o FSS1 P-6
SUPPLEMENT DATED MAY 1, 2000
TO THE PROSPECTUSES OF
FRANKLIN STRATEGIC SERIES
(FRANKLIN AGGRESSIVE GROWTH, CALIFORNIA GROWTH, LARGE CAP GROWTH, SMALL CAP
GROWTH I AND SMALL CAP GROWTH II FUNDS - CLASS A, B & C)
DATED SEPTEMBER 1, 1999
AS AMENDED MAY 1, 2000
AND
FRANKLIN STRATEGIC SERIES
(FRANKLIN TECHNOLOGY FUND - CLASS A, B & C)
DATED MAY 1, 2000
During the period May 1, 2000 through June 30, 2000, Franklin Templeton
Distributors, Inc., the principal underwriter for Franklin Strategic Series,
will pay to each participating securities firm that originates shareholder
investments in Franklin Small Cap Growth Fund II-Class A and Franklin
Technology Fund-Class A the full applicable front-end sales charge paid by
such investors.
Please keep this supplement for future reference.
Prospectus
FRANKLIN TECHNOLOGY FUND - CLASS A, B & C
Franklin Strategic Series
INVESTMENT STRATEGY GROWTH
MAY 1, 2000
[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
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2 Goal and Strategies
4 Main Risks
8 Performance
8 Fees and Expenses
10 Management
11 Distributions and Taxes
YOUR ACCOUNT
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INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND services
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12 Choosing a Share Class
16 Buying Shares
18 Investor Services
21 Selling Shares
23 Account Policies
26 Questions
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT THE FUND
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Back Cover
THE FUND
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund invests at least
65% of its total assets in equity securities of companies expected to benefit
from the development, advancement, and use of technology. These may include,
for example, companies in the following areas:
o Technology services, including Internet services, data processing,
technology consulting and implementation, services and electronics
distributors;
o Computer software;
o Computing hardware, peripherals, and electronic components;
o Semiconductors, semiconductor fabrication equipment, and precision
instruments;
o Telecommunications, including communications equipment and services;
o Media and information services, including cable television,
broadcasting, satellite and media content;
o Health-care technology and biotechnology; and
o Aerospace and defense technologies.
The fund may invest in companies of any size, and may, from time to time,
invest a significant portion of its assets in smaller companies. The fund
may invest up to 35% of its total assets in foreign securities.
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The fund concentrates in common stocks of technology companies.
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PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager
relies on a team of analysts to provide in-depth industry expertise and uses
both qualitative and quantitative analysis to evaluate companies for distinct
and sustainable competitive advantages. Such advantages as a particular
marketing niche, proven technology, strong management, and industry leadership
are all factors the manager believes point to strong growth potential.
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable to investors, the manager may invest up to 100% of
the fund's assets in a temporary defensive manner or hold a substantial
portion of the fund's portfolio in cash. Temporary defensive investments
generally may include money market securities or short-term debt securities.
The manager also may invest in these types of securities or hold cash while
looking for suitable investment opportunities or to maintain liquidity. In
these circumstances, the fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
TECHNOLOGY COMPANIES By focusing on technology industries, the fund carries
much greater risks of adverse developments among such industries than a fund
that invests in a wider variety of industries. Prices often change
collectively without regard to the merits of individual companies. Technology
company stocks can be subject to abrupt or erratic price movements and have
been volatile, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Technology companies
are subject to significant competitive pressures, such as new market
entrants, aggressive pricing, and competition for market share, and the
potential for falling profit margins. These companies also face the risks
that new services, equipment or technologies will not be accepted by
consumers and businesses or will become rapidly obsolete. These factors can
affect the profitability of technology companies and, as a result, the value
of their securities. In addition, many internet-related companies are in the
emerging stage of development and are particularly vulnerable to the risks of
rapidly changing technologies. Prices of these companies' securities
historically have been more volatile than other securities, especially over
the short term.
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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.
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STOCKS While stocks have historically outperformed other asset classes over
the long term, their value tends to go up and down more dramatically over the
short-term. These price movements may result from factors affecting
individual companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of
future earnings or revenues, and can, therefore, fall dramatically if the
company fails to meet those projections. Growth stocks may also be more
expensive relative to their earnings or assets compared to value or other
stocks. Because the fund's manager uses an aggressive growth strategy, an
investment in the fund involves greater risk and more volatility than an
investment in a growth fund investing entirely in proven growth stocks.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund.
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Because foreign stocks the fund holds fluctuate in price with foreign market
conditions and currencies, 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.
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CURRENCY Many of the fund's investments are denominated in foreign
currencies. Changes in the foreign currency exchange rates into U.S. dollars
will increase or decrease the fund's returns from its foreign portfolio
holdings. Devaluations of currency by a country's government can
significantly decrease the value of securities denominated in that currency.
The economic impact of the euro, a relatively new currency adopted by certain
European countries to replace their national currencies, is unclear.
EURO. On January 1, 1999, the European Economic and Monetary Union introduced
a new single currency called the euro. By July 1, 2002, the euro will have
replaced the national currencies for participating member countries.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers in other
regions whose securities the fund may hold.
