
OPTIONS ON STOCK INDICES. The fund may buy call and put options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to
options on securities except that, rather than the right to buy or sell stock
at a specified price, options on a stock index give the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level
of the underlying stock index is greater than (or less than, in the case of
puts) the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of
the option, expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends
on price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account containing cash or high quality fixed-income securities
with its custodian bank in an amount at least equal to the market value of
the underlying stock index and will maintain the account while the option is
open or it will otherwise cover the transaction.
TEMPORARY INVESTMENTS. The fund may invest its cash temporarily in short-term
debt instruments, including U.S. government securities, CDs, high-grade
commercial paper, repurchase agreements, and other money market equivalents,
and the shares of money market funds managed by the manager that invest
primarily in short-term debt securities. The fund will make these temporary
investments with cash it holds to maintain liquidity or pending investment.
In the event of a general decline in the market prices of stocks in which the
fund invests, or when the manager anticipates such a decline, the fund may
invest its portfolio in a temporary defensive manner. Under such
circumstances, a fund may invest up to 100% of its assets in short-term debt
instruments.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Make loans to other persons, except by the purchase of bonds, debentures
or similar obligations which are publicly distributed or of a character
usually acquired by institutional investors, or through loans of the fund's
portfolio securities, or to the extent the entry into a repurchase agreement
or similar transaction may be deemed a loan;
2. Borrow money or mortgage or pledge any of its assets, except in the form
of reverse repurchase agreements or from banks for temporary or emergency
purposes in an amount up to 33% of the value of the fund's total assets
(including the amount borrowed) based on the lesser of cost or market, less
liabilities (not including the amount borrowed) at the time the borrowing is
made. While borrowings exceed 5% of the fund's total assets, the fund will
not make any additional investments;
3. Underwrite securities of other issuers (does not preclude the fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities) or invest more than 5% of
its assets in illiquid securities with legal or contractual restrictions on
resale (although the fund may invest in Rule 144A restricted securities to
the full extent permitted under the federal securities laws); except that all
or substantially all of the assets of the fund may be invested in another
registered investment company having the same investment objective and
policies as the fund;
4. Invest in securities for the purpose of exercising management or control
of the issuer; except that all or substantially all of the assets of the fund
may be invested in another registered investment company having the same
investment objective and policies as the fund;
5. Effect short sales, unless at the time the fund owns securities
equivalent in kind and amount to those sold (which will normally be for
deferring recognition of gains or losses for tax purposes);
6. Invest directly in real estate, real estate limited partnerships or
illiquid securities issued by real estate investment trusts (the fund may,
however, invest up to 10% of its assets in marketable securities issued by
real estate investment trusts);
7. Invest directly in interests in oil, gas or other mineral leases,
exploration or development programs;
8. Invest in the securities of other investment companies, except where
there is no commission other than the customary brokerage commission or sales
charge, or except that securities of another investment company may be
acquired pursuant to a plan of reorganization, merger, consolidation or
acquisition, and except where the fund would not own, immediately after the
acquisition, securities of the investment companies which exceed in the
aggregate i) more than 3% of the issuer's outstanding voting stock, ii) more
than 5% of the fund's total assets and iii) together with the securities of
all other investment companies held by the fund, exceed, in the aggregate,
more than 10% of the fund's total assets; except that all or substantially
all of the assets of the fund may be invested in another registered
investment company having the same investment objective and policies as the
fund. Pursuant to available exemptions from the Investment Company Act of
1940, as amended (1940 Act), the fund may invest in shares of one or more
money market funds managed by Advisers, or its affiliates;
9. Purchase from or sell to its officers and trustees, or any firm of which
any officer or trustee is a member, as principal, any securities, but may
deal with such persons or firms as brokers and pay a customary brokerage
commission; or purchase or retain securities of any issuer if one or more of
the officers or trustees of the trust, or its investment adviser, own
beneficially more than one-half of 1% of the securities of such issuer and
all such officers and trustees together own beneficially more than 5% of such
securities;
10. Concentrate in any industry, except that under normal circumstances the
fund will invest at least 25% of total assets in the securities issued by
domestic and foreign companies operating within the natural resources sector;
except that all or substantially all of the assets of the fund may be
invested in another registered investment company having the same investment
objective and policies as the fund; and
11. Invest more than 10% of its assets in securities of companies which have
a record of less than three years continuous operation, including the
operations of any predecessor companies; except that all or substantially all
of the assets of the fund may be invested in another registered investment
company having the same investment objective and policies as the fund.
The fund presently has the following additional restrictions, which are not
fundamental and may be changed without shareholder approval.
The fund may not:
1. Engage in joint or joint and several trading accounts in securities,
except that it may: (i) participate in joint repurchase arrangements; (ii)
invest in shares of one or more money market funds managed by Advisers or its
affiliates, to the extent permitted by exemptions granted under the 1940 Act;
or (iii) combine orders to buy or sell with orders from other persons to
obtain lower brokerage commissions.
2. Invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not
listed on either the NYSE or American Stock Exchange.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value. Foreign markets
have substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers, and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
The manager endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover
service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent the
fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board of trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of
foreign governments to which such assets may be exposed. The board of
trustees also considers the degree of risk involved through the holding of
portfolio securities in domestic and foreign securities depositories.
However, in the absence of willful misfeasance, bad faith, or gross
negligence on the part of the manager, any losses resulting from the holding
of the fund's portfolio securities in foreign countries and/or with
securities depositories will be at the risk of the shareholders. No assurance
can be given that the appraisal of the risks by the board of trustees will
always be correct or that such exchange control restrictions or political
acts of foreign governments might not occur.
DEPOSITARY RECEIPTS Depositary receipts reduce but do not eliminate all the
risk inherent in investing in the securities of non-U.S. issuers. To the
extent that the fund acquires depositary receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the depositary receipt to issue and service such depositary
receipts, there may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offerings involving the foreign issuer in a timely manner.
CURRENCY Some of the fund's investments may be denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value
of what the fund owns and the fund's share price. Generally, when the U.S.
dollar rises in value against a foreign currency, an investment in that
country loses value because that currency is worth fewer U.S. dollars.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) introduced a
new single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
HEDGING TRANSACTIONS
The fund's ability to hedge effectively all or a portion of its securities
through transactions in options on securities and stock indices depends on
the degree to which price movements in the underlying index or underlying
securities correlate with price movements in the relevant portion of the
fund's portfolio. Inasmuch as such securities will not duplicate the
components of any index or underlying securities, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities being hedged will not move in the same amount as the hedging
instrument. It is also possible that there may be a negative correlation
between the index or other securities underlying the hedging instrument and
the hedged securities which would result in a loss on both the securities and
the hedging instrument. Accordingly, successful use by the fund of options on
securities and stock indices will be subject to the manager's ability to
predict correctly movements in the direction of the securities markets
generally or of a particular segment. This requires different skills and
techniques than predicting changes in the price of individual stocks.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract. There is also the risk of loss by
the fund of margin deposits in the event of bankruptcy of a broker with whom
the fund has an open position in an option.
Positions in options on securities and stock indices may be closed out only
on an exchange that provides a secondary market. There can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time. Thus, it may not be possible to close an option position. If
the fund were unable to close out an option position, and if prices moved
adversely, the fund would have to continue to make daily cash payments to
maintain its required margin, and, if the fund had insufficient cash, it
might have to sell portfolio securities at a disadvantageous time. In
addition, the fund might be required to deliver the stocks underlying options
contracts it holds. The inability to close options positions could also have
an adverse impact on the fund's ability to hedge its securities effectively.
The fund will enter into an option position only if there appears to be a
liquid secondary market for such options.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only
by exercising it or entering into a closing sale transaction with the dealer
that issued it. Similarly, when the fund writes an OTC option, it generally
can close out that option before its expiration only by entering into a
closing purchase transaction with the dealer to which the fund originally
wrote it. If a covered call option writer cannot effect a closing
transaction, it cannot sell the underlying security until the option expires
or the option is exercised. Therefore, a covered call option writer of an OTC
option may not be able to sell an underlying security even though it might
otherwise be advantageous to do so. Likewise, a secured put writer of an OTC
option may be unable to sell the securities pledged to secure the put for
other investment purposes while it is obligated as a put writer. Similarly, a
buyer of a put or call option might also find it difficult to terminate its
position on a timely basis in the absence of a liquid secondary market.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. While these contracts are not
presently regulated by the CFTC, the CFTC may in the future assert authority
to regulate forward contracts. In this event, the fund's ability to use
forward contracts may be restricted. The use of foreign currency forward
contracts will not eliminate fluctuations in the underlying U.S. dollar
equivalent value of, or rates of return on, the fund's foreign currency
denominated portfolio securities and the use of such techniques will subject
the fund to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition,
the fund may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the fund's ability to use
such contracts to hedge or cross-hedge its assets. Also, with regard to the
fund's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to
the U.S. dollar will continue. Thus, at any time, poor correlation may exist
between movements in the exchange rates of the foreign currencies in which
the fund's assets that are the subject of such cross-hedges are denominated.
FOREIGN CURRENCY FUTURES. By entering into these contracts, the fund is able
to protect against a loss resulting from an adverse change in the
relationship between the U.S. dollar and a foreign currency occurring between
the trade and settlement dates of the fund's securities transaction. These
contracts also tend to limit the potential gains that might result from a
positive change in such currency relationships.
OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies and forward
contracts are not traded on contract markets regulated by the CFTC or (with
the exception of certain foreign currency options) by the SEC. To the
contrary, such instruments are traded through financial institutions acting
as market makers, although foreign currency options are also traded on
certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation.
Similarly, options on currencies may be traded over-the-counter. In an OTC
trading environment, many of the protections afforded to exchange
participants will not be available. For example, there are no daily price
fluctuation limits, and adverse market movements could therefore continue to
an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related
transaction costs, this entire amount could be lost. Moreover, the option
writer and a trader of forward contracts could lose amounts substantially in
excess of their initial investments, due to the margin and collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on these
exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing
Corporation (OCC), thereby reducing the risk of counterparty default.
Further, a liquid secondary market in options traded on a national securities
exchange may be more readily available than in the OTC market, potentially
permitting a fund to liquidate open positions at a profit before exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
are subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on
foreign currencies involve certain risks not presented by the OTC market. For
example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it
determines that foreign governmental restrictions or taxes would prevent the
orderly settlement of foreign currency option exercises, or would result in
undue burdens on the OCC or its clearing member, impose special procedures on
exercise and settlement, such as technical changes in the mechanics of
delivery of currency, the fixing of dollar settlement prices or prohibitions
on exercise.
In addition, forward contracts and options on foreign currencies may be
traded on foreign exchanges. Such transactions are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign
currencies. The value of these positions also could be adversely affected by
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions,
(iii) delays in a fund's ability to act upon economic events occurring in
foreign markets during non-business hours in the U.S., (iv) the imposition of
different exercise and settlement terms and procedures and margin
requirements than in the U.S., and (v) less trading volume.
HIGH YIELD 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. These securities
are typically not callable for a period of time, usually for three to five
years from the date of issue. However, if an issuer calls its securities
during periods of declining interest rates, the manager 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 Internal
Revenue 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. The manager 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 the manager's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
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.
ILLIQUID SECURITIES The sale of restricted or illiquid securities often
requires more time and results in higher brokerage charges or dealer
discounts and other selling expenses than the sale of securities eligible for
trading on national securities exchanges or in the OTC markets. Restricted
securities often sell at a price lower than similar securities that are not
subject to restrictions on resale.
144A SECURITIES Subject to its liquidity limitation, the fund may invest in
certain unregistered securities which may be sold under Rule 144A of the
Securities Act of 1933 ("144A securities"). Due to changing market or other
factors, 144A securities may be subject to a greater possibility of becoming
illiquid than securities that have been registered with the SEC for sale. In
addition, the fund's purchase of 144A securities may increase the level of
the security's illiquidity, as some institutional buyers may become
disinterested in purchasing such securities after the fund has purchased them.
REPURCHASE AGREEMENTS The use of repurchase agreements involves certain
risks. For example, if the other party to a repurchase agreement defaults on
its obligation to repurchase the underlying security at a time when the value
of the security has declined, the fund may incur a loss upon disposition of
the security. If the other party to the agreement becomes insolvent and
subject to liquidation or reorganization under the bankruptcy code or other
laws, a court may determine that the underlying security is collateral for
the loan by the fund not within the control of the fund, and therefore the
realization by the fund on the collateral may be automatically stayed.
Finally, it is possible that the fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor
of the other party to the agreement. While the manager acknowledges these
risks, it is expected that if repurchase agreements are otherwise deemed
useful to the fund, these risks can be controlled through careful monitoring
procedures.
REITS An investment in REITs includes the possibility of a decline in the
value of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants, and increases in interest rates. The value of
securities of companies that service the real industry will also be affected
by these risks.
In addition, equity REITs are affected by changes in the value of the
underlying property owned by the trusts, while mortgage REITs are affected by
the quality of the properties to which they have extended credit. Equity and
mortgage REITs are dependent upon the REITs management skill. REITs may not
be diversified and are subject to the risks of financing projects.
OFFICERS AND TRUSTEES
- ---------------------
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors the fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 per month plus $1,050 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES TOTAL FEES RECEIVED THE FRANKLIN
RECEIVED FROM THE FRANKLIN TEMPLETON GROUP OF
FROM THE TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME TRUST 1 FUNDS 2 SERVES 3
- --------------------------------------------------------------------------------
Frank H. Abbott, III $13,935 $159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith E. Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon S. Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from April 30,
1998, through May 31, 1998, fees at the rate of $300 for each of the Trust's
eight meetings, plus $300 per meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- ----------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
(Advisers). The manager is a wholly owned subsidiary of Franklin Resources,
Inc. (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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.625 of 1% of the value of average daily net assets up to and including
$100 million;
o 0.50 of 1% of the value of average daily net assets over $100 million up to
and including $250 million;
o 0.45 of 1% of the value of average daily net assets over $250 million up to
and including $10 billion;
o 0.44 of 1% of the value of average daily net assets over $10 billion up to
and including $12.5 billion;
o 0.42 of 1% of the value of average daily net assets over $12.5 billion up
to and including $15 billion;
o 0.40 of 1% of the value of average daily net assets over $15 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the fund paid the following
management fees:
MANAGEMENT FEES PAID ($)
- -------------------------------------------------
1999 52,805
1998 159,204
1997 83,520
Under an agreement by the manager to limit its fees, the funds paid the
management fees shown above. For the three fiscal years ended April 30,
management fees, before any advance waiver, totaled:
MANAGEMENT FEES BEFORE WAIVER ($)
- -------------------------------------------------
1999 256,117
1998 357,984
1997 175,237
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended April 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
-------------------------------------------------
1999 61,469
1998 85,915
1997 32,992 1
1. For the period October 1, 1996, through April 30, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
fund also will 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 will 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, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- ----------------------------
The manager 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager 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, also may be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the manager, 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 may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended April 30, the fund paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
-------------------------------------------------
1999 143,235
1998 154,303
1997 120,604
[For the fiscal year ended [], 19[], the fund [did not pay][paid] brokerage
commissions [of $[] from aggregate portfolio transactions of $[]] to brokers
who provided research services.]
As of [], 199[], the fund did not own securities of its regular
broker-dealers.
DISTRIBUTIONS AND TAXES
- ----------------------------
The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in any distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS AND TAXES
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, the fund
may designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 70.46% of the dividends paid by the Natural
Resources Fund for the most recent fiscal year qualified for the
dividends-received deduction. In some circumstances, you will be allowed to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by the
fund as eligible for such treatment. All dividends (including the deducted
portion) must be included in your alternative minimum taxable income
calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses, and,
in limited cases, subject the fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -----------------------------------------------------
The fund is a diversified series of Franklin Strategic Series (the "Trust"),
an open-end management investment company, commonly called a mutual fund.
The trust was organized as a Delaware business trust on January 25, 1991, and
is registered with the SEC.
The fund currently offers two classes of shares, Class A and Advisor Class.
Before January 1, 1999, Class A shares were designated Class I. The fund may
offer additional classes of shares in the future. The full title of each
class is:
o Franklin Natural Resources Fund - Class A
o Franklin Natural Resources Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust] may hold special meetings, however, for matters
requiring shareholder approval. A meeting may be called by the board to
consider the removal of a board member if requested in writing 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. A special meeting also may
be called by the board in its discretion.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of any class.
As of June 7, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- -------------------------------
The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goal[s] exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. 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.
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.
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. 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- --------------------
When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 NAV. 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 close of the NYSE. The value of these securities used in computing
the NAV 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 close of the NYSE that will not be reflected in the
computation of the NAV. 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 use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- --------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
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.
For periods before January 1, 1997, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the
relevant time period, excluding the effect of Class A's maximum initial sales
charge, and including the effect of the distribution and service (Rule 12b-1)
fees applicable to the fund's Class A shares. For periods after January 1,
1997, Advisor Class standardized performance quotations are calculated as
described below.
An explanation of these and other methods used by the fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each 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 initial sales charge currently in effect.
The average annual total returns for the indicated periods ended April 30,
1999, were:
SINCE INCEPTION
1 YEAR (6/5/95)
- ----------------------------------------------------
Advisor Class -10.48% 11.96%
The following SEC formula was used to calculate these figures:
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 each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at net asset value. Cumulative total return, however, is based on the actual
return for a specified period rather than on the average return over the
periods indicated above. The cumulative total returns for the indicated
periods ended April 30, 1999, were:
SINCE INCEPTION
1 YEAR (6/5/95)
- ----------------------------------------------------
Advisor Class -10.48% 55.43%
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 net asset value per share on the last day
of the period and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of the class during the base
period. The yields for the 30-day period ended April 30, 1999, was:
YIELD
- -------------------------------------
Advisor Class 1.10%
The following SEC formula was used to calculate [these figures][this figure]:
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 net asset value per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in
the quoted current distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current net asset
value. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time. The current distribution rate for the 30-day period ended April 30,
1999, was:
DISTRIBUTION RATE
- ---------------------------------------------
Advisor Class .83%
VOLATILITY Occasionally statistics may be used to show the fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the
fund as a potential investment for 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 goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a unmanaged
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o 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.
o 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Valueline Index - an unmanaged index which follows the stocks of
approximately 1,700 companies.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o 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.
o 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.
o Morgan Stanley Capital International World Indices, including, among
others, the Morgan Stanley Capital International Europe, Australia, Far
East Index ("EAFE Index"). The EAFE index is an unmanaged index of more
than 1,000 companies of Europe, Australia and the Far East.
o Financial Times Actuaries Indices - including the FTA-World Index (and
components thereof), which are based on stocks in major world equity
markets.
o 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 also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
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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 is one of
the oldest mutual fund organizations and now services more than 4 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, a pioneer in international investing. The Mutual
Series team, 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 $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
You will receive the fund's financial reports every six months. If you would
like to receive an interim report of the fund's portfolio holdings, please
call 1-800/DIAL BEN(R).
DESCRIPTION OF RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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
that 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. These 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. These 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 that are speculative to a high
degree. These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted. Moody's commercial
paper ratings are opinions of the ability of issuers to repay punctually
their promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following designations for both short-term
debt and commercial paper, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN U.S. LONG-SHORT FUND
FRANKLIN STRATEGIC SERIES
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
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This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the fund's prospectus.
For a free copy of the current prospectus, contact your investment
representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Financial Statements
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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.
- -------------------------------------------------------------------------------
GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's principal investment goal is to provide long-term capital
appreciation in both bull and bear markets. Its secondary goal is to
maintain reduced exposure to the overall equity market. These goals are
fundamental, which means they may not be changed without shareholder approval.
Risk is normally measured by volatility of returns. Over time, the fund aims
to achieve its returns with reduced volatility and market correlation as
compared to a traditional long equity fund. A traditional U.S. equity fund
is fully exposed to the equity market and thus bears full market risk. The
fund, however, reduces its exposure to the market by combining a short
portfolio with a long portfolio. The fund's "net" exposure is the gross
amount of securities held long minus the gross amount of securities held
short - the short portfolio offsets the long portfolio. The fund will
maintain a flexible approach with regard to "net exposure" shifting its net
exposure depending on the relative attractiveness of long versus short
opportunities in the market. Reduced exposure should contribute to lower
overall volatility. In addition, the fund's variation in returns should be
somewhat different from a traditional U.S. equity fund. Traditional funds
normally produce positive returns in bull markets and negative returns in
bear markets - they are thus correlated with the overall market. A primary
goal of the fund is to provide positive returns in both bull and bear
markets. If this is achieved, the fund will have imperfect correlation with
the overall market. The fund manager believes the fund's risk and
correlation profile can be used to effectively diversify investor's U.S.
equity portfolios.
The fund is constructed on a stock by stock basis. The fund manager attempts
to create a portfolio of stocks with favorable risk/reward profiles. The
fund manager believes that every position - long and short - can be evaluated
by weighing potential gains against associated risk. Within the long
portfolio, the fund manager looks for companies with strong or improving
fundamentals or valuable assets that are under-appreciated by the market.
Once these fundamental factors are understood, they are considered against
various valuation metrics and a risk/reward profile is constructed.
Companies which compare favorably are long purchase candidates. Within the
short portfolio, risk/reward profiles are also generated. The fund manager
looks for companies whose fundamentals are likely to deteriorate or whose
market valuations are excessive. The fund manager focuses on short sale
candidates with a large number of associated risk factors or potential
negative future events that may cause the stock to underperform or decline in
value.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The
owner of an equity security may participate in a company's success through
the receipt of dividends, which are distributions of earnings by the company
to its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred
stock. Preferred stockholders typically receive greater dividends but may
receive less appreciation than common stockholders and may have greater
voting rights as well. Equity securities may also include convertible
securities, warrants, or rights. Warrants of rights give the holder the
right to purchase a common stock at a given time for a specified price.
SHORT SELLING In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. To complete
the transaction, the fund must borrow the security to make delivery to the
buyer. The fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. Until the
security is replaced, the fund must pay the lender any dividends or interest
that accrues during the period of the loan. To borrow the security, the fund
may also be required to pay a premium, which would increase the cost of the
security sold. The proceeds of the short sale will be retained by the
broker, to the extent necessary to meet margin requirements, until the short
position is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which
the fund replaces the borrowed security, and the fund will realize a gain if
the security declines in price between those same dates. The amount of any
gain will be decreased, and the amount of any loss increased, by the amount
of any premium, dividends or interest the fund is required to pay in
connection with the short sale.
The fund will segregate, in accordance with the law, an amount equal to the
difference between (a) the market value of the securities sold short at the
time they were sold short and (b) any cash or securities required to be
deposited as collateral with the broker in connection with the short sale
(not including the proceeds from the short sale). The segregated amount will
be marked-to-market daily and at no time will the amount segregated and
deposited with the broker as collateral be less than the market value of the
securities at the time they sold short.
AMERICAN DEPOSITARY 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. 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.
The fund may invest in sponsored or unsponsored ADRs. In sponsored programs,
an issuer has made arrangements to have its securities traded in the form of
Depositary Receipts. In unsponsored programs, the issuer may not be directly
involved in the creation of the program. Although regulatory requirements
with respect to sponsored and unsponsored programs are generally similar, in
some cases it may be easier to obtain financial information from an issuer
that has participated in the creation of a sponsored program. Accordingly,
there may be less information available regarding issuers of securities
underlying unsponsored programs, and there may not be a correlation between
such information and the market value of the Depositary Receipts.
SMALL COMPANIES Small companies are often overlooked by investors or
undervalued in relation to their earnings power. Because small companies
generally are not as well known to the investing public and have less of an
investor following than larger companies, they may provide greater
opportunities for long-term capital growth as a result of relative
inefficiencies in the market place. These companies may be undervalued
because they are part of an industry that is out of favor with investors,
although the individual companies may have high rates of earnings growth and
be financially sound.
REPURCHASE AGREEMENTS The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn
income on this portion of its assets, the fund may enter into repurchase
agreements with certain banks and broker-dealers. Repurchase agreements are
contracts under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed upon price and date. Under a
repurchase agreement, a fund agrees to buy a U.S. government security from
one of these issuers and then to sell the security back to the issuer after a
short period of time (generally, less than seven days) at a higher price. The
bank or broker-dealer must transfer to the fund's custodian securities with
an initial value of at least 102% of the dollar amount invested by the fund
in each repurchase agreement. The manager will monitor the value of such
securities daily to determine that the value equals or exceed the repurchase
price. Repurchase agreements may involve risks in the event of default or
insolvency of the seller, including possible delays or restrictions upon a
fund's ability to dispose of the underlying securities. The fund will enter
into repurchase agreements only with parties who meet creditworthiness
standards approved by the fund's Board, i.e., banks or broker-dealers that
have been determined by the manager to present no serious risk of becoming
involved in bankruptcy proceedings within the timeframe contemplated by the
repurchase transaction.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may
lend its portfolio securities to qualified securities dealers or other
institutional investors. Such loans may not exceed one third of the value of
the Fund's total assets, measured at the time of the most recent loan. For
each loan the borrower must maintain with the fund's custodian collateral
(consisting of any combination of cash, U.S. government securities, or
irrevocable letters of credit) with a value at least equal to 100% of the
current market value of the loaned securities. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to have voting rights with respect to the
securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower
fail.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares are represented at the meeting in person or
by proxy, whichever is less.
The fund may not:
1. Borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the Investment
Company Act of 1940, as amended (1940 Act), or any exemptions therefrom which
may be granted by the U.S. Securities and Exchange Commission (SEC), or for
temporary or emergency purposes and then in an amount not exceeding 33 1/3%
of the value of the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be
an underwriter when disposing of securities it owns or when selling its own
shares.
3. Make loans to other persons except (a) through the lending of its
portfolio securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment objectives and policies, and (c) to the extent the entry into
a repurchase agreement is deemed to be a loan. The fund may also make loans
to affiliated investment companies to the extent permitted by the 1940 Act or
any exemptions therefrom which may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase
or sell currencies, may enter into futures contracts on securities,
currencies, and other indices or any other financial instruments, and may
purchase and sell options on such futures contracts..
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest. Except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages
or pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making
short sales of securities to the extent permitted by the 1940 Act and any
rule or order thereunder, or SEC staff interpretations thereof.
6. Concentrate (invest more than 25% of its total assets) in securities of
issuers in a particular industry (other than securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities or
securities of other investment companies).
7. Purchase the securities of any one issuer (other than the U.S.
government or any of its agencies or instrumentalities or securities of other
investment companies) if immediately after such investment (a) more than 5%
of the value of the fund's total assets would be invested in such issuer or
(b) more than 10% of the outstanding voting securities of such issuer would
be owned by the fund, except that up to 25% of the value of such fund's total
assets may be invested without regard to such 5% and 10% limitations.
8. Sell securities of any single issuer short if the market value of the
securities sold short would exceed 3% of the value of the fund's net assets
at the time of such sale.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while
maximizing the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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CANADIAN SECURITIES. You should consider carefully the substantial risks
involved in securities of companies of Canada, which are in addition to the
usual risk inherent in domestic investments.
There may be less publicly available information about Canadian companies
comparable to the reports and ratings published about companies in the U.S.
This may be particularly true for companies that are only traded on the
Canadian exchanges because Canadian securities regulations differ in many
respects from U.S. securities regulations. Canadian companies may not be
subject to the uniform accounting or financial reporting standards, and
auditing practices and requirements for Canadian companies or may not be
comparable to those applicable to U.S. companies. A fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing
its portfolio and calculating its Net Asset Value. Securities of some
Canadian companies may be less liquid and more volatile than securities of
comparable U.S. companies.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of Canada and the U.S.,
by exchange control regulations, and by indigenous economic and political
developments.
Canadian currency has recently experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policies, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
Canada where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and to change the emphasis
on investments from one type of security to another. Some of these decisions
may later prove profitable and others may not. No assurance can be given
that profits, if any, will exceed losses.
The Board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions that would affect the
liquidity of each fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Board also considers
the degree of risk involved through the holding of portfolio securities in
domestic and foreign securities depositories. However, in the absence of
willful misfeasance, bad faith, or gross negligence on the part of the
manager, any losses resulting from the holding of a fund's portfolio
securities in foreign countries and/or with securities depositories will be
at the risk of the shareholders. No assurance can be given that the Board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
DEPOSITARY RECEIPTS. Depositary Receipts reduce but do not eliminate all the
risk inherent in investing in the securities of non-U.S. issuers. To the
extent that a fund acquires Depositary Receipts through banks that do not
have a contractual relationship with the foreign issuer of the security
underlying the Depositary Receipt to issue and service such Depositary
Receipts, there may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock
splits or rights offering s involving the foreign issuer in a timely manner.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors the fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 per month plus $1,050 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
TOTAL FEES RECEIVED FROM TEMPLETON GROUP
RECEIVED THE FRANKLIN OF FUNDS ON
FROM THE TEMPLETON GROUP WHICH EACH
NAME TRUST 1 OF FUNDS 2 SERVES 3
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Frank H. Abbott, III $13,935 $159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon S. Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from April 30,
1998, through May 31, 1998, fees at the rate of $300 for each of the Trust's
eight meetings, plus $300 per meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
(Advisers). The manager is a wholly owned subsidiary of Franklin Resources,
Inc. (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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of
1% of the value of net assets.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the fund to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The fund pays FT Services a monthly fee equal to an
annual rate of 0.20% of the fund's average daily net assets.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
fund also will 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 will 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, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager 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, also may be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the manager, 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 may improve execution and
reduce transaction costs to the fund.
DISTRIBUTIONS AND TAXES
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The fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, the fund
may designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund intends to
elect and qualify during the current fiscal year to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code. As a
regulated investment company, the fund generally pays no federal income tax
on the income and gains it distributes to you. The board reserves the right
not to maintain the qualification of the fund as a regulated investment
company if it determines such course of action to be beneficial to
shareholders. In such case, the fund will be subject to federal, and
possibly state, corporate taxes on its taxable income and gains, and
distributions to you will be taxed as ordinary dividend income to the extent
of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis
in the shares sold will be added to the tax basis of the shares you acquire
from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that the fund anticipates that a portion of the
dividends it pays will qualify for the dividends-received deduction. In some
circumstances, you will be allowed to deduct these qualified dividends,
thereby reducing the tax that you would otherwise be required to pay on these
dividends. The dividends-received deduction will be available only with
respect to dividends designated by the fund as eligible for such treatment.
All dividends (including the deducted portion) must be included in your
alternative minimum taxable income calculation.
SHORT SALES AND INVESTMENT IN COMPLEX SECURITIES In general, gains or losses
realized by the fund on short sales of capital assets will be long-term or
short-term, depending on how long the fund held such assets. Due to the
nature of short sales, however, such gains and losses will generally be
short-term. In this regard, any period during which the fund is protected
from the risk of loss will be excluded for purposes of determining the fund's
holding period.
The fund may invest in complex securities. These investments may be subject
to numerous special and complex tax rules. These rules could affect whether
gains and losses recognized by the fund are treated as ordinary income or
capital gain, accelerate the recognition of income to the fund and/or defer
the fund's ability to recognize losses, and, in limited cases, subject the
fund to U.S. federal income tax on income from certain of its foreign
securities. In turn, these rules may affect the amount, timing or character
of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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The fund is a diversified series of Franklin Strategic Series (Trust), an
open-end management investment company, commonly called a mutual fund. The
trust was organized as a Delaware business trust on January 25, 1991, and is
registered with the SEC.
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 A shares, shares
of the fund are considered Class A shares for redemption, exchange and other
purposes.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
As of June 7, 1999, the principal shareholder of the fund, beneficial or of
record, was:
NAME AND ADDRESS PERCENTAGE (%)
- --------------------------------------------
Franklin Resources, Inc.
555 Airport Blvd.
Burlingame, CA 94010 100
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.
As of June 7, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of the fund.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 5.75%.
The initial sales charge may be reduced for certain large purchases, as
described in the prospectus. We offer several ways for you to combine your
purchases in the Franklin Templeton Funds to take advantage of the lower
sales charges for large purchases. The Franklin Templeton Funds include the
U.S. registered mutual funds in the Franklin Group of Funds(R) and the
Templeton Group of Funds except Franklin Valuemark Funds, Templeton Capital
Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge,
you may combine the amount of your current purchase with the cost or current
value, whichever is higher, of your existing shares in the Franklin Templeton
Funds. You also may combine the shares of your spouse, children under the age
of 21 or grandchildren under the age of 21. If you are the sole owner of a
company, you also may 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 (LOI). You may buy shares at a reduced sales charge by
completing the letter of intent section of your account 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 application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
shares registered in your name until you fulfill your LOI. Your periodic
statements will include the reserved shares in the total shares you own,
and we will pay or reinvest dividend and capital gain distributions on the
reserved shares according to the distribution option you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy shares at the sales charge
applicable to the amount specified in your LOI. 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. Any purchases you made within 90 days before you filed your LOI
also may qualify for a retroactive reduction in the sales charge. If you file
your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy 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.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Fund shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in the
fund.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD or
a Franklin Templeton money fund, you may reinvest them as described above.
The proceeds must be reinvested within 365 days from the date the CD
matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Fund shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying sales charges.
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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy shares without an initial sales charge.
Retirement plans that are not qualified retirement plans (employer sponsored
pension or profit-sharing plans that qualify under section 401 of the
Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy shares
without an initial 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 CDSC 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.
SALES IN TAIWAN. 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.
The fund's shares may be offered to investors in Taiwan through securities
advisory firms known locally as Securities Investment Consulting Enterprises.
In conformity with local business practices in Taiwan, shares may be offered
with the following schedule of sales charges:
Size of Purchase - U.S. Dollars Sales Charge (%)
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Under $30,000 3.0
$30,000 but less than $50,000 2.5
$50,000 but less than $100,000 2.0
$100,000 but less than $200,000 1.5
$200,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $1
million or more: 1% on sales of $1 million to $2 million, plus 0.80% on sales
over $2 million to $3 million, plus 0.50% on sales over $3 million to $50
million, plus 0.25% on sales over $50 million to $100 million, plus 0.15% on
sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts,
out of its own resources, to securities dealers who initiate and are
responsible for purchases by certain retirement plans without an initial
sales charge: 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more,
either as a lump sum or through our cumulative quantity discount or letter of
intent programs, a CDSC may apply on any shares you sell within 12 months of
purchase. The CDSC 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 an initial sales charge also may be subject to
a CDSC 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.
CDSC WAIVERS. The CDSC generally will be waived for:
o Account fees
o Sales of shares purchased without an initial 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 by investors who purchased $1 million or more without an
initial sales charge if the securities dealer of record waived its
commission in connection with the purchase
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, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset
value depending on the frequency of your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. 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.
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.
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. 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
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When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share each business day at the close of
trading on the New York Stock Exchange (normally 1:00 p.m. pacific time). The
fund does not calculate the NAV on days the New York Stock Exchange (NYSE) is
closed for trading, which include New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 NAV. 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.
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 use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors may be entitled to reimbursement under the Rule 12b-1 plan, as
discussed below.
DISTRIBUTION AND SERVICE (12B-1) FEES The fund has a distribution or "Rule
12b-1" plan. Under the plan, the fund shall pay or may reimburse Distributors
or others for the expenses of activities that are primarily intended to sell
shares of the fund. These expenses may include, among others, distribution or
service fees paid to securities dealers or others who have executed a
servicing agreement with the fund, Distributors or its affiliates; a prorated
portion of Distributors' overhead expenses; and the expenses of printing
prospectuses and reports used for sales purposes, and preparing and
distributing sales literature and advertisements.
Payments by the fund under the plan may not exceed 0.35% per year of average
daily net assets, payable quarterly. Of this amount, the fund may reimburse
up to 0.35% to Distributors or others, out of which 0.10% generally will be
retained by Distributors for distribution expenses. All distribution expenses
over this amount will be borne by those who have incurred them.
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, the manager or
Distributors or other parties on behalf of the fund, the manager or
Distributors make payments that are deemed to be for the financing of any
activity primarily intended to result in the sale of fund shares within the
context of Rule 12b-1 under the Investment Company Act of 1940, as amended,
then such payments shall be deemed to have been made pursuant to the plan.
The terms and provisions of the 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 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 National Association of Securities Dealers, Inc.
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
noninterested members of the fund's board. The plan and any related agreement
may be terminated at any time, without penalty, by vote of a majority of the
noninterested 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 the manager or by
vote of a majority of the outstanding shares of the class. Distributors or
any dealer or other firm also may terminate their respective distribution or
service agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a
majority of the outstanding shares, and all material amendments to the plan
or any related agreements shall be approved by a vote of the noninterested
board members, 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.
PERFORMANCE
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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. Because the fund is new, it has no performance history and thus no
performance quotations have been provided. The following is an explanation
of the standardized methods of computing performances mandated by the SEC and
other methods used by the fund to compute or express performance. 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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial 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 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 initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
These figures are 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 each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial 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, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above.
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 also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance 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 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 goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the Dow
Jones Transportation Average (20 transportation stocks), and the Dow Jones
Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o 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.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o 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.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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 also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of
fluctuation of principal value, a risk generally not present in an investment
in a CD issued by a bank. For example, as the general level of interest rates
rise, the value of the fund's fixed-income investments, if any, as well as
the value of its shares that are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the fund's shares can be expected to increase. CDs are
frequently insured by an agency of the U.S. government. An investment in the
fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not
be identical to the formula used by the fund to calculate its figures. In
addition, there can be no assurance that the fund will continue its
performance as compared to these other averages.
MISCELLANEOUS INFORMATION
- -------------------------------------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to
have a projected amount available in the future to fund a child's college
education. (Projected college cost estimates are based upon current costs
published by the College Board.) The Franklin Retirement Planning Guide leads
you through the steps to start a retirement savings program. Of course, an
investment in the fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of
the oldest mutual fund organizations and now services more than 4 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, a pioneer in international investing. The Mutual
Series team, 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 $227 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
FINANCIAL STATEMENTS
FRANKLIN STRATEGIC SERIES
FINANCIAL HIGHLIGHTS
FRANKLIN U.S. LONG-SHORT FUND
CLASS A
-----------------------
PERIOD ENDED APRIL 30,
1999 1
-----------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period $ 10.00
-----------------------
Income from investment operations:
Net investment income .05
Net realized and unrealized gains .23
-----------------------
Total from investment operations .28
-----------------------
Net asset value, end of period $ 10.28
=======================
Total return * 2.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000'$) $ 1,028
Ratios to average net assets:
Net investment income 4.22% 2
Portfolio turnover rate 13.47%
* Total return does not reflect sales commissions or the contingent deferred
sales charge, and is not annualized for periods less than one year.
1 For the period March 15, 1999 (inception date) to April 30, 1999.
2 Annualized.
Franklin Strategic Series
Statement of Investments, April 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C>
Franklin U.S. Long-Short Fund SHARES VALUE
----------------------------------------------------------------------------------------
Common Stocks 30.8%
a Commercial Services 2.3%
d Convergys Corp. 900 16,763
Robert Half International Inc. 300 7,163
-------------
23,926
-------------
d Consumer Services 6.3%
a AT&T Corp. - Liberty Media Group, A 200 12,775
a Jones Intercable Inc., A 400 18,550
a MediaOne Group Inc. 200 16,313
a Rogers Communications Inc., B (Canada) 500 9,344
Shaw Communications Inc., B (Canada) 200 8,100
-------------
65,082
-------------
a Electronic Technology .8%
3Com Corp. 300 7,838
-------------
Energy Minerals 3.6%
d Devon Energy Corp. 400 13,300
d Tosco Corp. 300 8,025
Ultramar Diamond Shamrock Corp. 400 9,225
Unocal Corp. 150 6,234
-------------
36,784
-------------
Finance 7.7%
A.G. Edwards Inc. 300 10,500
d Bank One Corp. 200 11,800
d Citigroup Inc. 200 15,050
Dain Rauscher Corp. 100 4,288
d Fannie Mae 100 7,094
a,d Golden State Bancorp Inc. 300 7,369
a United Rentals Inc. 300 8,944
US Trust Corp. 150 13,706
-------------
78,751
-------------
a Industrial Services .5%
Safety-Kleen Corp. 300 4,763
-------------
d Non-Energy Minerals .5%
Ispat International NV, A, N.Y. shs. (Netherlands) 500 6,531
-------------
Producer Manufacturing 1.6%
Tyco International Ltd. 200 16,250
-------------
Real Estate 2.9%
d Boston Properties Inc. 300 10,894
d Equity Office Properties Trust 200 5,513
Host Marriott Corp. 500 6,656
Starwood Hotels & Resorts Worldwide Inc. 200 7,338
-------------
30,401
-------------
a Retail Trade .6%
Williams-Sonoma Inc. 200 5,800
-------------
a,d Technology Services 1.5%
Aspen Technologies Inc. 500 4,281
EMC Corp. 100 10,894
-------------
15,175
-------------
a,d Telecommunications 1.8%
Clearnet Communications Inc., A (Canada) 500 5,844
MCI WorldCom Inc. 150 12,324
-------------
18,168
-------------
d Utilities .7%
Enron Corp. 100 7,525
-------------
Total Long Term Investments (Cost $297,135) 316,994
-------------
</TABLE>
PRINCIPAL
AMOUNT
<TABLE>
<CAPTION>
-----------
Government Securities 38.9%
<S> <C> <C>
U.S. Treasury Bills, 5/06/99 (Cost $399,761) $ 400,000 399,857
b Repurchase Agreement 30.9%
Joint Repurchase Agreement, 4.862%, 5/03/99, (Maturity Value $ 317,188 $ 317,188
$317,317) (COST $317,188)
Barclays Capital Inc. (Maturity Value $32,769)
Bear, Stearns & Co. Inc. (Maturity Value $17,874)
Chase Securities Inc. (Maturity Value $32,769)
CIBC Oppenheimer Corp. (Maturity Value $32,769)
Deutsche Bank Securities Inc. (Maturity Value $4,522)
Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $32,769)
Dresdner Kleinwort Benson, North America LLC (Maturity Value $32,769)
Lehman Brothers Inc.(Maturity Value $32,769)
Paine Webber Inc. (Maturity Value $32,769)
Paribas Corp. (Maturity Value $32,769)
UBS Securities LLC (Maturity Value $32,769)
Collateralized by U.S. Treasury Bills & Notes
-------------
Total Investments (Cost $1,014,084) 100.6% 1,034,039
Securities Sold Short (6.9%) (70,606)
Other Assets, less Liabilities 6.3% 64,787
-------------
Net Assets 100.0% $ 1,028,220
-------------
c Securities Sold Short
ISSUER SHARES VALUE
----------------------------------------------------------------------------------------
a BioTime Inc. 500 $ 6,000
a Blue Rhino Corp. 1,000 14,375
a Carriage Services Inc. 500 9,593
a DATA RACE Inc. 1,200 5,775
a EarthShell Corp. 1,000 9,750
a IDT Corp. 400 11,400
MicroFinancial Inc. 400 7,125
a SCM Microsystems Inc. 100 6,588
-------------
Total (Proceeds $68,400) $ 70,606
-------------
</TABLE>
a Non-income producing.
b See notes 1(b) regarding joint repurchase agreement.
c See notes 1(c) regarding securities sold short.
d See note 1(c) regarding securities segregated with broker for securities sold
short
See notes to financial statements.