COUNTRY General securities market and interest rate 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. 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 imposition of exchange controls, foreign
ownership limitations, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, punitive taxes, and certain custody
and settlement risks. In addition, political or economic conditions may
disrupt previously established securities markets, causing liquid securities
to become illiquid, particularly in emerging market countries.
COMPANY Non-U.S. 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. Non-U.S. currency exchanges, 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 non-U.S. investments in non-U.S. courts than with
respect to U.S. companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer opportunities for
capital growth, they also have significant risk. Historically, smaller
company securities have been more volatile in price and have fluctuated
independently from larger company securities, especially over the
shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, including increases in interest
rates because of their reliance on credit, and their growth prospects are
less certain.
For example, smaller companies may lack depth of management or may have
limited financial resources for growth or development. They may have limited
product lines or market share. Smaller companies may be in new industries,
or their new products or services may not find an established market or may
become quickly obsolete. Smaller companies' securities may be less liquid
which may adversely affect their price. Investments in these companies may
be considered speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the
fund, or only in very limited quantities. Thus, when the fund's size is
smaller, any gains from IPOs will have an exaggerated impact on the fund's
reported performance than when the fund is larger.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in one issuer and have a smaller number of issuers 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
intends, however, to meet certain tax diversification requirements.
LIQUIDITY The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
PORTFOLIO TURNOVER Because of the fund's emphasis on technology stocks, the
fund's portfolio turnover rate may exceed 100% annually, which may involve
additional expenses to the fund, including portfolio transaction costs.
More detailed information about the fund, its policies and risks can be found
in the fund's Statement of Additional Information (SAI).
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Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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.
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[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
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Maximum sales charge (load) as a 5.75% 4.00% 1.99%
percentage of offering price
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 1 4.00% 2 0.99% 3
Exchange fee 4 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page 12 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)5
CLASS A CLASS B CLASS C
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Management fees 6 0.55% 0.55% 0.55%
Distribution and service
(12b-1) fees 0.35% 1.00% 1.00%
Other expenses 0.57% 0.57% 0.57%
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Total annual fund operating expenses 6 1.47% 2.12% 2.12%
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1. Except for investments of $1 million or more (see page 12) and purchases
by certain retirement plans without an initial sales charge.
2. Declines to zero after six years.
3. This is equivalent to a charge of 1% based on net asset value.
4. This fee is only for market timers (see page 24).
5. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated.
6. The manager and administrator have agreed in advance to waive or limit
their respective fees and assume as their own expense certain expenses
otherwise payable by the fund so that total annual fund operating expenses do
not exceed 1.40% for Class A, 2.05% for Class B and 2.05% for Class C for the
current fiscal year. After April 30, 2001 the manager and administrator may
end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o 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
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If you sell your shares at the
end of the period:
CLASS A $716 1 $1,013
CLASS B $615 $ 964
CLASS C $412 $ 757
If you do not sell your shares:
CLASS B $215 $ 664
CLASS C $313 $ 757
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.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager. Together,
Advisers and its affiliates manage over $229 billion in assets.
The team responsible for the fund's management is:
CANYON CHAN CFA, VICE PRESIDENT OF ADVISERS
Mr. Chan has been a manager of the fund since its inception. He joined the
Franklin Templeton group in 1991.
CONRAD 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.
IAN LINK CFA, VICE PRESIDENT OF ADVISERS
Mr. Link has been a manager of the fund since its inception. He joined the
Franklin Templeton group in 1989.
The fund pays Advisers a fee for managing the fund's assets. The fee is equal
to an annual rate of:
o 0.550% of the value of net assets up to and including $500 million;
o 0.450% of the value of net assets over $500 million, up to and including
$1 billion;
o 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion, up to and including
$6.5 billion;
o 0.325% of the value of net assets over $6.5 billion, up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and including
$16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and including
$19 billion;
o 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.
[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.[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and
redemption proceeds if you do not provide your correct social security or
taxpayer identification number and certify that you are not subject to backup
withholding, 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.
Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your fund shares generally will be subject to state and local
taxes. 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"] 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
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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% on charge of 1% on
purchases of $1 shares you sell shares you sell
million or more sold within the first within 18 months
within 12 months year, declining to
1% within six years
and eliminated
after that
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.
SALES CHARGES - CLASS A
THE SALES CHARGE WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT MAKES UP THIS % OF YOUR NET INVESTMENT
THE OFFERING PRICE
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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 15), 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 14).
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 0.35% 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
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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 14). 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 available to certain retirement plans,
including 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
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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 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.
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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 19 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.
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The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[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. Certain investors also may buy Class C shares without an initial
sales charge. The CDSC for each class 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 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.
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BUYING SHARES
MINIMUM INVESTMENTS
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INITIAL ADDITIONAL
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Regular accounts 1,000 $50
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Automatic investment plans $50 ($25 $50 ($25
for an for an
Education Education
IRA) IRA)
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UGMA/UTMA accounts $100 $50
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Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
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IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
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Broker-dealer sponsored wrap account
programs $250 $50
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Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members $100 $50
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PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE
IN YOUR STATE OR JURISDICTION.
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
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OPENING AN ACCOUNT ADDING TO AN ACCOUNT
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[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
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Make your check payable to Make your check payable to
[Insert graphic of Franklin Technology Fund. Franklin Technology Fund.
envelope] Include your account number
Mail the check and your on 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.
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[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.
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[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 19 for (Please see page 19 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. To sign up, complete the
appropriate section of your account application and mail it to Investor
Services. If you are opening a new account, please include the minimum
initial investment of $50 with your application.
AUTOMATIC PAYROLL DEDUCTION You may invest in the fund automatically 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 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 24).
*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. Please keep in mind that a contingent
deferred sales charge (CDSC) may apply.
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 59 1/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020
for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of Contact your investment representative
hands shaking]
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 sent to a bank account. See the
policies above for selling shares by mail or
BY ELECTRONIC FUNDS phone.
TRANSFER (ACH)
Before requesting to have redemption proceeds
sent to a bank account, please 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, a voided check or savings
account deposit slip, and a signature
guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by
1:00 p.m. Pacific time, proceeds sent by ACH
generally will be available within two to
three business days.
- -------------------------------------------------------------------------
[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 quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). 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 copies of all notifications and
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 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, wire or electronic funds transfer
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 (%) 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 on Class C NAV purchases. A dealer commission of up to
0.25% may be paid 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 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 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.
Retirement Services (1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor 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.franklintempleton.com
You also can obtain information about the fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file #811-6243 463 P 05/00
Prospectus
FRANKLIN TECHNOLOGY FUND - ADVISOR CLASS
Franklin Strategic Series
INVESTMENT STRATEGY GROWTH
MAY 1, 2000
[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]
2 Goal and Strategies
4 Main Risks
8 Past Performance
8 Fees and Expenses
10 Management
11 Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND services
[End callout]
12 Qualified Investors
16 Buying Shares
18 Investor Services
21 Selling Shares
23 Account Policies
26 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 investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund invests at least
65% of its total assets in equity securities of companies expected to benefit
from the development, advancement, and use of technology. These may include,
for example, companies in the following areas:
o Technology services, including Internet services, data processing,
technology consulting and implementation services, and electronics
distributors;
o Computer software;
o Computing hardware, peripherals, and electronic components;
o Semiconductors, semiconductor fabrication equipment, and precision
instruments;
o Telecommunications, including communications equipment and services;
o Media and information services, including cable television,
broadcasting, satellite and media content;
o Health-care technology and biotechnology; and
o Aerospace and defense technologies.
The fund may invest in companies of any size, and may, from time to time,
invest a significant portion of its assets in smaller companies. The fund
may invest up to 35% of its total assets in foreign securities.
[Begin callout]
The fund concentrates in common stocks of technology companies.
[End callout]
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager
relies on a team of analysts to provide in-depth industry expertise and uses
both qualitative and quantitative analysis to evaluate companies for distinct
and sustainable competitive advantages. Such advantages as a particular
marketing niche, proven technology, strong management, and industry
leadership are all factors the manager believes point to strong growth
potential.
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable to investors, the manager may invest up to 100% of
the fund's assets in a temporary defensive manner or hold a substantial
portion of the fund's portfolio in cash. Temporary defensive investments
generally may include money market securities or short-term debt securities.
The manager also may invest in these types of securities or hold cash while
looking for suitable investment opportunities or to maintain liquidity. In
these circumstances, the fund may be unable to achieve its investment goal.
[Insert graphic of chart with line going up and down] MAIN RISKS
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
TECHNOLOGY COMPANIES By focusing on technology industries, the fund carries
much greater risks of adverse developments among such industries than a fund
that invests in a wider variety of industries. Prices often change
collectively without regard to the merits of individual companies. Technology
company stocks can be subject to abrupt or erratic price movements and have
been volatile, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Technology companies
are subject to significant competitive pressures, such as new market
entrants, aggressive pricing, and competition for market share, and the
potential for falling profit margins. These companies also face the risks
that new services, equipment or technologies will not be accepted by
consumers and businesses or will become rapidly obsolete. These factors can
affect the profitability of technology companies and, as a result, the value
of their securities. In addition, many internet-related companies are in the
emerging stage of development and are particularly vulnerable to the risks of
rapidly changing technologies. Prices of these companies' securities
historically have been more volatile than other securities, especially over
the short term.
[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, their value tends to go up and down more dramatically over the
short-term. These price movements may result from factors affecting
individual companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of
future earnings or revenues, and can, therefore, fall dramatically if the
company fails to meet those projections. Growth stocks may also be more
expensive relative to their earnings or assets compared to value or other
stocks. Because the fund's manager uses an aggressive growth strategy, an
investment in the fund involves greater risk and more volatility than an
investment in a growth fund investing entirely in proven growth stocks.
FOREIGN SECURITIES Securities of companies located outside the U.S. may
involve risks that can increase the potential for losses in the fund.