Franklin Strategic Series
Financial Statements
Statement of Assets and Liabilities
April 30, 1999
<TABLE>
<CAPTION>
Franklin U.S. Long-Short Fund
Assets:
Investments in securities:
<S> <C>
Cost $ 696,896
--------------
Value 716,851
Repurchase agreements, at value and cost 317,188
Cash 386
Receivables:
Investment securities sold 6,926
Dividends and interest 104
Deposits with brokers for securities sold short 77,442
--------------
Total assets 1,118,897
--------------
Liabilities:
Payables:
Investment securities purchased 20,071
Securities sold short, at value (Proceeds $68,400) 70,606
--------------
Total liabilities 90,677
--------------
Net assets, at value $ 1,028,220
==============
Net assets consist of:
Undistributed net investment income $ 5,263
Net unrealized appreciation 17,749
Accumulated net realized gain 5,208
Capital shares 1,000,000
--------------
Net assets, at value $ 1,028,220
==============
Class A:
Net assets, at value $ 1,028,220
==============
Shares outstanding 100,000
==============
Net asset value per share* $ 10.28
==============
Maximum offering price per share (net asset value per share divided by 94.25%) $ 10.91
==============
* Redemption price is equal to net asset value less any applicable contingent deferred sales charge.
</TABLE>
See notes to financial statements.
Franklin Strategic Series
Financial Statements
Statement of Operations
for the period March 15, 1999 (inception date) to April 30, 1999
Franklin U.S. Long-Short Fund
Investment income:
Dividends $ 309
Interest 4,954
------------
Total investment income 5,263
------------
Realized and unrealized gains
Net realized gain from:
Investments 3,139
Securities sold short 2,069
-----------
Net realized gain 5,028
Net unrealized appreciation on investments 17,749
------------
Net realized and unrealized gain 22,957
------------
Net increase in net assets resulting from operations $ 28,220
============
See notes to financial statements.
Franklin Strategic Series
Financial Statements
Statement of Changes in Net Assets
for the period March 15, 1999 (Inception date) to April 30, 1999
<TABLE>
<CAPTION>
Franklin U.S. Long
Short Fund
-----------------
<S> <C>
1999
-----------------
Increase in net assets:
Operations:
Net investment income $ 5,263
Net realized gain from investments 5,208
Net unrealized appreciation on investments 17,749
-----------------
Net increase in net assets resulting from operations 28,220
Capital share transactions: (Note 2)
Class A 1,000,000
-----------------
Total capital share transactions 1,000,000
Net increase in net assets 1,028,220
Net assets
Beginning of period -
-----------------
End of period $ 1,028,220
-----------------
Undistributed net investment income included in net assets:
End of period $ 5,263
-----------------
</TABLE>
See notes to financial statements.
FRANKLIN STRATEGIC SERIES
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin U.S. Long Short Fund (the Fund) is a separate, diversified series of
the Franklin Strategic Series (the Trust) consisting of ten separate series,
which is an open-ended investment company registered under the Investment
Company Act of 1940. The Fund seeks to provide long-term capital appreciation in
both a bull and bear market.
The following summarizes the Fund's significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range
of the latest quoted bid and asked prices. Securities for which market
quotations are not readily available are valued at fair value as determined
by management in accordance with procedures established by the Board of
Trustees.
b. Joint Repurchase Agreement:
The Fund may enter into a joint repurchase agreement whereby their uninvested
cash balance is deposited into a joint cash account to be used to invest in
one or more repurchase agreements. The value and face amount of the joint
repurchase agreement are allocated to the Fund based on its pro-rata
interest. A repurchase agreement is accounted for as a loan by the Fund to
the seller, collateralized by securities which are delivered to the Fund's
custodian. The market value, including accrued interest, of the initial
collateralization is required to be at least 102% of the dollar amount
invested by the Fund, with the value of the underlying securities marked to
market daily to maintain coverage of at least 100%. At April 30, 1999, all
outstanding repurchase agreements had been entered into on that date.
c. Securities Sold Short:
The Fund is engaged in selling securities short, which obligates the Fund to
replace a borrowed security with the same security at the current market
value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces
the borrowed security. The Fund would realize a gain if the price of the
security declines between those dates.
The Fund is required to establish a margin account with the broker lending
the security sold short. While the short sale is outstanding, the broker
retains the proceeds of the short sale and the Fund must maintain a deposit
for the broker consisting of cash and securities having a value equal to a
specified percentage of the value of the securities sold short.
d. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
to distribute substantially all of its taxable income.
e. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and
losses on security transactions are determined on a specific identification
basis. Interest income and estimated expenses are accrued daily. Dividend
income and distributions to shareholders are recorded on the ex-dividend date.
Common expenses incurred by the Trust are allocated among the Funds based on
the ratio of net assets of each Fund to the combined net assets. Other
expenses are charged to each Fund on a specific identification basis. The
expenses described will commence on the effective date of registration,
May 28, 1999.
f. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the
reporting period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
At April 30, 1999, there were an unlimited number of shares authorized ($.01
par value). Transactions in the Fund's shares were as follows:
Franklin
U.S. Long Short Fund
----------------------
Shares Amount
----------------------
Class A Shares:
Period ended April 30,1999*
Shares sold 100,000 $ 1,000,000
----------------------
Net increase 100,000 $ 1,000,000
======================
*For the period March 15, 1999 (inception date) to April 30, 1999
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Trust are also officers and/or directors
of Franklin Advisers, Inc. (Advisers), Franklin/Templeton Distributors, Inc.
(Distributors), Franklin Templeton Services, Inc. (FT Services), and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, principal underwriter, administrative manager and
transfer agent, respectively. The fees described below will commence on the
effective date, May 28, 1999.
The Fund pays an investment management fee to Advisers of 1.00% per year of
the average daily net assets of the Fund.
The Fund pays an administrative fee to FT Services of .20% based on the
Fund's average net assets.
At April 30, 1999, Franklin Resources Inc. owned 100% of the Fund.
4. INCOME TAXES
Net realized capital gains differ for financial statement and tax purposes
primarily due to differing treatments of wash sales.
At April 30,1999, the net unrealized appreciation based on the cost of
investments and short sales for income tax purposes of $946,084 was as follows:
Unrealized appreciation $ 24,780
Unrealized depreciation (7,431)
-----------
Net unrealized
appreciation $ 17,349
===========
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended April 30, 1999 aggregated $317,718 and $23,703, respectively.
FRANKLIN STRATEGIC SERIES
Independent Auditor's Report
To the Board of Trustees and Shareholders of
Franklin U.S. Long-Short Fund
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Franklin U.S. Long-Short Fund
(the "Fund") at April 30, 1999, and the results its operations, the changes in
its net assets and the financial highlights for the period March 15, 1999
(inception date) to April 30, 1999, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at April 30, 1999 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, California
May 28, 1999
FRANKLIN STRATEGIC INCOME FUND
FRANKLIN STRATEGIC SERIES
CLASS A, B & C
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended April 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
- ------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is capital appreciation over the long term. These
goals are fundamental, which means they may not be changed without
shareholder approval.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities.
DEBT SECURITIES A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain period of time. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividends to holders of its equity securities. Bonds,
notes, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
these securities generally declines. To the extent the fund invests in debt
securities, these changes in market value will be reflected in its net asset
value.
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.
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.
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.
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 or 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"), 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.
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.
The underlying mortgages are backed by residential and various types of
commercial properties. 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 the manager, 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 U.S. Securities and Exchange Commission to be an investment
company, the fund will limit its investments in such securities in a manner
consistent with the provisions of the Investment Company Act of 1940, as
amended (the 1940 Act).
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 goals,
policies, and quality standards.
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.
CONVERTIBLE SECURITIES The fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, 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. However, if
the parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
REPURCHASE AGREEMENTS Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed-upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to
repurchase at not less than their repurchase price. The manager will monitor
the value of such securities daily to determine that the value equals or
exceeds the repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to dispose of the underlying securities.
The fund will enter into repurchase agreements only with parties who meet the
creditworthiness standards approved by the fund's board of trustees, i.e.
banks or broker dealers which have been determined by the manager to present
no serious risk of becoming involved in bankruptcy proceedings within the
time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to one-third of its
total assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to have voting rights with respect to the
securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower
fail.
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
goals 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 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.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
CALL AND PUT OPTIONS ON SECURITIES. The fund may write (sell) covered put
and call options and buy put and call options that trade on securities
exchanges and in the over-the-counter market.
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 the manager 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 manager 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 New York Stock 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 may 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.
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. The fund may buy and write (sell) put and call
options on foreign currencies traded on U.S. exchanges or in the
over-the-counter markets. 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
goals 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 the manager, impede portfolio
management or the ability of the fund to honor redemption requests.
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.
ILLIQUID SECURITIES 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 fund's board of trustees has
authorized the fund to invest in restricted securities where such investment
is consistent with the fund's investment goals and has authorized such
securities to be considered liquid to the extent the manager 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 the manager to
treat a restricted security as liquid, including the manager's assessment of
current trading activity and the availability of reliable price information.
In determining whether a restricted security is properly considered a liquid
security, the manager 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 goal 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.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares 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
goals 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 goals 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 goals 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 the manager 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 goals 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 goals 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 the manager or its affiliates.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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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, the manager 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. The manager 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 the manager's judgment, analysis, and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
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.
MORTGAGE-BACKED SECURITIES 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.
Some of the CMOs in which the fund may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs
could result in the fund's inability to dispose of such securities at an
advantageous price under certain circumstances.
FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value. Foreign markets
have substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers, and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's
system of share registration and custody; (b) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce
a judgment; (c) pervasiveness of corruption, insider trading, and crime in
the Russian economic system; (d) currency exchange rate volatility and the
lack of available currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (f) controls on foreign investment and local practices
disfavoring foreign investors and limitations on repatriation of invested
capital, profits, and dividends, and on the fund's ability to exchange local
currencies for U.S. dollars; (g) the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support
the economic reform programs implemented since the dissolution of the Soviet
Union and could follow radically different political and/or economic policies
to the detriment of investors, including non-market-oriented policies such as
the support of certain industries at the expense of other sectors or
investors, a return to the centrally planned economy that existed prior to
the dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalization,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many
Russian securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including
large amounts of inter-company debt which may create a payments crisis on a
national scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or,
in the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by the fund due to
the underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in
certain industries, thereby limiting the number of investment opportunities
in Russia; (o) the risk that pending legislation would confer to Russian
courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes
before an internationally-accepted third-country arbitrator; and (p) the
difficulty in obtaining information about the financial condition of Russian
issuers, in light of the different disclosure and accounting standards
applicable to Russian companies.
There is little long-term historical data on Russian securities markets
because they are relatively new, and a substantial proportion of securities
transactions in Russia is privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems,
settlement, clearing, and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced
by extracts from the register or by formal share certificates. However, there
is no central registration system for shareholders, and these services are
carried out by the companies themselves or by registrars located throughout
Russia. These registrars are not necessarily subject to effective state
supervision, nor are they licensed with any governmental entity, and it is
possible for the fund to lose its registration through fraud, negligence, or
even mere oversight. While the fund will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian
or other agent inspecting the share register and by obtaining extracts of
share registers through regular confirmations, these extracts have no legal
enforceability, and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian regulations
impose liability on registrars for losses resulting from their errors, it may
be difficult for the fund to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more
than 500 shareholders is required by law to contract out the maintenance of
its shareholder register to an independent entity that meets certain
criteria, in practice this regulation has not always been strictly enforced.
Because of this lack of independence, management of a company may be able to
exert considerable influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to record
transactions in the share register. In addition, so-called
"financial-industrial groups" have emerged in recent years that seek to deter
outside investors from interfering in the management of companies they
control. These practices may prevent the fund from investing in the
securities of certain Russian companies deemed suitable by the manager.
Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which
may expose the fund to potential loss on the investment.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent the
fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The board also considers the
degree of risk involved through the holding of portfolio securities in
domestic and foreign securities depositories. However, in the absence of
willful misfeasance, bad faith, or gross negligence on the part of the
manager, any losses resulting from the holding of the fund's portfolio
securities in foreign countries and/or with securities depositories will be
at the risk of the shareholders. No assurance can be given that the board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
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 the
manager's 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 the
manager 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 the manager's 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.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors the fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 per month plus $1,050 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST1 FUNDS2 SERVES3
- -------------------------------------------------------------------------------
Frank H Abbott, III 13,935 159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith E. Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon S. Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from May 1,
1998, through May 31, 1998, fees at the rate of $300 for each of the Trust's
eight meetings plus $300 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- ------------------------------------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc..
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
The fund's sub-advisor is Templeton Investment Counsel, Inc., through its
Global Bond Managers division. The sub-advisor has an agreement with the
manager and provides the manager with investment management advice and
assistance. The sub-advisor 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 securities and investments and cash equivalents in the fund. The
sub-advisor's activities are subject to the board's review and control, as
well as the manager's instruction and supervision.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.625 of 1% of the value of its average daily net assets up to and
including $100 million;
o 0.50 of 1% of the value of its average daily net assets over $100 million
and not over $250 million; and
o 0.45 of 1% of the value of its average daily net assets in excess of $250
million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the fund paid the following
management fees:
MANAGEMENT FEES PAID ($) 1
- -------------------------------------------------
1999 328,135
1998 0
1997 0
1. For the fiscal years ended April 30, 1999, 1998 and 1997, management
fees, before any advance waiver, totaled $1,308,242, $527,061 and $129,938,
respectively. Under an agreement by the manager to waive or limit its fees,
the fund paid the management fees shown.
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.3125 of 1% of the value of its average daily net assets up to and
including $100 million;
o 0.25 of 1% of the value of its average daily net assets over $100 million
and not over $250 million; and
o 0.225 of 1% of the value of its average daily net assets in excess of
$250 million.
The manager pays this fee from the management fees it receives from the fund.
TICI will pay all expenses incurred in connections with its activities under
the subadvisory agreement with the manager other than the cost of securities
(including brokerage commissions, if any) purchases for the fund. For the
last three fiscal years ended April 30, the manager paid the manager no
sub-advisory fees.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended April 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
------------------------------------------------
1999 350,136
1998 129,758
1997 1 21,855
1. For the period from October 1, 1996, through April 30, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
fund also will 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 will 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, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
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The manager 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager 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, also may be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the manager, 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 may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended April 30, the fund paid the
following brokerage commissions:
BROKERAGE COMMISSIONS ($)
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1999 10,085
1998 3,070
1997 2,435
As of April 30, 1999, the fund owned securities issued by Salomon Smith
Brothers Inc. and Morgan Stanley & Co. valued in the aggregate at $469,000
and $2,034,375, respectively. Except as noted, the fund did not own any
securities issued by its regular broker-dealers as of the end of the fiscal
year.
DISTRIBUTIONS AND TAXES
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The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the fund's total assets at
the end of the fiscal year are invested in securities of foreign
corporations, the fund may elect to pass-through to you your pro rata share
of foreign taxes paid by the fund. If this election is made, the year-end
statement you receive from the fund will show more taxable income than was
actually distributed to you. However, you will be entitled to either deduct
your share of such taxes in computing your taxable income or (subject to
limitations) claim a foreign tax credit for such taxes against your U.S.
federal income tax. The fund will provide you with the information necessary
to complete your individual income tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, the fund
may designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
DEFERRAL OF BASIS If you redeem some or all of your shares in the fund, and
then reinvest the sales proceeds in the fund or in another Franklin Templeton
Fund within 90 days of buying the original shares, the sales charge that
would otherwise apply to your reinvestment may be reduced or eliminated. The
IRS will require you to report gain or loss on the redemption of your
original shares in the fund. In doing so, all or a portion of the sales
charge that you paid for your original shares in the fund will be excluded
from your tax basis in the shares sold (for the purpose of determining gain
or loss upon the sale of such shares). The portion of the sales charge
excluded will equal the amount that the sales charge is reduced on your
reinvestment. Any portion of the sales charge excluded from your tax basis
in the shares sold will be added to the tax basis of the shares you acquire
from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
If you are a corporate shareholder, you should note that 3.73% of the
dividends paid by the fund for the most recent fiscal year qualified for the
dividends-received deduction. In some circumstances, you will be allowed to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by the
fund as eligible for such treatment. All dividends (including the deducted
portion) must be included in your alternative minimum taxable income
calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses, and,
in limited cases, subject the fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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The fund is a series of Franklin Strategic Series, an open-end management
investment company, commonly called a mutual fund. The trust was organized as
a Delaware business trust on January 25, 1991, and is registered with the
SEC.
The fund currently offers four classes of shares, Class A, Class B, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Strategic Series Fund - Class A
o Franklin Strategic Series Fund - Class B
o Franklin Strategic Series Fund - Class C
o Franklin Strategic Series Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of any class.
As of [], 199[], the officers and board members, as a group, owned of record
and beneficially less than 1% of the outstanding shares of each class. The
board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A
and 1% for Class C. There is no initial sales charge for Class B.
The initial sales charge for Class A shares may be reduced for certain large
purchases, as described in the prospectus. We offer several ways for you to
combine your purchases in the Franklin Templeton Funds to take advantage of
the lower sales charges for large purchases. The Franklin Templeton Funds
include the U.S. registered mutual funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds except Franklin Valuemark Funds, Templeton
Capital Accumulator Fund, Inc., and Templeton Variable Products Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may 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 (LOI). You may buy Class A shares at a reduced sales charge
by completing the letter of intent section of your account 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
application, you acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
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 LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the
sales charge applicable to the amount specified in your LOI. 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. Any Class A purchases you made within 90 days
before you filed your LOI also may qualify for a retroactive reduction in the
sales charge. If you file your LOI with the fund before a change in the
fund's sales charge, you may complete the LOI at the lower of the new sales
charge or the sales charge in effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days
before you filed your LOI will be counted towards the completion of the LOI,
but they will not be entitled to a retroactive reduction 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 LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of
your total purchases, less redemptions, is more than the amount specified in
your LOI and is an amount that would qualify for a further sales charge
reduction, a retroactive price adjustment will be made by Distributors and
the securities dealer through whom purchases were made. The price adjustment
will be made on purchases made within 90 days before and on those made after
you filed your LOI and will be applied towards the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases.
If the amount of your total purchases, less redemptions, is less than the
amount specified in your LOI, the sales charge will be adjusted upward,
depending on the actual amount purchased (less redemptions) during the
period. You will need to send Distributors an amount equal to the difference
in the actual dollar amount of sales charge paid and the amount of sales
charge that would have applied to the total purchases if the total of the
purchases had been made at one time. Upon payment of this amount, 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, we will redeem an
appropriate number of reserved shares to realize the difference. If you
redeem the total amount in your account before you fulfill your LOI, we will
deduct the additional sales charge due from the sale proceeds and forward the
balance to you.
For LOIs filed 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 LOI. These plans are not subject to the requirement to reserve 5%
of the total intended purchase or to the policy on upward adjustments in
sales charges described above, 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 LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class
A 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, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A 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 the fund's Class A
shares. This waiver category also applies to Class [B and] C shares.
o Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, 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.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money fund
shares.
o Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund
shares and the CDSC holding period will begin again. We will, however,
credit your fund account with additional shares based on the CDSC you
previously paid and the amount of the redemption proceeds that you
reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without
an initial sales charge or CDSC by various individuals and institutions due
to anticipated economies in sales efforts and expenses, including:
o 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.
o 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 fund shares without paying
sales charges. 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.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o 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
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting
distributions from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without an initial sales
charge. Retirement plans that are not qualified retirement plans (employer
sponsored pension or profit-sharing plans that qualify under section 401 of
the Internal Revenue Code, including 401(k), money purchase pension, profit
sharing and defined benefit plans), SIMPLEs (savings incentive match plans
for employees) or SEPs (employer sponsored simplified employee pension plans
established under section 408(k) of the Internal Revenue Code) must also meet
the group purchase requirements described above to be able to buy Class A
shares without an initial 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 CDSC 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.
SALES IN TAIWAN. 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.
The fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
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Under $30,000 3.0
$30,000 but less than $100,000 2.0
$100,000 but less than $400,000 1.0
$400,000 or more 0
DEALER COMPENSATION 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.
Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated in the dealer compensation table
in the fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares 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 of Class A shares by certain retirement plans
without an initial sales charge: 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in
Class A shares, either as a lump sum or through our cumulative quantity
discount or letter of intent programs, a CDSC may apply on any shares you
sell within 12 months of purchase. For Class C shares, a CDSC may apply if
you sell your shares within 18 months of purchase. The CDSC 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 A shares without an initial sales charge also may be
subject to a CDSC 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.
For Class B shares, there is a CDSC if you sell your shares within six years,
as described in the table below. The charge is based on the value of the
shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES
WITHIN THIS MANY YEARS AFTER BUYING THIS % IS DEDUCTED FROM
THEM YOUR PROCEEDS AS A CDSC
- --------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial 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 of Class A shares by investors who purchased $1 million or
more without an initial sales charge if the securities dealer of record
waived its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. 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 also
may be subject to a CDSC.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. 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.
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.
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. 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
- ------------------------------------------------------------------------------
When you buy shares, you pay the offering price. The offering price is the
net asset value (NAV) per share plus any applicable sales charge, calculated
to two decimal places using standard rounding criteria. When you sell shares,
you receive the NAV minus any applicable CDSC.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 NAV. 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 close of the NYSE. The value of these securities used in computing
the NAV 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 close of the NYSE that will not be reflected in the
computation of the NAV. 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 use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
- ------------------------------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
The table below shows the aggregate underwriting commissions Distributors
received in connection with the offering of the fund's shares, the net
underwriting discounts and commissions Distributors retained after allowances
to dealers, and the amounts Distributors received in connection with
redemptions or repurchases of shares for the last three fiscal years ended
April 30:
AMOUNT RECEIVED IN
CONNECTION WITH
TOTAL COMMISSIONS AMOUNT RETAINED BY REDEMPTIONS AND
RECEIVED ($) DISTRIBUTORS ($) REPURCHASES ($)
------------------------------------------------------------------------------
1999 2,507,064 147,305 16,052
1998 2,420,305 163,904 0
1997 330,506 23,568 0
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each class has a separate distribution
or "Rule 12b-1" plan. Under each plan, the fund shall pay or may reimburse
Distributors or others for the expenses of activities that are primarily
intended to sell shares of the class. These expenses may include, among
others, distribution or service fees paid to securities dealers or others who
have executed a servicing agreement with the fund, Distributors or its
affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class are based
only on the fees attributable to that particular class.