[Begin callout]
Because foreign stocks the fund holds fluctuate in price with foreign market
conditions and currencies, 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]
CURRENCY. Many of the fund's investments are denominated in foreign
currencies. Changes in the foreign currency exchange rates into U.S. dollars
will increase or decrease the fund's returns from its foreign portfolio
holdings. Devaluations of currency by a country's government can
significantly decrease the value of securities denominated in that currency.
The economic impact of the euro, a relatively new currency adopted by certain
European countries to replace their national currencies, is unclear.
EURO. On January 1, 1999, the European Economic and Monetary Union introduced
a new single currency called the euro. By July 1, 2002, the euro will have
replaced the national currencies for participating member countries.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers in other
regions whose securities the fund may hold.
COUNTRY. General securities market and interest rate 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. 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 imposition of exchange controls, foreign
ownership limitations, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, punitive taxes, and certain custody
and settlement risks. In addition, political or economic conditions may
disrupt previously established securities markets, causing liquid securities
to become illiquid, particularly in emerging market countries.
COMPANY. Non-U.S. 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. Non-U.S. currency exchanges, 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 non-U.S. investments in non-U.S. courts than with
respect to U.S. companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer opportunities for
capital growth, they also have significant risk. Historically, smaller
company securities have been more volatile in price and have fluctuated
independently from larger company securities, especially over the
shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions, including increases in interest
rates because of their reliance on credit, and their growth prospects are
less certain.
For example, smaller companies may lack depth of management or may have
limited financial resources for growth or development. They may have limited
product lines or market share. Smaller companies may be in new industries,
or their new products or services may not find an established market or may
become quickly obsolete. Smaller companies' securities may be less liquid
which may adversely affect their price. Investments in these companies may
be considered speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the
fund, or only in very limited quantities. Thus, when the fund's size is
smaller, any gains from IPOs will have an exaggerated impact on the fund's
reported performance than when the fund is larger.
DIVERSIFICATION The fund is a non-diversified fund. It may invest a greater
portion of its assets in one issuer and have a smaller number of issuers 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
intends, however, to meet certain tax diversification requirements.
LIQUIDITY The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
PORTFOLIO TURNOVER Because of the fund's emphasis on technology stocks, the
fund's portfolio turnover rate may exceed 100% annually, which may involve
additional expenses to the fund, including portfolio transaction costs.
More detailed information about the fund, its policies 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 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)
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 0.55%
Distribution and service (12b-1) fees None
Other expenses 0.57%
===============
Total annual fund operating expenses 3 1.12%
===============
1. This fee is only for market timers (see page 20).
2. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated.
3. The manager and administrator have agreed in advance to limit their
respective fees and assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not
exceed 1.05% for the current fiscal year. After April 30, 2001 the
administrator and manager may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year;
o The fund's operating expenses remain the same; and
o You sell your shares at the end of the periods shown.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 YEAR 3 YEARS
- -----------------------
$114 $356
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager. Together,
Advisers and its affiliates manage over $229 billion in assets.
The team responsible for the fund's management is:
CANYON CHAN CFA, VICE PRESIDENT OF ADVISERS
Mr. Chan has been a manager of the fund since its inception. He joined the
Franklin Templeton group in 1991.
CONRAD 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.
IAN LINK CFA, VICE PRESIDENT OF ADVISERS
Mr. Link has been a manager of the fund since its inception. He joined the
Franklin Templeton group in 1989.
The fund pays Advisers a fee for managing the fund's assets. The fee is equal
to an annual rate of:
o 0.550% of the value of net assets up to and including $500 million;
o 0.450% of the value of net assets over $500 million, up to and including
$1 billion;
o 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion, up to and including
$6.5 billion;
o 0.325% of the value of net assets over $6.5 billion, up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and including
$16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and including
$19 billion;
o 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.
[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.
[Begin callout]
BACKUP WITHHOLDING
By law, the fund must withhold 31% of your taxable distributions and
redemption proceeds if you do not provide your correct social security or
taxpayer identification number and certify that you are not subject to backup
withholding, 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.
Distributions of ordinary income and capital gains, and gains from the sale
or exchange of your shares generally will be subject to state and local
taxes. 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 Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
[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 below).
BUYING SHARES
- ------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of Contact your investment Contact your investment
hands shaking] representative representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic of Make your check payable to Make your check payable to
envelope] the Franklin Technology the Franklin Technology
Fund. Fund. Include your account
BY MAIL number on the check.
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.
BY WIRE Wire the funds and mail To make a same day wire
your signed application to investment, please call us
1-800/632-2301 (or Investor Services. Please by 1:00 p.m. Pacific time
1-650/312-2000 include the wire control and make sure your wire
collect) number or your new account arrives by 3:00 p.m.
number on the application.
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 Call Shareholder Services at
two arrows pointing at the number below, or the number below, or send
in opposite send signed written signed written instructions.
directions] instructions. (Please see (Please see page 15 for
page 15 for information on information on exchanges.)
BY EXCHANGE exchanges.)
- --------------------------------------------------------------------------------
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 and mail it to Investor
Services. If you are opening a new account, please include the minimum
initial investment of $50 with your application.