THE CLASS A PLAN. Payments by the fund under the Class A plan may not exceed
0.25% per year of Class A's average daily net assets, payable quarterly. All
distribution expenses over this amount will be borne by those who have
incurred them.
THE CLASS B AND C PLANS. Under the Class B and C plans, the fund pays
Distributors up to 0.50% per year of the class's average daily net assets,
payable quarterly, to pay Distributors or others for providing distribution
and related services and bearing certain expenses. All distribution expenses
over this amount will be borne by those who have incurred them. The fund also
may pay a servicing fee of up to 0.15% per year of the class's average daily
net assets, payable quarterly. 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 expenses relating to each of the Class B and C plans also are used to pay
Distributors for advancing the commission costs to securities dealers with
respect to the initial sale of Class B and C shares. Further, the expenses
relating to the Class B plan may be used by Distributors to pay third party
financing entities that have provided financing to Distributors in connection
with advancing commission costs to securities dealers.
THE CLASS A, B AND C 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, the manager or Distributors or other parties on behalf of
the fund, the manager or Distributors make payments that are deemed to be for
the financing of any activity primarily intended to result in the sale of
fund shares within the context of Rule 12b-1 under the Investment Company Act
of 1940, as amended, 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 National Association of Securities Dealers, Inc.
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
noninterested members of the fund's board. The plans and any related
agreement may be terminated at any time, without penalty, by vote of a
majority of the noninterested 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 the manager
or by vote of a majority of the outstanding shares of the class. The Class A
plan also may be terminated by any act that constitutes an assignment of the
underwriting agreement with Distributors. Distributors or any dealer or other
firm also may 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 noninterested board members, 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, 1999, Distributors' eligible expenditures
for advertising, printing, and payments to underwriters and broker-dealers
pursuant to the plans and the amounts the fund paid Distributors under the
plans were:
DISTRIBUTORS' ELIGIBLE AMOUNT PAID
EXPENSES ($) BY THE FUND ($)
- --------------------------------------------------------------------
Class A 1,034,619 541,169
Class B 100,759 4,063
Class C 407,730 130,387
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. Performance figures reflect Rule 12b-1 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.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes the maximum initial 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 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 initial sales charge currently in effect.
When considering the average annual total return quotations, you should keep
in mind that the maximum initial sales charge reflected in each quotation is
a one time fee charged on all direct purchases, which will have its greatest
impact during the early stages of your investment. This charge will affect
actual performance less the longer you retain your investment in the fund.
The average annual total returns for the indicated periods ended April 30,
1999, were:
SINCE INCEPTION
1 YEAR (%) (5/24/94) (%)
- -----------------------------------------------------------
Class A -0.21 10.02
SINCE INCEPTION
1 YEAR (%) (5/1/98) (%)
- -----------------------------------------------------------
Class C 1.62 1.62
The following SEC formula was used to calculate these figures:
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 each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes the maximum initial 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, is based on
the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total returns for the
indicated periods ended April 30, 1999, were:
SINCE INCEPTION
1 YEAR (%) (5/24/94) (%)
- -----------------------------------------------------------
Class A -0.21 60.17
SINCE INCEPTION
1 YEAR (%) (5/1/98) (%)
- -----------------------------------------------------------
Class C 1.62 1.62
- -----------------------------------------------------------
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 applicable maximum offering price per
share on the last day of the period and annualizing the result. Expenses
accrued for the period include any fees charged to all shareholders of the
class during the base period. The yields for the 30-day period ended April
30, 1999, were:
CLASS A (%) CLASS B (%) CLASS C (%)
- -------------------------------------------
7.53 7.47 7.39
The following SEC formula was used to calculate these figures:
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. Amounts paid to shareholders are reflected in
the quoted current distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current maximum
offering price. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time. The current distribution rates for the 30-day period ended April 30,
1999, were:
CLASS A (%) CLASS B (%) CLASS C (%)
- -------------------------------------------
7.21 7.10 7.04
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 also may quote the performance of
shares without a sales charge. Sales literature and advertising may quote a
cumulative total return, average annual total return and other measures of
performance with the substitution of net asset value for the public offering
price.
The fund may include in its advertising or sales material information
relating to investment goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o 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.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o 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.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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 also may compare the fund's performance to the
return on certificates of deposit (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
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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 is one of
the oldest mutual fund organizations and now services more than 4 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, a pioneer in international investing. The Mutual
Series team, 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 $223 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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
that 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. These 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. These 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 that are speculative to a high
degree. These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations for both
short-term debt and commercial paper, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC INCOME FUND
FRANKLIN STRATEGIC SERIES
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 1, 1999
P.O. BOX 997151
SACRAMENTO, CA 95899-9983 1-800/DIAL BEN(R)
This Statement of Additional Information (SAI) is not a prospectus. It
contains information in addition to the information in the fund's prospectus.
The fund's prospectus, dated September 1, 1999, which we may amend from time
to time, contains the basic information you should know before investing in
the fund. You should read this SAI together with the fund's prospectus.
The audited financial statements and auditor's report in the trust's Annual
Report to Shareholders, for the fiscal year ended April 30, 1999, are
incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
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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.
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GOALS AND STRATEGIES
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The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is capital appreciation over the long term. These
goals are fundamental, which means they may not be changed without
shareholder approval.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends, which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include convertible securities.
DEBT SECURITIES A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain period of time. A company typically meets its payment
obligations associated with its outstanding debt securities before it
declares and pays any dividends to holders of its equity securities. Bonds,
notes, and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
these securities generally declines. To the extent the fund invests in debt
securities, these changes in market value will be reflected in its net asset
value.
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.
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.
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.
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 or 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"), 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.
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.
The underlying mortgages are backed by residential and various types of
commercial properties. 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 the manager, 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 U.S. Securities and Exchange Commission to be an investment
company, the fund will limit its investments in such securities in a manner
consistent with the provisions of the Investment Company Act of 1940, as
amended (the 1940 Act).
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 goals,
policies, and quality standards.
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.
CONVERTIBLE SECURITIES The fund may invest in convertible securities. A
convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security
provides a fixed-income stream and the opportunity, through its conversion
feature, to participate in the capital appreciation resulting from a market
price advance in its underlying common stock. As with a straight fixed-income
security, a convertible security tends to increase in market value when
interest rates decline and decrease in value when interest rates rise. Like a
common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as
the market value of the underlying stock declines. Because both interest rate
and market movements can influence its value, 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. However, if
the parity price of the convertible security is less than the call price, the
operating company may pay out cash instead of common stock. If the
convertible security is issued by an investment bank, the security is an
obligation of and is convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security
will have recourse only to the issuer. In addition, a convertible security
may be subject to redemption by the issuer, but only after a specified date
and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security
that it uses to rate a more conventional debt security, a convertible
preferred stock is treated like a preferred stock for the fund's financial
reporting, credit rating, and investment limitation purposes. A preferred
stock is subordinated to all debt obligations in the event of insolvency, and
an issuer's failure to make a dividend payment is generally not an event of
default entitling the preferred shareholder to take action. A preferred stock
generally has no maturity date, so that its market value is dependent on the
issuer's business prospects for an indefinite period of time. In addition,
distributions from preferred stock are dividends, rather than interest
payments, and are usually treated as such for corporate tax purposes.
REPURCHASE AGREEMENTS Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed-upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to
repurchase at not less than their repurchase price. The manager will monitor
the value of such securities daily to determine that the value equals or
exceeds the repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to dispose of the underlying securities.
The fund will enter into repurchase agreements only with parties who meet the
creditworthiness standards approved by the fund's board of trustees, i.e.
banks or broker dealers which have been determined by the manager to present
no serious risk of becoming involved in bankruptcy proceedings within the
time frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to one-third of its
total assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to have voting rights with respect to the
securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower
fail.
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
goals 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 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.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES
CALL AND PUT OPTIONS ON SECURITIES. The fund may write (sell) covered put
and call options and buy put and call options that trade on securities
exchanges and in the over-the-counter market.
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 the manager 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 manager 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 New York Stock 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 may 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.
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. The fund may buy and write (sell) put and call
options on foreign currencies traded on U.S. exchanges or in the
over-the-counter markets. 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
goals 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 the manager, impede portfolio
management or the ability of the fund to honor redemption requests.
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.
ILLIQUID SECURITIES 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 fund's board of trustees has
authorized the fund to invest in restricted securities where such investment
is consistent with the fund's investment goals and has authorized such
securities to be considered liquid to the extent the manager 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 the manager to
treat a restricted security as liquid, including the manager's assessment of
current trading activity and the availability of reliable price information.
In determining whether a restricted security is properly considered a liquid
security, the manager 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 goal 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.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50%
of the fund's outstanding shares 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
goals 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 goals 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 goals 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 the manager 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 goals 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 goals 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 the manager or its affiliates.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund
is not required to sell a security because circumstances change and the
security no longer meets one or more of the fund's policies or restrictions.
If a percentage restriction or limitation 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 will not be considered a violation of the
restriction or limitation.
RISKS
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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, the manager 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. The manager 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 the manager's judgment, analysis, and experience in
evaluating the creditworthiness of an issuer. In this evaluation, the manager
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.
MORTGAGE-BACKED SECURITIES 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.
Some of the CMOs in which the fund may invest may be less liquid than other
types of mortgage securities. A lack of liquidity in the market for CMOs
could result in the fund's inability to dispose of such securities at an
advantageous price under certain circumstances.
FOREIGN SECURITIES You should consider carefully the substantial risks
involved in securities of companies of foreign nations, which are in addition
to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the U.S.
Foreign companies are not generally subject to uniform accounting or
financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The fund, therefore,
may encounter difficulty in obtaining market quotations for purposes of
valuing its portfolio and calculating its net asset value. Foreign markets
have substantially less volume than the NYSE, and securities of some foreign
companies are less liquid and more volatile than securities of comparable
U.S. companies. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the U.S., are likely to be
higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers, and listed companies than in the U.S.
Investments in companies domiciled in developing countries may be subject to
potentially higher risks than investments in developed countries. These risks
include (i) less social, political, and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict
the fund's investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interests; (iv) foreign
taxation; (v) the absence of developed legal structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and
(vii) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross domestic product, rate of inflation, currency depreciation,
capital reinvestment, resource self-sufficiency, and balance of payments
position.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following: (a) delays in
settling portfolio transactions and risk of loss arising out of Russia's
system of share registration and custody; (b) the risk that it may be
impossible or more difficult than in other countries to obtain and/or enforce
a judgment; (c) pervasiveness of corruption, insider trading, and crime in
the Russian economic system; (d) currency exchange rate volatility and the
lack of available currency hedging instruments; (e) higher rates of inflation
(including the risk of social unrest associated with periods of
hyper-inflation); (f) controls on foreign investment and local practices
disfavoring foreign investors and limitations on repatriation of invested
capital, profits, and dividends, and on the fund's ability to exchange local
currencies for U.S. dollars; (g) the risk that the government of Russia or
other executive or legislative bodies may decide not to continue to support
the economic reform programs implemented since the dissolution of the Soviet
Union and could follow radically different political and/or economic policies
to the detriment of investors, including non-market-oriented policies such as
the support of certain industries at the expense of other sectors or
investors, a return to the centrally planned economy that existed prior to
the dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalization,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many
Russian securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including
large amounts of inter-company debt which may create a payments crisis on a
national scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or,
in the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by the fund due to
the underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in
certain industries, thereby limiting the number of investment opportunities
in Russia; (o) the risk that pending legislation would confer to Russian
courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes
before an internationally-accepted third-country arbitrator; and (p) the
difficulty in obtaining information about the financial condition of Russian
issuers, in light of the different disclosure and accounting standards
applicable to Russian companies.
There is little long-term historical data on Russian securities markets
because they are relatively new, and a substantial proportion of securities
transactions in Russia is privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems,
settlement, clearing, and registration of securities transactions are subject
to significant risks. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced
by extracts from the register or by formal share certificates. However, there
is no central registration system for shareholders, and these services are
carried out by the companies themselves or by registrars located throughout
Russia. These registrars are not necessarily subject to effective state
supervision, nor are they licensed with any governmental entity, and it is
possible for the fund to lose its registration through fraud, negligence, or
even mere oversight. While the fund will endeavor to ensure that its interest
continues to be appropriately recorded either itself or through a custodian
or other agent inspecting the share register and by obtaining extracts of
share registers through regular confirmations, these extracts have no legal
enforceability, and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the fund of its ownership rights or improperly
dilute its interests. In addition, while applicable Russian regulations
impose liability on registrars for losses resulting from their errors, it may
be difficult for the fund to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share
registration. Furthermore, although a Russian public enterprise with more
than 500 shareholders is required by law to contract out the maintenance of
its shareholder register to an independent entity that meets certain
criteria, in practice this regulation has not always been strictly enforced.
Because of this lack of independence, management of a company may be able to
exert considerable influence over who can purchase and sell the company's
shares by illegally instructing the registrar to refuse to record
transactions in the share register. In addition, so-called
"financial-industrial groups" have emerged in recent years that seek to deter
outside investors from interfering in the management of companies they
control. These practices may prevent the fund from investing in the
securities of certain Russian companies deemed suitable by the manager.
Further, this also could cause a delay in the sale of Russian company
securities by the fund if a potential purchaser is deemed unsuitable, which
may expose the fund to potential loss on the investment.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies that would prevent the
fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of cessation
of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or
other amounts, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in
foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in
the relative rates of exchange between the currencies of different nations,
by exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies may not be internationally traded.
Certain of these currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which the fund's
portfolio securities are denominated may have a detrimental impact on the
fund. Through the fund's flexible policy, management endeavors to avoid
unfavorable consequences and to take advantage of favorable developments in
particular nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
The board considers at least annually the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of the fund's assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The board also considers the
degree of risk involved through the holding of portfolio securities in
domestic and foreign securities depositories. However, in the absence of
willful misfeasance, bad faith, or gross negligence on the part of the
manager, any losses resulting from the holding of the fund's portfolio
securities in foreign countries and/or with securities depositories will be
at the risk of the shareholders. No assurance can be given that the board's
appraisal of the risks will always be correct or that such exchange control
restrictions or political acts of foreign governments might not occur.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. While the
implementation of the euro could have a negative effect on the fund, the
fund's manager and its affiliated services providers are taking steps they
believe are reasonably designed to address the euro issue.
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 the
manager's 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 the
manager 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 the manager's 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.
OFFICERS AND TRUSTEES
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The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of the
fund's investment activities. The board, in turn, elects the officers of the
trust who are responsible for administering the trust's day-to-day
operations. The board also monitors the fund to ensure no material conflicts
exist among share classes. While none is expected, the board will act
appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (78)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (54)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin Investment
Advisory Services, Inc. and 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 52 of the investment
companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 50 of the investment companies in the Franklin
Templeton Group of Funds.
Edith E. Holiday (47)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of natural gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present) and
H.J. Heinz Company (processed foods and allied products) (1994-present);
director or trustee, as the case may be, of 24 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman (1995-1997) and
Trustee (1993-1997), 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).
*Charles B. Johnson (66)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Investment Advisory Services, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and Franklin Templeton
Services, Inc.; officer and/or director or trustee, as the case may be, of
most of the other subsidiaries of Franklin Resources, Inc. and of 49 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.
and Franklin Investment Advisory Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; 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 52 of
the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (70)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); director or trustee, as the case may be,
of 27 of the investment companies in the Franklin Templeton Group of Funds;
and FORMERLY, Director, Fischer Imaging Corporation (medical imaging
systems), Digital Transmission Systems, Inc. (wireless communications) and
Quarterdeck Corporation (software firm), and General Partner, Peregrine
Associates, which was the General Partner of Peregrine Ventures (venture
capital firm).
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Fund American Enterprises Holdings, Inc. (holding company), Martek
Biosciences Corporation, MCI WorldCom (information services), MedImmune, Inc.
(biotechnology), Spacehab, Inc. (aerospace services) and Real 3D (software);
director or trustee, as the case may be, of 48 of the investment companies in
the Franklin Templeton Group of Funds; and FORMERLY, Chairman, White River
Corporation (financial services) and Hambrecht and Quist Group (investment
banking), and President, National Association of Securities Dealers, Inc.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.,
Franklin/Templeton Investor Services, Inc. and Franklin Mutual Advisers, LLC;
Executive Vice President, Chief Financial Officer and Director, Templeton
Worldwide, Inc.; Executive Vice President, Chief Operating Officer and
Director, Templeton Investment Counsel, Inc.; Executive Vice President and
Chief Financial Officer, Franklin Advisers, Inc.; Chief Financial Officer,
Franklin Advisory Services, LLC and Franklin Investment Advisory Services,
Inc.; President and Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 52 of
the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (50)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND SECRETARY
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, LLC and Franklin Mutual Advisers, LLC;
Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc.; and officer of 53 of the investment
companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (43)
500 East Broward Blvd., Fort Lauderdale, FL 33394-3091
VICE PRESIDENT
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; Chairman and Director, Templeton Investment
Counsel, Inc.; Vice President, Franklin Advisers, Inc.; officer and/or
director of some of the other subsidiaries of Franklin Resources, Inc.; and
officer and/or director or trustee, as the case may be, of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (60)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal
securities laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the
father and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $1,575 per month plus $1,050 per
meeting attended. Board members who serve on the audit committee of the trust
and other funds in the Franklin Templeton Group of Funds receive a flat fee
of $2,000 per committee meeting attended, a portion of which is allocated to
the trust. Members of a committee are not compensated for any committee
meeting held on the day of a board meeting. Noninterested board members also
may serve as directors or trustees of other funds in the Franklin Templeton
Group of Funds and may receive fees from these funds for their services. The
fees payable to noninterested board members by the trust are subject to
reductions resulting from fee caps limiting the amount of fees payable to
board members who serve on other boards within the Franklin Templeton Group
of Funds. The following table provides the total fees paid to noninterested
board members by the trust and by the Franklin Templeton Group of Funds.
NUMBER OF BOARDS IN
TOTAL FEES RECEIVED THE FRANKLIN
TOTAL FEES FROM THE FRANKLIN TEMPLETON GROUP OF
RECEIVED TEMPLETON GROUP OF FUNDS ON WHICH EACH
NAME FROM THE TRUST 1 FUNDS 2 SERVES 3
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Frank H Abbott, III 13,935 159,051 27
Harris J. Ashton 16,280 361,157 48
S. Joseph Fortunato 15,279 367,835 50
Edith E. Holiday 18,975 211,400 24
Frank W.T. LaHaye 16,035 163,753 27
Gordon S. Macklin 16,280 361,157 48
1. For the fiscal year ended April 30, 1999. During the period from May 1,
1998, through May 31, 1998, fees at the rate of $300 for each of the Trust's
eight meetings plus $300 per board meeting attended were in effect.
2. For the calendar year ended December 31, 1998.
3. 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 54 registered investment companies, with
approximately 163 U.S. based funds or series.
Noninterested board members 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 Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of their
participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February
1998, this policy was formalized through adoption of a requirement that each
board member invest one-third of fees received for serving as a director or
trustee of a Templeton fund in shares of one or more Templeton funds and
one-third of fees received for serving as a director or trustee of a Franklin
fund in shares of one or more Franklin funds until the value of such
investments equals or exceeds five times the annual fees paid such board
member. Investments in the name of family members or entities controlled by a
board member constitute fund holdings of such board member for purposes of
this policy, and a three year phase-in period applies to such investment
requirements for newly elected board members. In implementing such policy, a
board member's fund holdings existing on February 27, 1998, are valued as of
such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
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MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc..
The manager is a wholly owned subsidiary of Franklin Resources, Inc.
(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.
The manager provides investment research and portfolio management services,
and selects the securities for the fund to buy, hold or sell. The manager
also selects the brokers who execute the fund's portfolio transactions. The
manager provides periodic reports to the board, which reviews and supervises
the manager's investment activities. To protect the fund, the manager and its
officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager 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 the manager on behalf of the fund. Similarly, with respect to
the fund, the manager is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that the manager
and access persons, as defined by applicable federal securities laws, may buy
or sell for its or their own account or for the accounts of any other fund.
The manager is not obligated to refrain from investing in securities held by
the fund or other funds it manages. Of course, any transactions for the
accounts of the manager and other access persons will be made in compliance
with the fund's code of ethics.
Under the fund's code of ethics, employees of the Franklin Templeton Group
who are access persons may 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 and statements must be sent to a
compliance officer; (iii) all brokerage accounts must be disclosed on an
annual basis; and (iv) access persons involved in preparing and making
investment decisions must, in addition to (i), (ii) and (iii) 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.
The fund's sub-advisor is Templeton Investment Counsel, Inc., through its
Global Bond Managers division. The sub-advisor has an agreement with the
manager and provides the manager with investment management advice and
assistance. The sub-advisor 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 securities and investments and cash equivalents in the fund. The
sub-advisor's activities are subject to the board's review and control, as
well as the manager's instruction and supervision.
MANAGEMENT FEES The fund pays the manager a fee equal to an annual rate of:
o 0.625 of 1% of the value of its average daily net assets up to and
including $100 million;
o 0.50 of 1% of the value of its average daily net assets over $100 million
and not over $250 million; and
o 0.45 of 1% of the value of its average daily net assets in excess of $250
million.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of the
fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended April 30, the fund paid the following
management fees:
MANAGEMENT FEES PAID ($)1
- -------------------------------------------------
1999 328,135
1998 0
1997 0
1. For the fiscal years ended April 30, 1999, 1998 and 1997, management
fees, before any advance waiver, totaled $1,308,242, $527,061 and $129,938,
respectively. Under an agreement by the manager to waive its fees, the fund
paid the management fees shown.
The manager pays the sub-advisor a fee equal to an annual rate of:
o 0.3125 of 1% of the value of its average daily net assets up to and
including $100 million;
o 0.25 of 1% of the value of its average daily net assets over $100 million
and not over $250 million; and
o 0.225 of 1% of the value of its average daily net assets in excess of
$250 million.
The manager pays this fee from the management fees it receives from the fund.
TICI will pay all expenses incurred in connections with its activities under
the subadvisory agreement with the manager other than the cost of securities
(including brokerage commissions, if any) purchases for the fund. For the
last three fiscal years ended April 30, the manager paid the manager no
sub-advisory fees.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) has an agreement with the manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by
Resources and is an affiliate of the fund's manager and principal
underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an
annual rate of:
o 0.15% of the fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended April 30, the manager paid FT
Services the following administration fees:
ADMINISTRATION FEES PAID ($)
------------------------------------------------
1999 350,136
1998 129,758
1997 1 21,855
1. For the period from October 1, 1996, through April 30, 1997.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor
Services, Inc. (Investor Services) is the fund's shareholder servicing agent
and acts as the fund's transfer agent and dividend-paying agent. Investor
Services is located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please
send all correspondence to Investor Services to P.O. Box 997151, Sacramento,
CA 95899-9983.
For its services, Investor Services receives a fixed fee per account. The
fund also will 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 will 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, NY 10286, acts as custodian of the fund's securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA
94105, is the fund's independent auditor. The auditor gives an opinion on the
financial statements included in the trust's Annual Report to Shareholders
and reviews the trust's registration statement filed with the U.S. Securities
and Exchange Commission (SEC).
PORTFOLIO TRANSACTIONS
- ------------------------------------------------------------------------------
The manager 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, the manager 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 is
negotiated between the manager 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. The manager
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 the manager, a better price and execution can otherwise be
obtained. Purchases of portfolio securities from underwriters will include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers will include a spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager 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 the manager's overall responsibilities to client
accounts over which it exercises investment discretion. The services that
brokers may provide to the manager 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 the manager in carrying out its
investment advisory responsibilities. These services may not always directly
benefit the fund. They must, however, be of value to the manager 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 the manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions in order
to obtain additional research services allows the manager 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, the manager 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, also may be considered a factor in the
selection of broker-dealers to execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of
the National Association of Securities Dealers, Inc., it may sometimes
receive certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture 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 the manager 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 the manager 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 the manager, 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 may improve execution and
reduce transaction costs to the fund.
During the last three fiscal years ended April, the fund paid the following
brokerage commissions:
BROKERAGE COMMISSIONS ($)
------------------------------------------------
1999 10,085
1998 3,070
1997 2,435
As of April 30, 1999, the fund owned securities issued by Salomon Smith
Brothers Inc. and Morgan Stanley & Co. valued in the aggregate at $469,000
and $2,034,375, respectively. Except as noted, the fund did not own any
securities issued by its regular broker-dealers as of the end of the fiscal
year.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
The fund calculates dividends and capital gains the same way for each class.
The amount of any income dividends per share will differ, however, generally
due to the difference in the distribution and service (Rule 12b-1) fees of
each class. The fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in
the form of dividends and interest on its investments. This income, less
expenses incurred in the operation of the fund, constitutes the fund's net
investment income from which dividends may be paid to you. Any distributions
by the fund from such income will be taxable to you as ordinary income,
whether you take them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net capital gains realized by the fund
generally will be distributed once each year, and may be distributed more
frequently, if necessary, in order to reduce or eliminate excise or income
taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's
ordinary income distributions to you, and may cause some or all of the fund's
previously distributed income to be classified as a return of capital.
The fund may be subject to foreign withholding taxes on income from certain
of its foreign securities. If more than 50% of the fund's total assets at
the end of the fiscal year are invested in securities of foreign
corporations, the fund may elect to pass-through to you your pro rata share
of foreign taxes paid by the fund. If this election is made, the year-end
statement you receive from the fund will show more taxable income than was
actually distributed to you. However, you will be entitled to either deduct
your share of such taxes in computing your taxable income or (subject to
limitations) claim a foreign tax credit for such taxes against your U.S.
federal income tax. The fund will provide you with the information necessary
to complete your individual income tax return if it makes this election.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you
of the amount of your ordinary income dividends and capital gains
distributions at the time they are paid, and will advise you of their tax
status for federal income tax purposes shortly after the close of each
calendar year. If you have not held fund shares for a full year, the fund
may designate and distribute to you, as ordinary income or capital gain, a
percentage of income that is not equal to the actual amount of such income
earned during the period of your investment in the fund.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code, has qualified as such for its most recent fiscal year,
and intends to so qualify during the current fiscal year. As a regulated
investment company, the fund generally pays no federal income tax on the
income and gains it distributes to you. The board reserves the right not to
maintain the qualification of the fund as a regulated investment company if
it determines such course of action to be beneficial to shareholders. In
such case, the fund will be subject to federal, and possibly state, corporate
taxes on its taxable income and gains, and distributions to you will be taxed
as ordinary dividend income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the
Internal Revenue Code requires the fund to distribute to you by December 31
of each year, at a minimum, the following amounts: 98% of its taxable
ordinary income earned during the calendar year; 98% of its capital gain net
income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year. The fund intends to declare
and pay these amounts in December (or in January that are treated by you as
received in December) to avoid these excise taxes, but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. If you
redeem your fund shares, or exchange your fund shares for shares of a
different Franklin Templeton Fund, the IRS will require that you report a
gain or loss on your redemption or exchange. If you hold your shares as a
capital asset, the gain or loss that you realize will be capital gain or loss
and will be long-term or short-term, generally depending on how long you hold
your shares. Any loss incurred on the redemption or exchange of shares held
for six months or less will be treated as a long-term capital loss to the
extent of any long-term capital gains distributed to you by the fund on those
shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you buy other shares in the
fund (through reinvestment of dividends or otherwise) within 30 days before
or after your share redemption. Any loss disallowed under these rules will
be added to your tax basis in the new shares you buy.
U.S. GOVERNMENT OBLIGATIONS Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in Government National Mortgage
Association or Federal National Mortgage Association securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
The rules on exclusion of this income are different for corporations.
If you are a corporate shareholder, you should note that ___% of the
dividends paid by the fund for the most recent fiscal year qualified for the
dividends-received deduction. In some circumstances, you will be allowed to
deduct these qualified dividends, thereby reducing the tax that you would
otherwise be required to pay on these dividends. The dividends-received
deduction will be available only with respect to dividends designated by the
fund as eligible for such treatment. All dividends (including the deducted
portion) must be included in your alternative minimum taxable income
calculation.
INVESTMENT IN COMPLEX SECURITIES The fund may invest in complex securities.
These investments may be subject to numerous special and complex tax rules.
These rules could affect whether gains and losses recognized by the fund are
treated as ordinary income or capital gain, accelerate the recognition of
income to the fund and/or defer the fund's ability to recognize losses, and,
in limited cases, subject the fund to U.S. federal income tax on income from
certain of its foreign securities. In turn, these rules may affect the
amount, timing or character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------------------------------
The fund is a series of Franklin Strategic Series, an open-end management
investment company, commonly called a mutual fund. The trust was organized as
a Delaware business trust on January 25, 1991, and is registered with the
SEC.
The fund currently offers four classes of shares, Class A, Class B, Class C
and Advisor Class. Before January 1, 1999, Class A shares were designated
Class I and Class C shares were designated Class II. The fund began offering
Class B shares on January 1, 1999. The fund may offer additional classes of
shares in the future. The full title of each class is:
o Franklin Strategic Series Fund - Class A
o Franklin Strategic Series Fund - Class B
o Franklin Strategic Series Fund - Class C
o Franklin Strategic Series Fund - Advisor Class
Shares of each class represent proportionate interests in the fund's assets.
On matters that affect the fund as a whole, each class has the same voting
and other rights and preferences as any other class. On matters that affect
only one class, only shareholders of that class may vote. Each class votes
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.
Additional series may be offered in the future.
The trust has noncumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all
of the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The trust does not intend to hold annual shareholder meetings. The trust or a
series of the trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the board to consider the
removal of a board member if requested in writing 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. A special meeting also may be called by the board in its
discretion.
From time to time, the number of fund shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares
outstanding. To the best knowledge of the fund, no other person holds
beneficially or of record more than 5% of the outstanding shares of any class.
As of June 8, 1999, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each class.
The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
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The fund continuously offers its shares through securities dealers who have
an agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any 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. Banks and financial
institutions that sell shares of the fund may be required by state law to
register as securities dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
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.
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.
If you buy shares through the reinvestment of dividends, the shares 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.
GROUP PURCHASES As described in the prospectus, members of a qualified group
may add the group's investments together for minimum investment purposes.
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.
DEALER COMPENSATION 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 rules of the
National Association of Securities Dealers, Inc.
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. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares 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 goals exist immediately. This money will then be withdrawn from
the short-term, interest-bearing 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh 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.
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. There are no service charges
for establishing or maintaining a systematic withdrawal plan. Once your plan
is established, any distributions paid by the fund will be automatically
reinvested in your account.
Payments under the plan will be made from the redemption of an equivalent
amount of shares in your account, generally on the 25th day of the month in
which a payment is scheduled. If the 25th falls on a weekend or holiday, we
will process the redemption on the next business day. When you sell your
shares under a systematic withdrawal plan, it is a taxable transaction.
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.
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. 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.
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 U.S. Securities
and Exchange Commission (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.
Redemptions in kind are taxable transactions. 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.
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.
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. 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.
The wiring of redemption proceeds is a special service that we make available
whenever possible. 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 the prospectus.
Franklin Templeton Investor Services, Inc. (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 also may charge a fee for their services
directly to their clients.
If you buy or sell shares through your securities dealer, we use the net
asset value next calculated after your securities dealer receives your
request, which is promptly transmitted to the fund. 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. 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. Any loss to you resulting
from your dealer's failure to transmit your redemption order to the fund in a
timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or
selling fund shares than those described in this SAI or in the prospectus.
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.
PRICING SHARES
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When you buy and sell shares, you pay the net asset value (NAV) per share.
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.
The fund calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. pacific
time). The fund does not calculate the NAV on days the New York Stock
Exchange (NYSE) is closed for trading, which include New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent
quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most
representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options
at their market price as determined above. The current market value of any
option the fund holds is its last sale price on the relevant exchange before
the fund values its assets. If there are no sales that day or if the last
sale price is outside the bid and ask prices, the fund values options within
the range of the current closing bid and ask prices if the fund believes the
valuation fairly reflects the contract's market value.
The fund determines the value of a foreign security as of the close of
trading on the foreign exchange on which the security is traded or as of the
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 NAV. 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 close of the NYSE. The value of these securities used in computing
the NAV 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 close of the NYSE that will not be reflected in the
computation of the NAV. 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 use a pricing service, bank or securities dealer to
perform any of the above described functions.
THE UNDERWRITER
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Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares.
Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The fund pays the expenses
of preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of
Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class.
PERFORMANCE
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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.
For periods before May 28, 1999, Advisor Class standardized performance
quotations are calculated by substituting Class A performance for the
relevant time period, excluding the effect of Class A's maximum initial sales
charge, and including the effect of the distribution and service (Rule 12b-1)
fees applicable to the fund's Class A shares. For periods after May 28, 1999,
Advisor Class standardized performance quotations are calculated as described
below.
An explanation of these and other methods used by the fund to compute or
express performance follows. Regardless of the method used, past performance
does not guarantee future results, and is an indication of the return to
shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by
finding the average annual rates of return over the periods indicated below
that would equate an initial hypothetical $1,000 investment to its ending
redeemable value. The calculation assumes income dividends and capital gain
distributions are reinvested at net asset value. The quotation assumes the
account was completely redeemed at the end of each 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 initial sales charge currently in effect. The average annual total
return for the indicated periods ended April 30, 1999, were:
SINCE INCEPTION
1 YEAR (%) (5/24/94) (%)
- ---------------------------------------------------
Advisor Class 2.39 10.45
The following SEC formula was used to calculate these figures:
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 each period at the end
of each period
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested
at net asset value. Cumulative total return, however, is based on the actual
return for a specified period rather than on the average return over the
periods indicated above. The cumulative total return for the indicated
periods ended April 30, 1999, were:
SINCE INCEPTION
1 YEAR (%) (5/24/94) (%)
- ---------------------------------------------------
Advisor Class 2.39 63.31
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 net asset value per share on the last day
of the period and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of the class during the base
period. The yield for the 30-day period ended April 30, 1999, was:
YIELD (%)
- -------------------------------------
Advisor Class 7.53
The following SEC formula was used to calculate this figure:
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 net asset value per share on the last day of the period
CURRENT DISTRIBUTION RATE Current yield, which is calculated according to a
formula prescribed by the SEC, is not indicative of the amounts which were or
will be paid to shareholders. Amounts paid to shareholders are reflected in
the quoted current distribution rate. The current distribution rate is
usually computed by annualizing the dividends paid per share by a class
during a certain period and dividing that amount by the current net asset
value. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of
time. The current distribution rate for the 30-day period ended April 30,
1999, was:
DISTRIBUTION RATE
(%)
- --------------------------------------------
Advisor Class 7.53
VOLATILITY Occasionally statistics may be used to show the fund's volatility
or risk. Measures of volatility or risk are generally used to compare the
fund's net asset value or performance to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market, as represented by an index considered representative of the types of
securities in which the fund invests. A beta of more than 1.00 indicates
volatility greater than the market and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average over a specified period of
time. The idea is that greater volatility means greater risk undertaken in
achieving performance.
OTHER PERFORMANCE QUOTATIONS Sales literature referring to the use of the
fund as a potential investment for 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 goals and performance results of funds belonging to
the Franklin Templeton Group of Funds. Franklin Resources, Inc. 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 goal, advertisements and other materials about the
fund may discuss certain measures of fund performance as reported by various
financial publications. Materials also may 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:
o Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial Average
(30 blue-chip stocks that are generally leaders in their industry), the
Dow Jones Transportation Average (20 transportation stocks), and the Dow
Jones Utilities Average (15 utility stocks involved in the production of
electrical energy).
o Standard & Poor's(R) 500 Stock Index or its component indices - a
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500
stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an
unmanaged index of all industrial, utilities, transportation, and finance
stocks listed on the NYSE.
o 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.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity 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.
o 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.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes
price, yield, risk, and total return for mutual funds.
o 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.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time,
in the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o 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.
o 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 also may compare the fund's performance to the
return on certificates of deposit (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 is one of
the oldest mutual fund organizations and now services more than 4 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, a pioneer in international investing. The Mutual
Series team, 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 $223 billion in assets under management for
more than 7 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 113 U.S. based open-end
investment companies to the public. The fund may identify itself by its
NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
New York Stock Exchange. While many of them have similar investment goals, no
two are exactly alike. Shares of the fund are generally sold through
securities dealers, whose investment representatives are experienced
professionals who can offer advice on the type of investments suitable to
your unique goals and needs, as well as the risks associated with such
investments.
The Information Services & Technology division of Franklin Resources, Inc.
(Resources) established a Year 2000 Project Team in 1996. This team has
already begun making necessary software changes to help the computer systems
that service the fund and its shareholders to be Year 2000 compliant. After
completing these modifications, comprehensive tests are conducted in one of
Resources' U.S. test labs to verify their effectiveness. Resources continues
to seek reasonable assurances from all major hardware, software or
data-services suppliers that they will be Year 2000 compliant on a timely
basis. Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical to
develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use of
normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
DESCRIPTION OF RATINGS
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CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (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 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 that 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
that 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. These 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. These 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 that are speculative to a high
degree. These 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.
STANDARD & POOR'S CORPORATION (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 a 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 these bonds will likely have some quality and protective
characteristics, they 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 also may 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.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations for both
short-term debt and commercial paper, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC SERIES
FILE NOS. 33-39088 &
811-6243
FORM N-1A
PART C
OTHER INFORMATION
PART C: OTHER INFORMATION
Item 23 Exhibits. The following exhibits are incorporated by reference to
the previously filed document indicated below, except as noted:
(a) Agreement and Declaration of Trust
(i) Agreement and Declaration of Trust 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 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
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
(b) By-Laws
(i) Amended and Restated By-Laws as of April 25, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amendment to By-Laws dated October 27, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(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) 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
(iii) 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
(iv) 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
(v) 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
(vi) 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
(vii) 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
(viii) 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
(ix) 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
(x) 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
(xi) Investment Advisory Agreement between the Registrant, on
behalf of Franklin U.S. Long-Short Fund, and Franklin
Advisers, Inc. dated February 18, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(xii) Investment Advisory Agreement between the Registrant, on
behalf of Franklin Large Cap Growth Fund, and Franklin
Advisers, Inc. dated May 18, 1999
(xiii) Investment Advisory Agreement between the Registrant, on
behalf of Franklin Aggressive Growth Fund, and Franklin
Advisers, Inc. dated May 18, 1999
(e) Underwriting Contracts
(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 dated March 1,
1998
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(iv) Amendment of Amended and Restated Distribution Agreement
between the Registrant on behalf of Franklin Strategic
Income Fund, and Franklin/Templeton Distributors, Inc.
dated January 12, 1999
(v) Amendment of Amended and Restated Distribution Agreement
between the Registrant on behalf of all series except
Franklin Strategic Income Fund dated January 12, 1999
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(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 February 27, 1998 to Master Custody
Agreement between Registrant and Bank of New York dated
February 16, 1996
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(v) Foreign Custody Manager Agreement between the Registrant
and The Bank of New York dated February 27, 1998
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services dated
October 1, 1996 and Amendment thereto dated April 30,
1998 between Franklin Advisers, Inc. and Franklin
Templeton Services, Inc.
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(ii) 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
(iii) Fund Administration Agreement between the Registrant, on
behalf of Franklin U.S. Long-Short Fund, and Franklin
Templeton Services, Inc. dated February 18, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(iv) Fund Administration Agreement between the Registrant, on
behalf of Franklin Large Cap Growth Fund, and Franklin
Templeton Services, Inc. dated May 18, 1999
(v) Fund Administration Agreement between the Registrant, on
behalf of Franklin Aggressive Growth Fund, and Franklin
Templeton Services, Inc. dated May 18, 1999
(i) Legal Opinion
(i) Opinion and consent of counsel dated March 8, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(j) Other Opinions
(i) Consent of Independent Auditors dated June 25, 1999
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding for Franklin California Growth
Fund 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 Biotechnology
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
(viii) Letter of Understanding for Franklin U.S. Long-Short Fund
dated March 11, 1999
(ix) Letter of Understanding for Franklin Large Cap Growth
Fund dated June 4, 1999
(x) Letter of Understanding for Franklin Aggressive Growth
Fund dated June 22, 1999
(m) Rule 12b-1 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., dated
September 15, 1997
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
Filing: Post-Effective Amendment No. 28 to Registration
Statement on Form N-1A
File No. 33-39088
Filing date: April 21, 1998
(xi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin California Growth Fund
- Class B, and Franklin/Templeton Distributors, Inc.
dated October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Global Health Care Fund
- Class B, and Franklin/Templeton Distributors, Inc.
dated October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xiii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Global Utilities Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xiv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Strategic Income Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin U.S. Long-Short Fund,
and Franklin Templeton Distributors, Inc. dated April 15,
1999
(xvi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Large Cap Growth Fund -
Class A, and Franklin Templeton Distributors, Inc. dated
May 18, 1999
(xvii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Aggressive Growth Fund
- Class A, and Franklin Templeton Distributors, Inc.
dated May 18, 1999
(xviii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Large Cap Growth Fund
- Class B, and Franklin/Templeton Distributors, Inc.
dated May 18, 1999
(xix) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Aggressive Growth Fund
- Class B, and Franklin/Templeton Distributors, Inc.
dated May 18, 1999
(xx) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Large Cap Growth Fund
- Class C, and Franklin/Templeton Distributors, Inc.
dated May 18, 1999
(xxi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Aggressive Growth Fund
- Class C, and Franklin/Templeton Distributors, Inc.
dated May 18, 1999
(o) Rule 18f-3 Plan
(i) Multiple Class Plan for Franklin Global Utilities Fund
dated April 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(ii) Multiple Class Plan for Franklin California Growth Fund
dated April 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(iii) Multiple Class Plan for Franklin Global Health Care Fund
dated April 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(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 18, 1999
Filing: Post-Effective Amendment No. 32 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(vii) Multiple Class Plan for Franklin Large Cap Growth Fund
dated May 18, 1999
(viii) Multiple Class Plan for Franklin Aggressive Growth Fund
dated May 18, 1999
(p) Power of Attorney
(i) Power of Attorney for Franklin Strategic Series dated May
18, 1999
(27) Financial Data Schedule
Not Applicable
Item 24 Persons Controlled by or Under Common Control with the Fund
None
Item 25. 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 26 Business and Other Connections of the 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 27 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 Floating Rate Trust
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
Franklin Valuemark Funds
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director
and officer of Distributors is incorporated by reference to Part B of this
N-1A and Schedule A of Form BD filed by Distributors with the Securities and
Exchange Commission pursuant to the Securities Act of 1934 (SEC File No.
8-5889)
c) Not Applicable. Registrant's principal underwriter is an affiliated
person of an affiliated person of the Registrant.
Item 28 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 29 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 30 Undertakings
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant 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 28th
day of June, 1999.