AUTOMATIC PAYROLL DEDUCTION You may invest in the fund automatically 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 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 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 or Templeton Foreign 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 20).
*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 Services at
1-800/527-2020 for details.
SELLING SHARES
- ------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- --------------------------------------------------------------------------------
[Insert graphic Contact your investment representative
of hands shaking]
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
[Insert graphic Send written instructions and endorsed share certificates
of envelope] (if you hold share certificates) to Investor Services.
Corporate, partnership or trust accounts may need to send
BY MAIL 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 less, you do
of phone] not hold share certificates and you have not changed your
address by phone within the last 15 days, you can sell your
BY PHONE 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 proceeds sent to a
of three bank account. See the policies above for selling shares by
lightning bolts] mail or phone.
BY ELECTRONIC Before requesting to have redemption proceeds sent to a bank
FUNDS TRANSFER account, please make sure we have your bank account
(ACH) information on file. If we do not have this information, you
will need to send written instructions with your bank's name
and address, a voided check or savings account deposit slip,
and a signature guarantee if the ownership of the bank and
fund accounts is different.
If we receive your request in proper form by 1:00 p.m.
Pacific time, proceeds sent by ACH generally will be
available within two to three business days.
- --------------------------------------------------------------------------------
[Insert graphic Obtain a current prospectus for the fund you are considering.
of two arrows
pointing in Call Shareholder Services at the number below, or send
opposite signed written instructions. See the policies above for
directions] selling shares by mail or phone.
BY EXCHANGE 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 quarterly account statements that
show all your account transactions during the quarter. You also will receive
written notification after each transaction affecting your account (except
for distributions and transactions made through automatic investment or
withdrawal programs, which will be reported on your quarterly statement). 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 copies of all notifications and
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, wire or electronic funds transfer
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,
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 Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Advisor 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.franklintempleton.com
You also can obtain information about the fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR
Database on the SEC's Internet site at http://www.sec.gov. You can obtain
copies of this information, after paying a duplicating fee, by writing to the
SEC's Public Reference Section, Washington, D.C. 20549-0102 or by electronic
request at the following E-mail address: [email protected].
Investment Company Act file #811-6243 463PA 05/00
FRANKLIN TECHNOLOGY FUND
CLASS A, B & C
FRANKLIN STRATEGIC SERIES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
[Insert Franklin Templeton Ben Head]
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 May 1, 2000, 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 PAGE
Goal and Strategies..........................................2
Risks.......................................................12
Officers and Trustees.......................................17
Management and Other Services...............................20
Portfolio Transactions......................................21
Distributions and Taxes.....................................22
Organization, Voting Rights and Principal Holders...........24
Buying and Selling Shares...................................24
Pricing Shares..............................................31
The Underwriter.............................................31
Performance.................................................32
Miscellaneous Information...................................34
Description of Ratings......................................35
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- -------------------------------------------------------------------------------
o ARE NOT 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.
- -------------------------------------------------------------------------------
GOAL AND STRATEGIES
- -------------------------------------------------------------------------------
The fund's principal investment goal is capital appreciation. Under normal
market conditions, the fund will invest at least 65% of its total assets in
equity securities of companies expected to benefit from the development,
advancement, and use of technology. This goal is fundamental, which means it
may not be changed without shareholder approval.
OTHER INVESTMENT POLICIES Below is more detailed information about some of
the various types of securities the fund may buy and the fund's investment
policies and restrictions.
CONCENTRATION The fund concentrates its investments in equity securities of
companies in the technology sector, including companies expected to benefit
from the development, advancement, and use of technology. The fund may invest
up to 25% of its total assets in any one or more industries within the
technology sector.
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 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 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 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 that convertible
security is "converted," the operating company often issues new stock to the
holder of the convertible security. If, however, the parity price (the price
at which the common stock underlying the convertible security may be
obtained) of the convertible security is less than the call price (the price
of the bond, including any premium related to the conversion feature), the
operating company may pay out cash instead of common stock.
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 of the issuer 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 and 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 proceeds of the convertible
preferred stock offering pass through to the company. The company then issues
a convertible subordinated debenture to the special purpose vehicle. This
convertible subordinated debenture has 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. The fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary, to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio. The fund,
however, intends to acquire liquid convertible securities, though there can
be no assurances that this will be achieved.
LATE STAGE PRIVATE PLACEMENTS The fund may invest up to 5% of its assets in
private placements, particularly late stage private placements. Late stage
private placements are sales of securities made in non-public, unregistered
transactions shortly before a company expects to go public. The fund may make
such investments in order to participate in companies whose initial public
offerings are expected to be "hot" issues. There is no public market for
shares sold in these private placements and it is possible that initial
public offering will never be completed. Moreover, even after an initial
public offering, there may be a limited trading market for the securities or
the fund may be subject to contractual limitations on its ability to sell the
shares.
DEBT SECURITIES The fund will invest less than 5% of its net assets in debt
securities. The fund may buy 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. 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 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.
Bond, notes and commercial paper are types of debt securities. Each of these
differs in the length of the issuer's payment schedule, with commercial paper
having the shortest payment schedule.
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.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS Although the fund may invest up
to 25% of total assets in foreign securities, it intends to limit its
investments to 15% of total assets.
The fund may buy foreign securities traded in the U.S. or directly in foreign
markets and securities issued by companies domiciled in emerging markets. 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 (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 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 The fund generally will 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.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as
to payment of principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the securities back
to the bank or broker-dealer 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 market 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 exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
REVERSE REPURCHASE AGREEMENTS are the opposite of repurchase agreements but
involve similar mechanics and risks. The fund sells securities to a bank or
dealer and agrees to repurchase them at a mutually agreed price and date.
Cash or liquid high-grade debt securities having an initial market value,
including accrued interest, equal to at least 100% of the dollar amount sold
by the fund are segregated, i.e., set aside, as collateral and
marked-to-market daily to maintain coverage of at least 100%. Reverse
repurchase agreements involve the risk that the market value of the
securities retained by the fund may decline below the price of the securities
the fund has sold but is obligated to repurchase under the agreement. A
default by the purchaser might cause the fund to experience a loss or delay
in the liquidation costs. The fund intends to enter into reverse repurchase
agreements with domestic or foreign banks or securities dealers. The manager
will evaluate the creditworthiness of these entities prior to engaging in
such transactions and it will conduct these activities under the general
supervision of the board.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. For each loan, the borrower must maintain with the fund's
custodian collateral (consisting of any combination of cash, securities
issued by the U.S. government and its agencies and instrumentalities, 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 also continues to receive any
distributions paid on the loaned securities. The fund may terminate a loan at
any time and obtain the return of the securities loaned within the normal
settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. The fund will lend its
securities only to parties who meet creditworthiness standards approved by
the fund's board of trustees, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
SECURITIES INDUSTRY RELATED INVESTMENTS Securities issued by companies
engaged in securities related businesses, including companies that are
securities brokers, dealers, underwriters or investment advisors are
considered to be part of the financial services industry. Generally, under
the Investment Company Act of 1940, as amended (the "1940 Act"), the fund may
not acquire a security or any interest in a securities related business to
the extent such acquisition would result in the fund acquiring in excess of
5% of a class of an issuer's outstanding equity securities or 10% of the
outstanding principal amount of an issuer's debt securities, or investing
more than 5% of the value of the fund's total assets in securities of the
issuer. In addition, any equity security of a securities-related business
must be a marginable security under Federal Reserve Board regulations and any
debt security of a securities-related business must be investment grade as
determined by the fund's board of trustees. The fund does not believe that
these limitations will impede the attainment of its investment goals.
BORROWING The fund may borrow in excess of 5% of its total assets only from
banks for temporary or emergency purposes and up to 5% for any purpose other
than direct investments in securities. The fund may borrow from banks up to
33 1/3% of its total net assets. In addition, the fund may enter into
borrowing arrangements with non-banks under specified conditions. Under
federal securities laws, the fund may borrow from banks and is required to
maintain continuous asset coverage of 300% with respect to such borrowings
and to sell (within three days) sufficient portfolio holdings to restore such
coverage if it should decline to less than 300% due to market fluctuations or
otherwise, even if disadvantageous from an investment standpoint.
Leveraging by means of borrowing may make any change in the fund's net asset
value even greater and thus result in increased volatility of returns. The
fund's assets that are used as collateral to secure the borrowing may
decrease in value while the borrowing is outstanding, which may force the
fund to use its other assets to increase the collateral. In addition, the
money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances).
The cost of borrowing may exceed the income received from the securities
purchased with borrowed funds.
In addition to borrowing for leverage purposes, the fund also may borrow
money to meet redemptions in order to avoid forced, unplanned sales of
portfolio securities. This allows the fund greater flexibility to buy and
sell portfolio securities for investment or tax considerations, rather than
cash flow considerations. See "Investment restrictions" for more information
about the fund's policies with respect to borrowing.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) 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 within 15 to 60 days. Purchases of securities on
a when-issued or delayed delivery basis are subject to the risk that the
value or the yields at delivery may be more or less than the purchase price
or yields available when the transaction was entered into. To the extent the
fund engages in these transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with its investment objectives and
policies, and not for the purpose of investment leverage. Although the fund
will generally buy securities on a when-issued or TBA basis with the
intention of holding the securities, it may sell the securities before the
settlement date if the manager believes it is advisable to do so.
When the fund is the buyer in this type of transaction, it will maintain, in
a segregated account with its custodian bank, cash or marketable securities
having an aggregate value equal to the amount of the fund's purchase
commitments until payment is made. As a buyer in one of these 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, delayed delivery or TBA transaction is a
form of leverage that may affect changes in net asset value to a greater
extent.
STANDBY COMMITMENT AGREEMENTS 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 the manager
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."
Unless otherwise noted in the fund's policies, the value of the underlying
securities on which options may be written at any one time will not exceed
15% of the fund's assets. Nor will the fund purchase put or call options if
the aggregate premium paid for such options would exceed 5% of its assets at
the time of purchase. The fund 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 and
related options. The fund may purchase or sell futures contracts or options
on futures contracts if, immediately thereafter, the aggregate amount of
initial margin deposits on all the futures positions of the fund and the
premiums paid on options on futures contracts would exceed 5% of the market
value of the fund's total assets.