Franklin Strategic Series
(Registrant)
By:/s/Leiann Nuzum
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
Rupert H. Johnson, Jr.* Principal Executive Officer
Rupert H. Johnson, Jr. and Trustee
Dated: June 28, 1999
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: June 28, 1999
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: June 28, 1999
Frank H. Abbott, III* Trustee
Frank H. Abbott, III Dated: June 28, 1999
Harris J. Ashton* Trustee
Harris J. Ashton Dated: June 28, 1999
Harmon E. Burns* Trustee
Harmon E. Burns Dated: June 28, 1999
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: June 28, 1999
Edith E. Holiday* Trustee
Edith E. Holiday Dated: June 28, 1999
Charles B. Johnson* Trustee
Charles B. Johnson Dated: June 28, 1999
Frank W.T. LaHaye* Trustee
Frank W.T. LaHaye Dated: June 28, 1999
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: June 28, 1999
By:/s/Leiann Nuzum
Leiann Nuzum
Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
FRANKLIN STRATEGIC SERIES
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust dated *
January 22, 1991
EX-99.(a)(ii) Certificate of Trust dated January 22, *
1991
EX-99.(a)(iii) Certificate of Amendment to the *
Certificate of Trust dated November 19,
1991
EX-99.(a)(iv) Certificate of Amendment to the *
Certificate of Trust of Franklin
Strategic Series dated May 14, 1992
EX-99.(a)(v) Certificate of Amendment of Agreement *
and Declaration of Trust of Franklin
Strategic Series dated April 18, 1995
EX-99.(b)(i) Amended and Restated By-Laws as of April *
25, 1991
EX-99.(b)(ii) Amendment to By-Laws dated October 27, *
1994
EX-99.(d)(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.(d)(ii) Management Agreement between the *
Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin
Advisers, Inc., dated May 24, 1994
EX-99.(d)(iii) 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.(d)(iv) 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.(d)(v) Management Agreement between the *
Registrant, on behalf of Franklin Blue
Chip Fund, and Franklin Advisers, Inc.,
dated February 13, 1996
EX-99.(d)(vi) 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.(d)(vii) 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.(d)(viii) Amendment dated August 1, 1995 to the *
Management Agreement between the
Registrant, on behalf of Franklin Global
Health Care Fund, and Franklin Small Cap
Growth Fund, Franklin Global Utilities
Fund, and Franklin Natural Resources
Fund, and Franklin Advisers, Inc., dated
February 24, 1992
EX-99.(d)(ix) 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.(d)(x) Management Agreement between the *
Registrant, on behalf of Franklin
Biotechnology Discovery Fund, and
Franklin Advisers, Inc., dated July 15,
1997
EX-99.(d)(xi) Investment Advisory Agreement between *
the Registrant, on behalf of Franklin
U.S. Long-Short Fund, and Franklin
Advisers, Inc. dated February 18, 1999
EX-99.(d)(xii) Investment Advisory Agreement between Attached
the Registrant, on behalf of Franklin
Large Cap Growth Fund, and Franklin
Advisers, Inc. dated May 18, 1999
EX-99.(d)(xiii) Investment Advisory Agreement between Attached
the Registrant, on behalf of Franklin
Aggressive Growth Fund, and Franklin
Advisers, Inc. dated May 18, 1999
EX-99.(e)(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.(e)(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.(e)(iii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc.,
and Securities Dealers dated March 1,
1998
EX-99.(e)(iv) Amendment of Amended and Restated Attached
Distribution Agreement between the
Registrant on behalf of Franklin
Strategic Income Fund, and
Franklin/Templeton Distributors, Inc.
dated January 12, 1999
EX-99.(e)(v) Amendment of Amended and Restated Attached
Distribution Agreement between the
Registrant on behalf of all series
except Franklin Strategic Income Fund
dated January 12, 1999
EX-99.(g)(i) Master Custody Agreement between the *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between the *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, 1997 to Master *
Custody Agreement between Registrant and
Bank of New York dated February 16, 1996
EX-99.(g)(iv) Amendment dated February 27, 1998 to *
Master Custody Agreement between
Registrant and Bank of New York dated
February 16, 1996
EX-99.(g)(v) Foreign Custody Manager Agreement *
between the Registrant and The Bank of
New York dated February 27, 1998
EX-99.(h)(i) Subcontract for Fund Administrative *
Services dated October 1, 1996 and
Amendment thereto dated April 30, 1998
between Franklin Advisers, Inc. and
Franklin Templeton Services, Inc.
EX-99.(h)(ii) Administration Agreement between the *
Registrant, on behalf of Franklin
Biotechnology Discovery Fund, and
Franklin Templeton Services, Inc., dated
July 15, 1997
EX-99.(h)(iii) Fund Administration Agreement between *
the Registrant, on behalf of Franklin
U.S. Long-Short Fund, and Franklin
Templeton Services, Inc. dated February
18, 1999
EX-99.(h)(iv) Fund Administration Agreement between Attached
the Registrant, on behalf of Franklin
Large Cap Growth Fund, and Franklin
Templeton Services, Inc. dated May 18,
1999
EX-99.(h)(v) Fund Administration Agreement between Attached
the Registrant, on behalf of Franklin
Aggressive Growth Fund, and Franklin
Templeton Services, Inc. dated May 18,
1999
EX-99.(i)(i) Opinion and consent of counsel dated *
March 8, 1999
EX-99.(j)(i) Consent of Independent Auditors dated Attached
June 25, 1999
EX-99.(l)(i) Letter of Understanding for Franklin *
California Growth Fund dated August 20,
1991
EX-99.(l)(ii) Letter of Understanding for Franklin *
Global Utilities Fund - Class II dated
April 12, 1995
EX-99.(l)(iii) Letter of Understanding for Franklin *
Natural Resources Fund dated June 5, 1995
EX-99.(l)(iv) Letter of Understanding for Franklin *
California Growth Fund - Class II dated
August 30, 1996
EX-99.(l)(v) Letter of Understanding for Franklin *
Global Health Care Fund dated August 30,
1996
EX-99.(l)(vi) Letter of Understanding for Franklin *
Blue Chip Fund dated May 24, 1996
EX-99.(l)(vii) Letter of Understanding for Franklin *
Biotechnology Discovery Fund dated
September 5, 1997
EX-99.(l)(viii) Letter of Understanding for Franklin Attached
U.S. Long-Short Fund dated March 11, 1999
EX-99.(l)(ix) Letter of Understanding for Franklin Attached
Large Cap Growth Fund dated June 4, 1999
EX-99.(l)(x) Letter of Understanding for Franklin Attached
Aggressive Growth Fund dated June 22, 1999
EX-99.(m)(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.(m)(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.(m)(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.(m)(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.(m)(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.(m)(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.(m)(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.(m)(viii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of
Franklin Biotechnology Discovery Fund,
and Franklin/Templeton Distributors,
Inc., dated September 15, 1997
EX-99.(m)(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.(m)(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
EX-99.(m)(xi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of
California Growth Fund - Class B, and
Franklin/Templeton Distributors, Inc.
dated October 16, 1998
EX-99.(m)(xii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of
Franklin Global Health Care Fund - Class
B, and Franklin/Templeton Distributors,
Inc. dated October 16, 1998
EX-99.(m)(xiii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of
Franklin Global Utilities Fund - Class
B, and Franklin/Templeton Distributors,
Inc. dated October 16, 1998
EX-99.(m)(xiv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of
Franklin Strategic Income Fund - Class
B, and Franklin/Templeton Distributors,
Inc. dated October 16, 1998
EX-99.(m)(xv) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of
Franklin U.S. Long-Short Fund and
Franklin/Templeton Distributors, Inc.
dated April 15, 1999
EX-99.(m)(xvi) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of
Franklin Large Cap Growth Fund - Class A
and Franklin/Templeton Distributors,
Inc. dated May 18, 1999
EX-99.(m)(xvii) Distribution Plan pursuant to the Rule Attached
12b-1 between the Registrant, on behalf
of Franklin Aggressive Growth Fund -
Class A and Franklin/Templeton
Distributors, Inc. dated May 18, 1999
EX-99.(m)(xviii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of
Franklin Large Cap Growth Fund - Class
B, and Franklin/Templeton Distributors,
Inc. dated May 18, 1999
EX-99.(m)(xix) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of
Franklin Aggressive Growth Fund - Class
B, and Franklin/Templeton Distributors,
Inc. dated May 18, 1999
EX-99.(m)(xx) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of
Franklin Large Cap Growth Fund - Class
C, and Franklin/Templeton Distributors,
Inc. dated May 18, 1999
EX-99.(m)(xxi) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant, on behalf of
Franklin Aggressive Growth Fund - Class
C, and Franklin/Templeton Distributors,
Inc. dated May 18, 1999
EX-99.(o)(i) Multiple Class Plan for Franklin Global *
Utilities Fund dated April 16, 1998
EX-99.(o)(ii) Multiple Class Plan for Franklin *
California Growth Fund dated April 16,
1998
EX-99.(o)(iii) Multiple Class Plan for Franklin Global *
Health Care Fund dated April 16, 1998
EX-99.(o)(iv) Multiple Class Plan for Franklin Small *
Cap Growth Fund dated June 18, 1996
EX-99.(o)(v) Multiple Class Plan for Franklin Natural *
Resources Fund dated June 18, 1996
EX-99.(o)(vi) Multiple Class Plan for Franklin *
Strategic Income Fund dated February 18,
1999
EX-99.(o)(vii) Multiple Class Plan for Franklin Large Attached
Cap Growth Fund dated May 18, 1999
EX-99.(o)(viii) Multiple Class Plan for Franklin Attached
Aggressive Growth Fund dated May 18, 1999
EX-99.(p)(i) Power of Attorney for Franklin Strategic Attached
Series dated May 18, 1999
* Incorporated by reference
FRANKLIN STRATEGIC SERIES
on behalf of
FRANKLIN LARGE CAP GROWTH FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN STRATEGIC
SERIES a Delaware business trust (the "Trust"), on behalf of FRANKLIN LARGE
CAP GROWTH FUND (the "Fund"), a series of the Trust, and FRANKLIN ADVISERS,
INC., a California corporation, (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust desires to avail itself of the services, information, advice,
assistance and facilities of an investment adviser and to have an investment
adviser perform various management, statistical, research, investment
advisory and other services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment
companies and other investment counseling clients, and desires to provide
these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser
to manage the investment and reinvestment of the Fund's assets and to
administer its affairs, subject to the direction of the Board of Trustees and
the officers of the Trust, for the period and on the terms hereinafter set
forth. The Adviser hereby accepts such employment and agrees during such
period to render the services and to assume the obligations herein set forth
for the compensation herein provided. The Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Fund or the Trust in any way or
otherwise be deemed an agent of the Fund or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets subject
to and in accordance with the investment objectives and policies of the Fund
and any directions which the Trust's Board of Trustees may issue from time to
time. In pursuance of the foregoing, the Adviser shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. The Adviser shall render or cause
to be rendered regular reports to the Trust, at regular meetings of its Board
of Trustees and at such other times as may be reasonably requested by the
Trust's Board of Trustees, of (i) the decisions made with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement
shall not be deemed to obligate the Adviser to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set
forth in this section have been satisfied. The parties recognize that there
are likely to be many cases in which different brokers are equally able to
provide such best price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable to choose those
brokers who furnish research, statistical, quotations and other information
to the Fund and the Adviser in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and
so long as the Board of Trustees determines that the Fund will benefit,
directly or indirectly, by doing so, the Adviser may place orders with a
broker who charges a commission for that transaction which is in excess of
the amount of commission that another broker would have charged for effecting
that transaction, provided that the excess commission is reasonable in
relation to the value of "brokerage and research services" (as defined in
Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that
broker.
Accordingly, the Trust and the Adviser agree that the
Adviser shall select brokers for the execution of the Fund's transactions
from among:
(i) Those brokers and dealers who provide quotations
and other services to the Fund, specifically including
the quotations necessary to determine the Fund's net
assets, in such amount of total brokerage as may
reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to securities,
actual or potential, of the Fund, or which place the
Adviser in a better position to make decisions in
connection with the management of the Fund's assets and
securities, whether or not such data may also be useful
to the Adviser and its affiliates in managing other
portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Fund may
also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio
transactions.
(c) When the Adviser has determined that the Fund
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules
of any securities exchange or association of which Distributors may be a
member. Neither the Adviser nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel beyond that already
committed (other than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This Agreement
shall not obligate the Adviser or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting,
or (ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless
the Trust on behalf of the Fund shall enter into an agreement with the
Adviser and/or Distributors to reimburse them for all such expenses connected
with attempting to collect such fees, including legal fees and expenses and
that portion of the compensation due to their employees which is attributable
to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage
business has been placed by the Adviser, on behalf of the Fund, with brokers
falling into each of the categories referred to above and the manner in which
the allocation has been accomplished.
(e) The Adviser agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Adviser's paramount duty to obtain the
best net price and execution for the Fund.
(f) Decisions on proxy voting shall be made by the
Adviser unless the Board of Trustees determines otherwise. Pursuant to its
authority, Adviser shall have the power to vote, either in person or by
proxy, all securities in which the Fund may be invested from time to time,
and shall not be required to seek or take instructions from the Fund with
respect thereto. Adviser shall not be expected or required to take any
action other than the rendering of investment-related advice with respect to
lawsuits involving securities presently or formerly held in the Fund, or the
issuers thereof, including actions involving bankruptcy. Should Adviser
undertake litigation against an issuer on behalf of the Fund, the Fund agrees
to pay its portion of any applicable legal fees associated with the action or
to forfeit any claim to any assets Adviser may recover and, in such case,
agrees to hold Adviser harmless for excluding the Fund from such action. In
the case of class action suits involving issuers held in the Fund, Adviser
may include information about the Fund for purposes of participating in any
settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The
Adviser, its officers and employees will make available and provide accounting
and statistical information required by the Fund in the preparation of
registration statements, reports and other documents required by federal and
state securities laws and with such information as the Fund may reasonably
request for use in the preparation of such documents or of other materials
necessary or helpful for the underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all
of its own expenses other than those expressly assumed by the Adviser herein,
which expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;
E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting
service used on its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee
in cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Adviser, during the preceding month,
on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the
net assets of the Fund shall be determined in the same manner as that Fund
uses to compute the value of its net assets in connection with the
determination of the net asset value of its shares, all as set forth more
fully in the Fund's current prospectus and statement of additional
information. The rate of the management fee payable by the Fund shall be
calculated daily at the following annual rates:
0.500% of the value of its net assets up to and including
$500,000,000; and
0.400% of the value of its net assets over $500,000,000 up
to and including $1,000,000,000; and
0.350% of the value of its net assets over $1,000,000,000
up to and including $1,500,000,000; and
0.300% of the value of its net assets over $1,500,000,000
up to and including $6,500,000,000; and
0.275% of the value of its net assets over $6,500,000,000
up to and including $11,500,000,000; and
0.250% of the value of its net assets over $11,500,000,000
up to and including $16,500,000,000; and
0.240% of the value of its net assets over $16,500,000,000
up to and including $19,000,000,000; and
0.230% of the value of its net assets over $19,000,000,000
up to and including $21,500,000,000; and
0.220% of the value of its net assets over $21,500,000,000.
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith and to the extent necessary to comply with
the limitations on expenses which may be borne by the Fund as set forth in
the laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. The Adviser may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Adviser shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee, or any limitation of the Fund's expenses, as if such waiver or
limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the
Fund hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to
and in accordance with the Agreement and Declaration of Trust and By-Laws of
the Trust and Section 10(a) of the 1940 Act, it is understood that trustees,
officers, agents and shareholders of the Trust are or may be interested in
the Adviser or its affiliates as directors, officers, agents or stockholders;
that directors, officers, agents or stockholders of the Adviser or its
affiliates are or may be interested in the Trust as trustees, officers,
agents, shareholders or otherwise; that the Adviser or its affiliates may be
interested in the Fund as shareholders or otherwise; and that the effect of
any such interests shall be governed by said Agreement and Declaration of
Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Adviser, the Adviser shall not be subject to liability to the
Trust or the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security
by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Adviser or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Adviser
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Adviser or any of its affiliates or any of
their officers, directors, employees or stockholders. The Adviser shall not
be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Adviser or any of its affiliates from the sale of his
shares of the Adviser, or similar matters. So long as this Agreement is in
effect, the Adviser shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Adviser therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against
the Adviser or others for costs, expenses or damages heretofore incurred by
the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Adviser, from liability in violation of Sections 17(h) and (i) of the 1940
Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless
sooner terminated as hereinafter provided and shall continue in effect
thereafter for periods not exceeding one (1) year so long as such
continuation is approved at least annually (i) by a vote of a majority of the
outstanding voting securities of each Fund or by a vote of the Board of
Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of
the Trust who are not parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment
of any penalty either by vote of the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Fund on 60
days' written notice to the Adviser;
(ii) shall immediately terminate with respect to the
Fund in the event of its assignment; and
(iii) may be terminated by the Adviser on 60 days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any
office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 18th day of May 1999.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN LARGE CAP GROWTH FUND
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By:/s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
FRANKLIN STRATEGIC SERIES
on behalf of
FRANKLIN AGGRESSIVE GROWTH FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN STRATEGIC
SERIES a Delaware business trust (the "Trust"), on behalf of FRANKLIN
AGGRESSIVE GROWTH FUND (the "Fund"), a series of the Trust, and FRANKLIN
ADVISERS, INC., a California corporation, (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its
By-Laws and its Registration Statements under the 1940 Act and the Securities
Act of 1933, all as heretofore and hereafter amended and supplemented; and
the Trust desires to avail itself of the services, information, advice,
assistance and facilities of an investment adviser and to have an investment
adviser perform various management, statistical, research, investment
advisory and other services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment
companies and other investment counseling clients, and desires to provide
these services to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser
to manage the investment and reinvestment of the Fund's assets and to
administer its affairs, subject to the direction of the Board of Trustees and
the officers of the Trust, for the period and on the terms hereinafter set
forth. The Adviser hereby accepts such employment and agrees during such
period to render the services and to assume the obligations herein set forth
for the compensation herein provided. The Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Fund or the Trust in any way or
otherwise be deemed an agent of the Fund or the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to
assume the following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets subject
to and in accordance with the investment objectives and policies of the Fund
and any directions which the Trust's Board of Trustees may issue from time to
time. In pursuance of the foregoing, the Adviser shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as
may be necessary to implement the same. Such determinations and services
shall include determining the manner in which any voting rights, rights to
consent to corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. The Adviser shall render or cause
to be rendered regular reports to the Trust, at regular meetings of its Board
of Trustees and at such other times as may be reasonably requested by the
Trust's Board of Trustees, of (i) the decisions made with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, (ii) the reasons for such decisions and (iii) the extent to which
those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement
shall not be deemed to obligate the Adviser to place any order solely on the
basis of obtaining the lowest commission rate if the other standards set
forth in this section have been satisfied. The parties recognize that there
are likely to be many cases in which different brokers are equally able to
provide such best price and execution and that, in selecting among such
brokers with respect to particular trades, it is desirable to choose those
brokers who furnish research, statistical, quotations and other information
to the Fund and the Adviser in accordance with the standards set forth
below. Moreover, to the extent that it continues to be lawful to do so and
so long as the Board of Trustees determines that the Fund will benefit,
directly or indirectly, by doing so, the Adviser may place orders with a
broker who charges a commission for that transaction which is in excess of
the amount of commission that another broker would have charged for effecting
that transaction, provided that the excess commission is reasonable in
relation to the value of "brokerage and research services" (as defined in
Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that
broker.
Accordingly, the Trust and the Adviser agree that the
Adviser shall select brokers for the execution of the Fund's transactions
from among:
(i) Those brokers and dealers who provide quotations
and other services to the Fund, specifically including
the quotations necessary to determine the Fund's net
assets, in such amount of total brokerage as may
reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to securities,
actual or potential, of the Fund, or which place the
Adviser in a better position to make decisions in
connection with the management of the Fund's assets and
securities, whether or not such data may also be useful
to the Adviser and its affiliates in managing other
portfolios or advising other clients, in such amount of
total brokerage as may reasonably be required. Provided
that the Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the Fund may
also be considered as a factor in the selection of
broker-dealers to execute the Fund's portfolio
transactions.
(c) When the Adviser has determined that the Fund
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules
of any securities exchange or association of which Distributors may be a
member. Neither the Adviser nor Distributors shall be obligated to make any
additional commitments of capital, expense or personnel beyond that already
committed (other than normal periodic fees or payments necessary to maintain
its corporate existence and membership in the National Association of
Securities Dealers, Inc.) as of the date of this Agreement. This Agreement
shall not obligate the Adviser or Distributors (i) to act pursuant to the
foregoing requirement under any circumstances in which they might reasonably
believe that liability might be imposed upon them as a result of so acting,
or (ii) to institute legal or other proceedings to collect fees which may be
considered to be due from others to it as a result of such a tender, unless
the Trust on behalf of the Fund shall enter into an agreement with the
Adviser and/or Distributors to reimburse them for all such expenses connected
with attempting to collect such fees, including legal fees and expenses and
that portion of the compensation due to their employees which is attributable
to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage
business has been placed by the Adviser, on behalf of the Fund, with brokers
falling into each of the categories referred to above and the manner in which
the allocation has been accomplished.
(e) The Adviser agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Adviser's paramount duty to obtain the
best net price and execution for the Fund.
(f) Decisions on proxy voting shall be made by the
Adviser unless the Board of Trustees determines otherwise. Pursuant to its
authority, Adviser shall have the power to vote, either in person or by
proxy, all securities in which the Fund may be invested from time to time,
and shall not be required to seek or take instructions from the Fund with
respect thereto. Adviser shall not be expected or required to take any
action other than the rendering of investment-related advice with respect to
lawsuits involving securities presently or formerly held in the Fund, or the
issuers thereof, including actions involving bankruptcy. Should Adviser
undertake litigation against an issuer on behalf of the Fund, the Fund agrees
to pay its portion of any applicable legal fees associated with the action or
to forfeit any claim to any assets Adviser may recover and, in such case,
agrees to hold Adviser harmless for excluding the Fund from such action. In
the case of class action suits involving issuers held in the Fund, Adviser
may include information about the Fund for purposes of participating in any
settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The
Adviser, its officers and employees will make available and provide accounting
and statistical information required by the Fund in the preparation of
registration statements, reports and other documents required by federal and
state securities laws and with such information as the Fund may reasonably
request for use in the preparation of such documents or of other materials
necessary or helpful for the underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all
of its own expenses other than those expressly assumed by the Adviser herein,
which expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;
E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the
Trust's legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable
state laws; including the printing and mailing of prospectuses to its
shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting
service used on its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee
in cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services
rendered and obligations assumed by the Adviser, during the preceding month,
on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the
net assets of the Fund shall be determined in the same manner as that Fund
uses to compute the value of its net assets in connection with the
determination of the net asset value of its shares, all as set forth more
fully in the Fund's current prospectus and statement of additional
information. The rate of the management fee payable by the Fund shall be
calculated daily at the following annual rates:
0.500% of the value of its net assets up to and including
$500,000,000; and
0.400% of the value of its net assets over $500,000,000 up
to and including $1,000,000,000; and
0.350% of the value of its net assets over $1,000,000,000
up to and including $1,500,000,000; and
0.300% of the value of its net assets over $1,500,000,000
up to and including $6,500,000,000; and
0.275% of the value of its net assets over $6,500,000,000
up to and including $11,500,000,000; and
0.250% of the value of its net assets over $11,500,000,000
up to and including $16,500,000,000; and
0.240% of the value of its net assets over $16,500,000,000
up to and including $19,000,000,000; and
0.230% of the value of its net assets over $19,000,000,000
up to and including $21,500,000,000; and
0.220% of the value of its net assets over $21,500,000,000.