OPTIONS - GENERAL. The fund may write (sell) covered put and call options and
buy put and call options on securities listed on a national securities
exchange and in the over-the-counter (OTC) market. Additionally, the fund may
"close out" options it has entered into.
A call option gives the option holder the right to buy the underlying
security from the option writer at the option exercise price at any time
prior to the expiration of the option. A put option gives the option holder
the right to sell the underlying security to the option writer at the option
exercise price at any time prior to the expiration of the option. The OTC
market is the dealer-to-dealer market in securities, in this case, option
securities in which the fund may buy or sell.
WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. The fund may write
options to generate additional income and to hedge its portfolio against
market or exchange rate movements. The writer of covered calls gives up the
potential for capital appreciation above the exercise price of the option
should the underlying stock rise in value. If the value of the underlying
stock rises above the exercise price of the call option, the security may be
"called away" and the fund required to sell shares of the stock at the
exercise price. The fund will realize a gain or loss from the sale of the
underlying security depending on whether the exercise price is greater or
less than the purchase price of the stock. Any gain will be increased by the
amount of the premium received from the sale of the call; any loss will be
decreased by the amount of the premium received. If a covered call option
expires unexercised, the fund will realize a gain in the amount of the
premium received. If, however, the stock price decreases, the hedging benefit
of the covered call option is limited to the amount of the premium received.
A call option written by the fund is "covered" if:
(a) the fund owns the underlying security that is subject to the call; or
(b) the fund 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
in exercise prices is maintained by the fund in cash or high-grade debt
securities in a segregated account with its custodian bank.
Options may be written in connection with "buy-and-write" transactions; that
is, the fund may purchase a security and then write a call option against
that security. The exercise price of the call will depend upon the expected
price movement of the underlying security. The exercise price of a call
option may be below ("in-the-money"), equal to ("at-the-money"), or above
("out-of-the-money") the current value of the underlying security at the time
the option is written.
The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines
below the exercise price of the put option, the security may be "put to" the
fund and the fund required to buy the stock at the exercise price. The fund
will incur an unrealized loss to the extent that the current market value of
the underlying security is less than the exercise price of the put option.
However, the loss will be offset at least in part by the premium received
from the sale of the put. If a put option written by the fund expires
unexercised, the fund will realize a gain in the amount of the premium
received.
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 in a
segregated account with its custodian bank. A put option 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 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.
BUYING CALL AND PUT OPTIONS ON SECURITIES. 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 the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
The fund may buy call options on securities that it intends to buy in order
to limit the risk of a substantial increase in the market price of the
security before the purchase is effected. The fund may also buy call options
on securities held in its portfolio and on which it has written call options.
As the holder of a put option, the fund has the right to sell the underlying
security at the exercise price at any time during the option period. The fund
may enter into closing sale transactions with respect to put options,
exercise them or permit them to expire.
The fund may buy a put option on an underlying security or currency owned by
the fund ("a protective put") as a hedging technique in order to protect
against an anticipated decline in the market value of the security. Such
hedge protection is provided only during the life of the put option when the
fund, as the holder of the put option, is able to sell the underlying
security at the put exercise price, regardless of any decline in the
underlying security's market price or currency's exchange value. For example,
a put option may be purchased in order to protect unrealized appreciation of
a security when 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 short-term capital gain
that may be available for distribution when the security is eventually sold.
The fund may also buy put options at a time when it does not own the
underlying security. By buying put options on a security it does not own, the
fund seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if
the market price of the underlying security remains equal to or greater than
the exercise price during the life of the put option, the fund will lose its
entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
OVER-THE-COUNTER (OTC) OPTIONS. 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. OTC options, however, 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.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. 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. The fund may suffer a loss if it is not able to exercise or
sell its position on a timely basis. 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 with which the fund
originally wrote the option. If the fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
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 also buy and sell both call and put
options on stock indices in order to hedge against the risk of market or
industry-wide stock price fluctuations or to increase income to the fund.
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 (or less, in the case of puts) than 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 the price movements in
the stock market generally (or in a particular industry or segment of the
market) rather than price movements in individual stock.
When the fund writes an option on a stock index, the fund may cover the
option by owning securities whose price changes, in the opinion of the
manager, are expected to be similar to those of the index, or in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. The fund may also cover
by establishing 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. The fund will maintain the
account while the option is open or it will otherwise cover the transaction.
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 fund will
incur brokerage fees when it buys or sells financial futures contracts.
The fund may invest in futures contracts only to hedge against changes in the
value of its securities or those it intends to buy. The fund will not enter
into a futures contract if the amounts paid for open contracts, including
required initial deposits, would exceed 5% of net assets.
FINANCIAL FUTURES. Financial futures contracts are commodity contracts that
obligate the purchaser or seller 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. 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 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, that is a member of the
relevant contract market. The exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
The fund may enter into futures contracts on foreign currencies, interest
rates, or on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through
mortgage-backed securities, and three-month U.S. Treasury bills. The fund may
also enter into futures contracts on corporate securities and non-U.S.
government debt securities, but such futures contracts are not currently
available.