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash
payments of tender offer solicitation fees less certain costs and expenses
incurred in connection therewith and to the extent necessary to comply with
the limitations on expenses which may be borne by the Fund as set forth in
the laws, regulations and administrative interpretations of those states in
which the Fund's shares are registered. The Adviser may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated
as a reduction in purchase price of its services. The Adviser shall be
contractually bound hereunder by the terms of any publicly announced waiver
of its fee, or any limitation of the Fund's expenses, as if such waiver or
limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the
Fund hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to
and in accordance with the Agreement and Declaration of Trust and By-Laws of
the Trust and Section 10(a) of the 1940 Act, it is understood that trustees,
officers, agents and shareholders of the Trust are or may be interested in
the Adviser or its affiliates as directors, officers, agents or stockholders;
that directors, officers, agents or stockholders of the Adviser or its
affiliates are or may be interested in the Trust as trustees, officers,
agents, shareholders or otherwise; that the Adviser or its affiliates may be
interested in the Fund as shareholders or otherwise; and that the effect of
any such interests shall be governed by said Agreement and Declaration of
Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the
part of the Adviser, the Adviser shall not be subject to liability to the
Trust or the Fund or to any shareholder of the Fund for any act or omission
in the course of, or connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or sale of any security
by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to
reimburse the Trust for any and all costs, expenses, and counsel and
trustees' fees reasonably incurred by the Trust in the preparation, printing
and distribution of proxy statements, amendments to its Registration
Statement, holdings of meetings of its shareholders or trustees, the conduct
of factual investigations, any legal or administrative proceedings (including
any applications for exemptions or determinations by the Securities and
Exchange Commission) which the Trust incurs as the result of action or
inaction of the Adviser or any of its affiliates or any of their officers,
directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Adviser
or its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken
without the prior, express approval of the Trust's Board of Trustees; or,
(ii) is within the control of the Adviser or any of its affiliates or any of
their officers, directors, employees or stockholders. The Adviser shall not
be obligated pursuant to the provisions of this Subparagraph 6(B), to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any
stockholder of the Adviser or any of its affiliates from the sale of his
shares of the Adviser, or similar matters. So long as this Agreement is in
effect, the Adviser shall pay to the Trust the amount due for expenses
subject to this Subparagraph 6(B) within 30 days after a bill or statement
has been received by the Adviser therefor. This provision shall not be
deemed to be a waiver of any claim the Trust may have or may assert against
the Adviser or others for costs, expenses or damages heretofore incurred by
the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Adviser, from liability in violation of Sections 17(h) and (i) of the 1940
Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless
sooner terminated as hereinafter provided and shall continue in effect
thereafter for periods not exceeding one (1) year so long as such
continuation is approved at least annually (i) by a vote of a majority of the
outstanding voting securities of each Fund or by a vote of the Board of
Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of
the Trust who are not parties to the Agreement (other than as Trustees of the
Trust), cast in person at a meeting called for the purpose of voting on the
Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment
of any penalty either by vote of the Board of Trustees of the Trust or by
vote of a majority of the outstanding voting securities of the Fund on 60
days' written notice to the Adviser;
(ii) shall immediately terminate with respect to the
Fund in the event of its assignment; and
(iii) may be terminated by the Adviser on 60 days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any
office of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and effective on the 18th day of May 1999.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN AGGRESSIVE GROWTH FUND
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN ADVISERS, INC.
By:/s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
FRANKLIN STRATEGIC SERIES
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Amended and Restated Distribution Agreement
For Franklin Strategic Income Fund ONLY
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Amended and Restated
Distribution Agreement (the "Agreement") currently in effect between you and
us. As used herein all capitalized terms herein have the meanings set forth
in the Agreement. We have been authorized to execute and deliver the
Amendment to you by a resolution of our Board passed at a meeting at which a
majority of Board members, including a majority who are not otherwise
interested persons of the Fund and who are not interested persons of our
investment adviser, its related organizations or of you or your related
organizations, were present and voted in favor of such resolution approving
the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into
a distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share
shall be earned when such Class B Share is sold and shall be
payable from time to time as provided in the Class B Plan. The
distribution fee payable to you as provided in the Class B Plan
shall be payable without offset, defense or counterclaim (it
being understood by the parties hereto that nothing in this
sentence shall be deemed a waiver by the Fund of any claim the
Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance
Company Limited ("LFL") or other persons providing funds to you
to cover expenses referred to in Section 2(a) of the Class B Plan
and to cause our custodian to pay the service fee to you for
payment to dealers or others or directly to others to cover
expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL
in exchange for funds that you will use to cover expenses
referred to in Section 2(a) of the Class B Plan. In recognition
that we will benefit from your arrangement with LFL, we agree
that, in addition to the provisions of Section 7 (iii) of the
Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B
Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding
sentence shall survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services
agent (the "Transfer Agent") to withhold from redemption proceeds
payable to holders of the Shares all contingent deferred sales
charges properly payable by such holders in accordance with the
terms of our then current prospectuses and statements of
additional information (each such sales charge, a "CDSC"). Upon
receipt of an order for redemption, the Transfer Agent shall
direct our custodian to transfer such redemption proceeds to a
general trust account. We shall then cause the Transfer Agent to
pay over to you or your assigns from the general trust account
such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of
Shares. CDSCs shall be payable without offset, defense or
counterclaim (it being understood that nothing in this sentence
shall be deemed a waiver by us of any claim we may have against
you.) You may direct that the CDSCs payable to you be paid to
any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN STRATEGIC SERIES
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By:/s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: January 12, 1999
FRANKLIN STRATEGIC SERIES
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: Amendment of Amended and Restated Distribution Agreement
For All Series EXCEPT Franklin Strategic Income Fund
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund," which is registered under the
Investment Company Act of 1940, as amended (the "1940 Act") and whose shares
are registered under the Securities Act of 1933, as amended (the "1933
Act"). You have informed us that your company is registered as a
broker-dealer under the provisions of the Securities Exchange Act of 1934, as
amended (the "1934 Act") and that your company is a member of the National
Association of Securities Dealers, Inc.
This agreement is an amendment (the "Amendment") of the Amended and Restated
Distribution Agreement (the "Agreement") currently in effect between you and
us. As used herein all capitalized terms herein have the meanings set forth
in the Agreement. We have been authorized to execute and deliver the
Amendment to you by a resolution of our Board passed at a meeting at which a
majority of Board members, including a majority who are not otherwise
interested persons of the Fund and who are not interested persons of our
investment adviser, its related organizations or of you or your related
organizations, were present and voted in favor of such resolution approving
the Amendment.
To the extent that any provision of the Amendment conflicts with any
provision of the Agreement, the Amendment provision supersedes the Agreement
provision. The Agreement and the Amendment together constitute the entire
agreement between the parties hereto and supersede all prior oral or written
agreements between the parties hereto.
Section 4. entitled "Compensation" is amended by adding the following
sentences at the end of Subsection 4.B:
The compensation provided in the Class B Distribution Plan
applicable to Class B Shares (the "Class B Plan") is divided into
a distribution fee and a service fee, each of which fees is in
compensation for different services to be rendered to the Fund.
Subject to the termination provisions in the Class B Plan, the
distribution fee with respect to the sale of a Class B Share
shall be earned when such Class B Share is sold and shall be
payable from time to time as provided in the Class B Plan. The
distribution fee payable to you as provided in the Class B Plan
shall be payable without offset, defense or counterclaim (it
being understood by the parties hereto that nothing in this
sentence shall be deemed a waiver by the Fund of any claim the
Fund may have against you). You may direct the Fund to cause our
custodian to pay such distribution fee to Lightning Finance
Company Limited ("LFL") or other persons providing funds to you
to cover expenses referred to in Section 2(a) of the Class B Plan
and to cause our custodian to pay the service fee to you for
payment to dealers or others or directly to others to cover
expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive
certain distribution fees with respect to Class B Shares to LFL
in exchange for funds that you will use to cover expenses
referred to in Section 2(a) of the Class B Plan. In recognition
that we will benefit from your arrangement with LFL, we agree
that, in addition to the provisions of Section 7 (iii) of the
Class B Plan, we will not pay to any person or entity, other than
LFL, any such assigned distribution fees related to Class B
Shares sold by you prior to the termination of either the
Agreement or the Class B Plan. We agree that the preceding
sentence shall survive termination of the Agreement.
Section 4. entitled "Compensation" is amended by adding the following
Subsection 4.C. after Subsection 4.B.:
C. With respect to the sales commission on the redemption of
Shares of each series and class of the Fund as provided in
Subsection 4.A. above, we will cause our shareholder services
agent (the "Transfer Agent") to withhold from redemption proceeds
payable to holders of the Shares all contingent deferred sales
charges properly payable by such holders in accordance with the
terms of our then current prospectuses and statements of
additional information (each such sales charge, a "CDSC"). Upon
receipt of an order for redemption, the Transfer Agent shall
direct our custodian to transfer such redemption proceeds to a
general trust account. We shall then cause the Transfer Agent to
pay over to you or your assigns from the general trust account
such CDSCs properly payable by such holders as promptly as
possible after the settlement date for each such redemption of
Shares. CDSCs shall be payable without offset, defense or
counterclaim (it being understood that nothing in this sentence
shall be deemed a waiver by us of any claim we may have against
you.) You may direct that the CDSCs payable to you be paid to
any other person.
Section 11. entitled "Conduct of Business" is amended by replacing the
reference in the second paragraph to "Rules of Fair Practice" with a
reference to the "Conduct Rules".
Section 16. entitled "Miscellaneous" is amended in the first paragraph by
changing the first letter of each of the words in each of the terms in
quotations marks, except "Parent," to the lower case and giving to the term
"assignment" the meaning as set forth only in the 1940 Act and the Rules and
Regulations thereunder (and not as set forth in the 1933 Act and the Rules
and Regulations thereunder.)
If the foregoing meets with your approval, please acknowledge your acceptance
by signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN STRATEGIC SERIES
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
Accepted:
Franklin/Templeton Distributors, Inc.
By:/s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Dated: January 12, 1999
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 18, 1999 between FRANKLIN STRATEGIC
SERIES (the "Investment Company"), an investment company registered under the
Investment Company Act of 1940 ("1940 Act"), on behalf of FRANKLIN LARGE CAP
GROWTH FUND (the "Fund"), and Franklin Templeton Services, Inc.
("Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to
Shareholders, notices of dividends, capital gains distributions and tax
credits; and attending to routine correspondence and other communications
with individual Shareholders when asked to do so by the Fund's shareholder
servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by
the Fund; providing fund accounting services, including preparing and
supervising publication of daily net asset value quotations, periodic
earnings reports and other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law
firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and
the rules and regulations thereunder, supervising compliance with
recordkeeping requirements imposed by state laws or regulations, and
maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and
foreign laws and regulations applicable to the operation of investment
companies; the Fund's investment objectives, policies and restrictions; and
the Code of Ethics and other policies adopted by the Investment Company's
Board of Trustees ("Board") or by the Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements, and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund
to pay any compensation to the officers of the Investment Company. Nothing
in this Agreement shall obligate the Administrator to pay for the services of
third parties, including attorneys, auditors, printers, pricing services or
others, engaged directly by the Fund to perform services on behalf of the
Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.20% of the average
daily net assets of each Fund during the month preceding each payment.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee, or
any limitation of the affected Fund's expenses, as if such waiver or
limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved
by the vote of a majority of the Board of the Investment Company in office at
the time or by the vote of a majority of the outstanding voting securities of
the Investment Company (as defined by the 1940 Act); and shall automatically
and immediately terminate in the event of its assignment (as defined by the
1940 Act
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with,
rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN LARGE CAP GROWTH FUND
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By:/s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 18, 1999 between FRANKLIN STRATEGIC
SERIES (the "Investment Company"), an investment company registered under the
Investment Company Act of 1940 ("1940 Act"), on behalf of FRANKLIN AGGRESSIVE
GROWTH FUND (the "Fund"), and Franklin Templeton Services, Inc.
("Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on
behalf of the Fund;
(d) supervising preparation of periodic reports to
Shareholders, notices of dividends, capital gains distributions and tax
credits; and attending to routine correspondence and other communications
with individual Shareholders when asked to do so by the Fund's shareholder
servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by
the Fund; providing fund accounting services, including preparing and
supervising publication of daily net asset value quotations, periodic
earnings reports and other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law
firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and
the rules and regulations thereunder, supervising compliance with
recordkeeping requirements imposed by state laws or regulations, and
maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and
foreign laws and regulations applicable to the operation of investment
companies; the Fund's investment objectives, policies and restrictions; and
the Code of Ethics and other policies adopted by the Investment Company's
Board of Trustees ("Board") or by the Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements, and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund
to pay any compensation to the officers of the Investment Company. Nothing
in this Agreement shall obligate the Administrator to pay for the services of
third parties, including attorneys, auditors, printers, pricing services or
others, engaged directly by the Fund to perform services on behalf of the
Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.20% of the average
daily net assets of each Fund during the month preceding each payment.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee, or
any limitation of the affected Fund's expenses, as if such waiver or
limitation were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved
by the vote of a majority of the Board of the Investment Company in office at
the time or by the vote of a majority of the outstanding voting securities of
the Investment Company (as defined by the 1940 Act); and shall automatically
and immediately terminate in the event of its assignment (as defined by the
1940 Act
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with,
rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN AGGRESSIVE GROWTH FUND
By:/s/Deborah R. Gatzek
Deborah R. Gatzek
Vice President & Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By:/s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No.
37 to the Registration Statement of Franklin Strategic Series on Form N-1A,
File No. 33-39088, of our report dated June 4, 1999, 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, 1999, filed with the Securities and Exchange Commission
pursuant to section 30(d) of the Investment Company Act of 1940, which is
incorporated by reference in the Registration Statement. We also consent to
the reference to our firm under the captions "Financial Highlights" and
"Auditor."
PricewaterhouseCoopers LLP
San Francisco, California
June 25, 1999
Franklin Reosurces, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 94403-7777
tel 650/312-3000
March 11, 1999
FRANKLIN STRATEGIC SERIES
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to invest $100 on March 10, 1999 and $999,900 on March 11,
1999 in the Class A shares (the "Shares") of the Franklin U.S. Long-Short
Fund (the "Fund"), a series of Franklin Strategic Series (the "Trust") at a
purchase price of $10.00 per share. We will purchase the Shares in a private
offering prior to the effectiveness of the Form N-1A registration statement
filed by the Trust on behalf of the Fund under the Securities Act of 1933.
The Shares are being purchased as the initial advance in connection with the
operations of the Fund.
We consent to the filing of this Investment Letter as an exhibit to the
Form N-1A registration statement of the Trust.
Sincerely,
FRANKLIN RESOURCES, INC.
By: /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Franklin Reosurces, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 94403-7777
tel 650/312-3000
June 4, 1999
FRANKLIN STRATEGIC SERIES
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire the shares of beneficial interest (the "Shares")
of each Class ("class") of Franklin Large Cap Growth Fund (the "Fund"), a
series of Franklin Strategic Series (the "Trust"), as indicated in the chart
below.
Fund and Class #Shares Price/Share Total
- --------------------------------------------------------------------------------
Franklin Large Cap
Growth Fund - Class A 75,000 $10.00 $750,000
- --------------------------------------------------------------------------------
Franklin Large Cap
Growth Fund - Class B 25,000 $10.00 $250,000
- --------------------------------------------------------------------------------
Franklin Large Cap
Growth Fund - Class C 25,000 $10.00 $250,000
- --------------------------------------------------------------------------------
Franklin Large Cap
Growth Fund - 75,000 $10.00 $750,000
Advisor Class
- --------------------------------------------------------------------------------
Total $2,000,000
- --------------------------------------------------------------------------------
We will purchase the Shares in a private offering prior to the
effectiveness of the Form N-1A registration statement filed by the Trust on
behalf of the Fund under the Securities Act of 1933. The Shares are being
purchased as the initial advance in connection with the operations of the
Fund.
We consent to the filing of this Investment Letter as an exhibit to the
Form N-1A registration statement of the Trust.
Sincerely,
FRANKLIN RESOURCES, INC.
By: /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Franklin Reosurces, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, CA 94403-7777
tel 650/312-3000
June 22, 1999
FRANKLIN STRATEGIC SERIES
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire the shares of beneficial interest (the "Shares")
of each Class ("class") of Franklin Aggressive Growth Fund (the "Fund"), a
series of Franklin Strategic Series (the "Trust"), as indicated in the chart
below.
Fund and Class #Shares Price/Share Total
- --------------------------------------------------------------------------------
Franklin Aggressive
Growth Fund - Class A 75,000 $10.00 $750,000
- --------------------------------------------------------------------------------
Franklin Aggressive
Growth Fund - Class B 25,000 $10.00 $250,000
- --------------------------------------------------------------------------------
Franklin Aggressive
Growth Fund - Class C 25,000 $10.00 $250,000
- --------------------------------------------------------------------------------
Franklin Aggressive
Growth Fund - 75,000 $10.00 $750,000
Advisor Class
- --------------------------------------------------------------------------------
Total $2,000,000
- --------------------------------------------------------------------------------
We will purchase the Shares in a private offering prior to the
effectiveness of the Form N-1A registration statement filed by the Trust on
behalf of the Fund under the Securities Act of 1933. The Shares are being
purchased as the initial advance in connection with the operations of the
Fund.
We consent to the filing of this Investment Letter as an exhibit to the
Form N-1A registration statement of the Trust.
Sincerely,
FRANKLIN RESOURCES, INC.
By: /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
FRANKLIN STRATEGIC SERIES
ON BEHALF OF
FRANKLIN U.S. LONG-SHORT FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by
FRANKLIN STRATEGIC SERIES ("Trust") for the use of the Class A shares of its
series named FRANKLIN U.S. LONG-SHORT FUND (the "Fund"), which Plan shall
take effect on the date the shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of
the Board of Trustees of the Trust (the "Board"), including a majority of the
trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Trust on
behalf of the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of
the Underwriting Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded
that the compensation of Advisers under the Investment Advisory Agreement was
fair and not excessive; however, the Board also recognized that uncertainty
may exist from time to time with respect to whether payments to be made by
the Fund to Advisers, Distributors, or others or by Advisers or Distributors
to others may be deemed to constitute distribution expenses. Accordingly,
the Board determined that the Plan should provide for such payments and that
adoption of the Plan would be prudent and in the best interests of the Fund
and its shareholders. Such approval included a determination that in the
exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay to Distributors or others for expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, as well as for shareholder services provided for existing shareholders
of the Fund. Distribution expenses may include, but are not limited to, the
expenses of the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution
of Fund shares; or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. Shareholder service expenses may include, but are not limited to,
the expenses of 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 Fund. These expenses may
also include any distribution or service fees paid to securities dealers or
their firms or others. Agreements for the payment of distribution and
service fees to securities dealers or their firms or others shall be in a
form which has been approved from time to time by the Board, including the
non-interested trustees.
2. The maximum amount which shall be paid by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Fund. Said payment shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund shall make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of shares issued by the
Fund within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to
be made pursuant to the Plan under this paragraph, exceed the amount
permitted to be paid pursuant to the Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the
Plan, and shall furnish the Board with such other information as the Board
may reasonably request in connection with the payments made under the Plan in
order to enable the Board to make an informed determination of whether the
Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually
by a vote of the Board, including the non-interested trustees, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested trustees, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an
assignment of the Investment Advisory Agreement between the Trust on behalf
of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 2 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by a vote of the non-interested
trustees cast in person at a meeting called for the purpose of voting on any
such amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Trust's non-interested trustees shall be committed to the discretion of such
non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed
to by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN U.S. LONG-SHORT FUND
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
Dated: April 15, 1999
FRANKLIN STRATEGIC SERIES
ON BEHALF OF
FRANKLIN LARGE CAP GROWTH FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by
FRANKLIN STRATEGIC SERIES ("Trust") for the use of the Class A shares of its
series named FRANKLIN LARGE CAP GROWTH FUND (the "Fund"), which Plan shall
take effect on the date the shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of
the Board of Trustees of the Trust (the "Board"), including a majority of the
trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Trust on
behalf of the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of
the Underwriting Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded
that the compensation of Advisers under the Investment Advisory Agreement was
fair and not excessive; however, the Board also recognized that uncertainty
may exist from time to time with respect to whether payments to be made by
the Fund to Advisers, Distributors, or others or by Advisers or Distributors
to others may be deemed to constitute distribution expenses. Accordingly,
the Board determined that the Plan should provide for such payments and that
adoption of the Plan would be prudent and in the best interests of the Fund
and its shareholders. Such approval included a determination that in the
exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay to Distributors or others for expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, as well as for shareholder services provided for existing shareholders
of the Fund. Distribution expenses may include, but are not limited to, the
expenses of the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution
of Fund shares; or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. Shareholder service expenses may include, but are not limited to,
the expenses of 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 Fund. These expenses may
also include any distribution or service fees paid to securities dealers or
their firms or others. Agreements for the payment of distribution and
service fees to securities dealers or their firms or others shall be in a
form which has been approved from time to time by the Board, including the
non-interested trustees.
2. The maximum amount which shall be paid by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Fund. Said payment shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund shall make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of shares issued by the
Fund within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to
be made pursuant to the Plan under this paragraph, exceed the amount
permitted to be paid pursuant to the Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the
Plan, and shall furnish the Board with such other information as the Board
may reasonably request in connection with the payments made under the Plan in
order to enable the Board to make an informed determination of whether the
Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually
by a vote of the Board, including the non-interested trustees, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested trustees, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an
assignment of the Investment Advisory Agreement between the Trust on behalf
of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 2 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by a vote of the non-interested
trustees cast in person at a meeting called for the purpose of voting on any
such amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Trust's non-interested trustees shall be committed to the discretion of such
non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed
to by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN LARGE CAP GROWTH FUND
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
Dated: May 18, 1999
FRANKLIN STRATEGIC SERIES
ON BEHALF OF
FRANKLIN AGGRESSIVE GROWTH FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant
to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by
FRANKLIN STRATEGIC SERIES ("Trust") for the use of the Class A shares of its
series named FRANKLIN AGGRESSIVE GROWTH FUND (the "Fund"), which Plan shall
take effect on the date the shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of
the Board of Trustees of the Trust (the "Board"), including a majority of the
trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the Plan (the
"non-interested trustees"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Investment Advisory Agreement between the Trust on
behalf of the Fund and Franklin Advisers, Inc. ("Advisers") and the terms of
the Underwriting Agreement between the Trust on behalf of the Fund and
Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded
that the compensation of Advisers under the Investment Advisory Agreement was
fair and not excessive; however, the Board also recognized that uncertainty
may exist from time to time with respect to whether payments to be made by
the Fund to Advisers, Distributors, or others or by Advisers or Distributors
to others may be deemed to constitute distribution expenses. Accordingly,
the Board determined that the Plan should provide for such payments and that
adoption of the Plan would be prudent and in the best interests of the Fund
and its shareholders. Such approval included a determination that in the
exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay to Distributors or others for expenses incurred by
Distributors or others in the promotion and distribution of the shares of the
Fund, as well as for shareholder services provided for existing shareholders
of the Fund. Distribution expenses may include, but are not limited to, the
expenses of the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution
of Fund shares; or for certain promotional distribution charges paid to
broker-dealer firms or others, or for participation in certain distribution
channels. Shareholder service expenses may include, but are not limited to,
the expenses of 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 Fund. These expenses may
also include any distribution or service fees paid to securities dealers or
their firms or others. Agreements for the payment of distribution and
service fees to securities dealers or their firms or others shall be in a
form which has been approved from time to time by the Board, including the
non-interested trustees.
2. The maximum amount which shall be paid by the Fund to Distributors or
others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average
daily net assets of the Fund. Said payment shall be made quarterly by the
Fund to Distributors or others.
3. In addition to the payments which the Fund shall make pursuant to
paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of shares issued by the
Fund within the context of Rule 12b-1 under the Act, then such payments shall
be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to
be made pursuant to the Plan under this paragraph, exceed the amount
permitted to be paid pursuant to the Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it and to others under the
Plan, and shall furnish the Board with such other information as the Board
may reasonably request in connection with the payments made under the Plan in
order to enable the Board to make an informed determination of whether the
Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually
by a vote of the Board, including the non-interested trustees, cast in person
at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested trustees, on not more than sixty (60) days' written notice, or
by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an
assignment of the Investment Advisory Agreement between the Trust on behalf
of the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 2 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by a vote of the non-interested
trustees cast in person at a meeting called for the purpose of voting on any
such amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Trust's non-interested trustees shall be committed to the discretion of such
non-interested trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed
to by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN AGGRESSIVE GROWTH FUND
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
Dated: May 18, 1999
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN STRATEGIC SERIES
II. Fund: FRANKLIN LARGE CAP GROWTH FUND - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B 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 B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect
as of the date Class B 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 Investment Advisory 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 Investment Advisory 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.
The Board recognizes that Distributors has entered into an arrangement
with a third party in order to finance the distribution activities of the
Class pursuant to which Distributors may assign its rights to the fees
payable hereunder to such third party. The Board further recognizes that it
has an obligation to act in good faith and in the best interests of the Fund
and its shareholders when considering the continuation or termination of the
Plan and any payments to be made thereunder.
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 Investment Company'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) The monies paid to Distributors pursuant to Paragraph 1(a)
above shall be treated as compensation for Distributors' distribution-related
services including compensation for amounts advanced to securities dealers or
their firms or others selling shares of the Class who have executed an
agreement with the Investment Company, Distributors or its affiliates, which
form of agreement has been approved from time to time by the Board, including
the non-interested Board members, with respect to the sale of Class shares.
In addition, such monies may be used to compensate Distributors for other
expenses incurred 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, or
for certain promotional distribution charges paid to broker-dealer firms or
others, or for participation in certain distribution channels. None of such
payments are the legal obligation of Distributors or its designee.
(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. None of such payments are the legal
obligation of Distributors or its designee.
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 Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a
quarterly basis, a written report of the monies paid 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. (a) Distributors may assign, transfer or pledge ("Transfer") to
one or more designees (each an "Assignee"), its rights to all or a designated
portion of the fees to which it is entitled under paragraph 1 of this Plan
from time to time (but not Distributors' duties and obligations pursuant
hereto or pursuant to any distribution agreement in effect from time to time,
if any, between Distributors and the Fund), free and clear of any offsets or
claims the Fund may have against Distributors. Each such Assignee's
ownership interest in a Transfer of a specific designated portion of the fees
to which Distributors is entitled is hereafter referred to as an "Assignee's
12b-1 Portion." A Transfer pursuant to this Section 5(a) shall not reduce or
extinguish any claims of the Fund against Distributors.
(b) Distributors shall promptly notify the Fund in writing of
each such Transfer by providing the Fund with the name and address of each
such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's
12b-1 Portion directly to each Assignee. In such event, Distributors shall
provide the Fund with a monthly calculation of the amount to which each
Assignee is entitled (the "Monthly Calculation"). In such event, the Fund
shall, upon receipt of such notice and Monthly Calculation from Distributors,
make all payments required directly to the Assignee in accordance with the
information provided in such notice and Monthly Calculation upon the same
terms and conditions as if such payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors
may direct the Fund to pay all or a portion of the fees to which Distributors
is entitled from time to time to a depository or collection agent designated
by any Assignee, which depository or collection agent may be delegated the
duty of dividing such fees between the Assignee's 12b-1 Portion and the
balance (such balance, when distributed to Distributors by the depository or
collection agent, the "Distributors' 12b-1 Portion"), in which case only
Distributors' 12b-1 Portion may be subject to offsets or claims the Fund may
have against Distributors.
6. 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. In
determining whether there is a reasonable likelihood that the continuation of
the Plan will benefit the Fund and its shareholders, the Board may, but is
not obligated to, consider that Distributors has incurred substantial cost
and has entered into an arrangement with a third party in order to finance
the distribution activities for the Class.
7. This Plan and any agreements entered into pursuant to this Plan
may be terminated with respect to the shares of the Class, without penalty,
at any time by vote of a majority of the non-interested Board members of the
Investment Company, or by vote of a majority of outstanding Shares of such
Class. Upon termination of this Plan with respect to the Class, the
obligation of the Fund to make payments pursuant to this Plan with respect to
such Class shall terminate, and the Fund shall not be required to make
payments hereunder beyond such termination date with respect to expenses
incurred in connection with Class shares sold prior to such termination date,
provided, in each case that each of the requirements of a Complete
Termination of this Plan in respect of such Class, as defined below, are
met. For purposes of this Section 7, a "Complete Termination" of this Plan
in respect of the Class shall mean a termination of this Plan in respect of
such Class, provided that: (i) the non-interested Board members of the
Investment Company shall have acted in good faith and shall have determined
that such termination is in the best interest of the Investment Company and
the shareholders of the Fund and the Class; (ii) and the Investment Company
does not alter the terms of the contingent deferred sales charges applicable
to Class shares outstanding at the time of such termination; and (iii) unless
Distributors at the time of such termination was in material breach under the
distribution agreement in respect of the Fund, the Fund shall not, in respect
of such Fund, pay to any person or entity, other than Distributors or its
designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. 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 outstanding voting securities of the Class of the Fund.
9. 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.
10. 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: May 18, 1999
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN LARGE CAP GROWTH FUND
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
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN STRATEGIC SERIES
II. Fund: FRANKLIN AGGRESSIVE GROWTH FUND - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS B 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 B shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect
as of the date Class B 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 Investment Advisory 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 Investment Advisory 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.
The Board recognizes that Distributors has entered into an arrangement
with a third party in order to finance the distribution activities of the
Class pursuant to which Distributors may assign its rights to the fees
payable hereunder to such third party. The Board further recognizes that it
has an obligation to act in good faith and in the best interests of the Fund
and its shareholders when considering the continuation or termination of the
Plan and any payments to be made thereunder.
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 Investment Company'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) The monies paid to Distributors pursuant to Paragraph 1(a)
above shall be treated as compensation for Distributors' distribution-related
services including compensation for amounts advanced to securities dealers or
their firms or others selling shares of the Class who have executed an
agreement with the Investment Company, Distributors or its affiliates, which
form of agreement has been approved from time to time by the Board, including
the non-interested Board members, with respect to the sale of Class shares.
In addition, such monies may be used to compensate Distributors for other
expenses incurred 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, or
for certain promotional distribution charges paid to broker-dealer firms or
others, or for participation in certain distribution channels. None of such
payments are the legal obligation of Distributors or its designee.
(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. None of such payments are the legal
obligation of Distributors or its designee.
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 Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a
quarterly basis, a written report of the monies paid 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. (a) Distributors may assign, transfer or pledge ("Transfer") to
one or more designees (each an "Assignee"), its rights to all or a designated
portion of the fees to which it is entitled under paragraph 1 of this Plan
from time to time (but not Distributors' duties and obligations pursuant
hereto or pursuant to any distribution agreement in effect from time to time,
if any, between Distributors and the Fund), free and clear of any offsets or
claims the Fund may have against Distributors. Each such Assignee's
ownership interest in a Transfer of a specific designated portion of the fees
to which Distributors is entitled is hereafter referred to as an "Assignee's
12b-1 Portion." A Transfer pursuant to this Section 5(a) shall not reduce or
extinguish any claims of the Fund against Distributors.
(b) Distributors shall promptly notify the Fund in writing of
each such Transfer by providing the Fund with the name and address of each
such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's
12b-1 Portion directly to each Assignee. In such event, Distributors shall
provide the Fund with a monthly calculation of the amount to which each
Assignee is entitled (the "Monthly Calculation"). In such event, the Fund
shall, upon receipt of such notice and Monthly Calculation from Distributors,
make all payments required directly to the Assignee in accordance with the
information provided in such notice and Monthly Calculation upon the same
terms and conditions as if such payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors
may direct the Fund to pay all or a portion of the fees to which Distributors
is entitled from time to time to a depository or collection agent designated
by any Assignee, which depository or collection agent may be delegated the
duty of dividing such fees between the Assignee's 12b-1 Portion and the
balance (such balance, when distributed to Distributors by the depository or
collection agent, the "Distributors' 12b-1 Portion"), in which case only
Distributors' 12b-1 Portion may be subject to offsets or claims the Fund may
have against Distributors.
6. 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. In
determining whether there is a reasonable likelihood that the continuation of
the Plan will benefit the Fund and its shareholders, the Board may, but is
not obligated to, consider that Distributors has incurred substantial cost
and has entered into an arrangement with a third party in order to finance
the distribution activities for the Class.
7. This Plan and any agreements entered into pursuant to this Plan
may be terminated with respect to the shares of the Class, without penalty,
at any time by vote of a majority of the non-interested Board members of the
Investment Company, or by vote of a majority of outstanding Shares of such
Class. Upon termination of this Plan with respect to the Class, the
obligation of the Fund to make payments pursuant to this Plan with respect to
such Class shall terminate, and the Fund shall not be required to make
payments hereunder beyond such termination date with respect to expenses
incurred in connection with Class shares sold prior to such termination date,
provided, in each case that each of the requirements of a Complete
Termination of this Plan in respect of such Class, as defined below, are
met. For purposes of this Section 7, a "Complete Termination" of this Plan
in respect of the Class shall mean a termination of this Plan in respect of
such Class, provided that: (i) the non-interested Board members of the
Investment Company shall have acted in good faith and shall have determined
that such termination is in the best interest of the Investment Company and
the shareholders of the Fund and the Class; (ii) and the Investment Company
does not alter the terms of the contingent deferred sales charges applicable
to Class shares outstanding at the time of such termination; and (iii) unless
Distributors at the time of such termination was in material breach under the
distribution agreement in respect of the Fund, the Fund shall not, in respect
of such Fund, pay to any person or entity, other than Distributors or its
designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. 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 outstanding voting securities of the Class of the Fund.
9. 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.
10. 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: May 18, 1999
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN AGGRESSIVE GROWTH FUND
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
CLASS C DISTRIBUTION PLAN
I. Investment Company: FRANKLIN STRATEGIC SERIES
II. Fund: FRANKLIN LARGE CAP GROWTH FUND - CLASS C
III. Maximum Per Annum Rule 12b-1 Fees for Class C Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS C 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 C shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect
as of the date class C 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 Investment Advisory 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 Investment Advisory 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 Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
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 Investment Advisory 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: May 18, 1999
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN LARGE CAP GROWTH FUND
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
CLASS C DISTRIBUTION PLAN
I. Investment Company: FRANKLIN STRATEGIC SERIES
II. Fund: FRANKLIN AGGRESSIVE GROWTH FUND - CLASS C
III. Maximum Per Annum Rule 12b-1 Fees for Class C Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS C 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 C shares
(the "Class") of the Fund named above ("Fund"), which Plan shall take effect
as of the date class C 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 Investment Advisory 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 Investment Advisory 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 Rule 2830(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
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 Investment Advisory 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: May 18, 1999
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN AGGRESSIVE GROWTH FUND
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
MULTIPLE CLASS PLAN
ON BEHALF OF
FRANKLIN LARGE CAP GROWTH FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Trustees of FRANKLIN STRATEGIC SERIES (the "Investment Company")
for its series, FRANKLIN LARGE CAP GROWTH FUND (the "Fund"). The Board has
determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole.
The Plan sets forth the provisions relating to the establishment of multiple
classes of shares of the Fund.
1. The Fund shall offer four classes of shares, to be known as Class
A Shares, Class B Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from
0% - 5.75%, and Class C Shares shall carry a front-end sales charge of
1.00%. Class B Shares and the Advisor Class Shares shall not be subject to
any front-end sales charges.
3. Class A 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.
Class B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall
be assessed a CDSC of 4% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (b) Class B Shares
redeemed within the third and fourth years of their purchase shall be
assessed a CDSC of 3% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (c) Class B Shares
redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on
the lesser of the then-current net asset value or the original net asset
value at the time of purchase; and (d) Class B Shares redeemed within 6 years
of their purchase shall be assessed a CDSC of 1% 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 described in the
Fund's prospectus.
Class C 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.
Advisor Class Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended, (the
"Rule 12b-1 Plan") associated with the Class A Shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or others
for expenses incurred in the promotion and distribution of the Class A
Shares. 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 the Class
A 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 Investment Company for the Class A Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two
components. The first component is an asset-based sales charge to be
retained by Distributor to compensate Distributor for amounts advanced to
securities dealers or their firms or others with respect to the sale of Class
B Shares. In addition, such payments may be retained by the Distributor to
be used in the promotion and distribution of Class B Shares in a manner
similar to that described above for Class A Shares. The second component is
a shareholder servicing fee to be paid to securities dealers or others who
provide personal assistance to shareholders in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two
components. The first component is a shareholder servicing fee, to be paid
to broker-dealers, banks, trust companies and others who maintain shareholder
accounts or 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 the 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 C Shares, in a manner similar
to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class
Shares and, therefore, the Advisor Class Shares shall not be subject to
deductions relating to Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B,
Class C, and Advisor Class Shares shall relate to differences in Rule 12b-1
plan expenses, as described in the applicable Rule 12b-1 Plans; however, to
the extent that the Rule 12b-1 Plan expenses of one Class are the same as the
Rule 12b-1 Plan expenses of another Class, such classes shall be subject to
the same expenses.
6. There shall be no conversion features associated with the Class
A, Class C, and Advisor Class Shares. Each Class B Share, however, shall be
converted automatically, and without any action or choice on the part of the
holder of the Class B Shares, into Class A Shares on the conversion date
specified, and in accordance with the terms and conditions approved by the
Franklin Strategic Series' Board of Trustees and as described, in each fund's
prospectus relating to the Class B Shares, as such prospectus may be amended
from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor 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.
8. Each class will vote separately with respect to any Rule 12b-1
Plan related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their
fiduciary responsibilities under the Investment Company Act of 1940 and
otherwise, will monitor the Fund for the existence of any material conflicts
between the Board members interests of the various classes of shares. The
Board members, including a majority of the independent Board members, 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.
10. All material amendments to this Plan must be approved by a
majority of the Board members, including a majority of the Board members who
are not interested persons of the Investment Company.
11. I, Deborah R. Gatzek, Secretary of the Franklin Group of Funds,
do hereby certify that this Multiple Class Plan was adopted by FRANKLIN
STRATEGIC SERIES, on behalf of its series FRANKLIN LARGE CAP GROWTH FUND, by
a majority of the Trustees of the Trust on May 18, 1999.
/s/Deborah R. Gatzek
Deborah R. Gatzek
Secretary
MULTIPLE CLASS PLAN
ON BEHALF OF
FRANKLIN AGGRESSIVE GROWTH FUND
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Trustees of FRANKLIN STRATEGIC SERIES (the "Investment Company")
for its series, FRANKLIN AGGRESSIVE GROWTH FUND (the "Fund"). The Board has
determined that the Plan, including the expense allocation, is in the best
interests of each class of the Fund and the Investment Company as a whole.
The Plan sets forth the provisions relating to the establishment of multiple
classes of shares of the Fund.
1. The Fund shall offer four classes of shares, to be known as Class
A Shares, Class B Shares, Class C Shares and Advisor Class Shares.
2. Class A Shares shall carry a front-end sales charge ranging from
0% - 5.75%, and Class C Shares shall carry a front-end sales charge of
1.00%. Class B Shares and the Advisor Class Shares shall not be subject to
any front-end sales charges.
3. Class A 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.
Class B Shares shall be subject to a CDSC with the following CDSC
schedule: (a) Class B Shares redeemed within 2 years of their purchase shall
be assessed a CDSC of 4% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (b) Class B Shares
redeemed within the third and fourth years of their purchase shall be
assessed a CDSC of 3% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase; (c) Class B Shares
redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on
the lesser of the then-current net asset value or the original net asset
value at the time of purchase; and (d) Class B Shares redeemed within 6 years
of their purchase shall be assessed a CDSC of 1% 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 described in the
Fund's prospectus.
Class C 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.
Advisor Class Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant
to Rule 12b-1 under the Investment Company Act of 1940, as amended, (the
"Rule 12b-1 Plan") associated with the Class A Shares may be used to
reimburse Franklin/Templeton Distributors, Inc. (the "Distributor") or others
for expenses incurred in the promotion and distribution of the Class A
Shares. 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 the Class
A 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 Investment Company for the Class A Shares, the Distributor or its
affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two
components. The first component is an asset-based sales charge to be
retained by Distributor to compensate Distributor for amounts advanced to
securities dealers or their firms or others with respect to the sale of Class
B Shares. In addition, such payments may be retained by the Distributor to
be used in the promotion and distribution of Class B Shares in a manner
similar to that described above for Class A Shares. The second component is
a shareholder servicing fee to be paid to securities dealers or others who
provide personal assistance to shareholders in servicing their accounts.
The Rule 12b-1 Plan associated with the Class C Shares has two
components. The first component is a shareholder servicing fee, to be paid
to broker-dealers, banks, trust companies and others who maintain shareholder
accounts or 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 the 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 C Shares, in a manner similar
to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class
Shares and, therefore, the Advisor Class Shares shall not be subject to
deductions relating to Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall
operate in accordance with Rule 2830(d) of the Conduct Rules of the National
Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B,
Class C, and Advisor Class Shares shall relate to differences in Rule 12b-1
plan expenses, as described in the applicable Rule 12b-1 Plans; however, to
the extent that the Rule 12b-1 Plan expenses of one Class are the same as the
Rule 12b-1 Plan expenses of another Class, such classes shall be subject to
the same expenses.
6. There shall be no conversion features associated with the Class
A, Class C, and Advisor Class Shares. Each Class B Share, however, shall be
converted automatically, and without any action or choice on the part of the
holder of the Class B Shares, into Class A Shares on the conversion date
specified, and in accordance with the terms and conditions approved by the
Franklin Strategic Series' Board of Trustees and as described, in each fund's
prospectus relating to the Class B Shares, as such prospectus may be amended
from time to time; provided, however, that the Class B Shares shall be
converted automatically into Class A Shares to the extent and on the terms
permitted by the Investment Company Act of 1940 and the rules and regulations
adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor 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.
8. Each class will vote separately with respect to any Rule 12b-1
Plan related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members, pursuant to their
fiduciary responsibilities under the Investment Company Act of 1940 and
otherwise, will monitor the Fund for the existence of any material conflicts
between the Board members interests of the various classes of shares. The
Board members, including a majority of the independent Board members, 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.
10. All material amendments to this Plan must be approved by a
majority of the Board members, including a majority of the Board members who
are not interested persons of the Investment Company.
11. I, Deborah R. Gatzek, Secretary of the Franklin Group of Funds,
do hereby certify that this Multiple Class Plan was adopted by FRANKLIN
STRATEGIC SERIES, on behalf of its series FRANKLIN AGGRESSIVE GROWTH FUND, by
a majority of the Trustees of the Trust on May 18, 1999.
/s/Deborah R. Gatzek
Deborah R. Gatzek
Secretary
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 LEIANN NUZUM (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 18th day of May, 1999.
/s/Rupert H. Johnson, Jr. /s/Charles B. Johnson
Rupert H. Johnson, Jr. Charles B. Johnson,
Principal 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