At the same time a futures contract is purchased or sold, the fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the fund would provide or receive cash
that reflects any decline or increase in the contract's value. In addition,
the fund must 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.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although financial futures contracts by their terms call for the actual
delivery or acquisition of securities, or the cash value of the index, in
most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the securities or cash.
The obligation to make or take delivery is ended by buying (or selling, as
the case may be) on an exchange an identical financial futures contract
calling for delivery in the same month. All transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with
the exchange on which the contracts are traded. The fund will incur brokerage
fees when it buys or sells financial futures.
The fund will not engage in transactions in futures contracts for
speculation. Futures contracts will be used as a hedge against changes
resulting from market conditions in the values of its securities or
securities that it intends to buy or to attempt to protect the fund from
fluctuations in price of portfolio securities without actually buying or
selling the underlying security. When the fund buys futures contracts or
related call options, marketable instruments 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 will be
deposited in a segregated account with the custodian bank to collateralize
such long positions.
OPTIONS ON FUTURES CONTRACTS. The fund may purchase and write options on
futures contracts for hedging purposes only. The purchase of a call option on
a futures contract is similar in some respects to the purchase of a call
option on an individual security or currency. Depending on the price of the
option compared to either the price of the futures contract upon which it is
based or the price of the underlying securities or currency, the option may
be less risky than direct ownership of the futures contract or the underlying
securities or currency. As with the purchase of futures contracts, when the
fund is not fully invested, it may purchase a call option on a futures
contract to hedge against a market advance due to declining interest rates or
appreciation in the value of a foreign currency against the U.S. dollar.
If the fund writes a call option on a futures contract and the futures price
at expiration of the option is below the exercise price, the fund will retain
the full amount of the option premium, which may provide a partial hedge
against any decline that may have occurred in the value of the fund's
holdings. If the futures price at expiration of the option is higher than the
exercise price, the fund will retain the full amount of the option premium,
which may provide a partial hedge against any increase in the price of
securities that the fund intends to purchase. If a put or call option the
fund has written is exercised, the fund will incur a loss that will be
reduced by the amount of the premium it received. Depending on the degree of
correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the fund's losses from
existing options on futures may be affected by changes in the value of its
portfolio securities.
STOCK INDEX FUTURES AND OPTIONS ON THESE FUTURES. The fund may buy and sell
stock index futures contracts and options on stock index futures contracts
that trade on domestic exchanges and, to the extent such contracts have been
approved by the CFTC for sale to customers in the U.S., on foreign exchanges.
In general, the fund may invest in index futures for hedging purposes. Open
futures contracts are valued on a daily basis and the fund may be obligated
to provide or receive cash reflecting any decline or increase in the
contracts value.
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 a possible decrease in market value of
its equity securities. 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. To hedge against risks of market price
fluctuations, the fund may buy and sell call and put options on stock index
futures. 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 writer of the option will
deliver to the holder of the option the accumulated balance in the writer's
futures margin account representing the amount that 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.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options, futures, and options in futures and any other derivative
investments that are not presently contemplated for use by the fund or that
are not currently available but which may be developed, to the extent such
opportunities are consistent with the fund's investment goal and legally
permissible for the fund.
ILLIQUID SECURITIES The fund may invest in securities that cannot be offered
to the public for sale without first being registered under the Securities
Act of 1933 ("restricted securities"), or in other securities which, in the
opinion of the board, may be illiquid.
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. Reduced liquidity in the secondary market for
certain securities may make it more difficult for the fund to obtain market
quotations based on actual trades for purposes of valuing the fund's
portfolio.
Securities acquired outside of the U.S. and that are publicly traded in the
U.S. or on a foreign securities market are not considered 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.
Subject to the fund's percentage limitation on illiquid securities, the board
has authorized the fund to invest in restricted securities where such
investment is consistent with the fund's investment goal. The fund considers
these securities to be liquid to the extent the manager determines that there
is a liquid institutional or other market for such securities - for example,
restricted securities which may be freely transferred among qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933,
as amended, and for which a liquid institutional market has developed. In
spite of the manager's determinations in this regard, the board will remain
responsible for such determinations and will consider appropriate action,
consistent with the fund's goal and policies, if the security should become
illiquid after purchase. In determining whether a restricted security is
properly considered a liquid security, the investment manager and the board
will take into account, among others, the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number of dealers
willing to buy or sell the security and the number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and (iv) the
nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer). To the extent the fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in the
fund may be increased if qualified institutional buyers become uninterested
in buying these securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility, that is, sharp
price movements over relatively short time periods, or a prolonged general
decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the
fund may invest up to 100% of its assets in high quality money market
instruments. High quality money market instruments include high-grade
commercial paper, repurchase agreements, and other money market equivalents.
In addition, the fund may also invest in short-term (less than twelve months
to maturity) fixed-income securities, non-U.S. currency, short-term
instruments denominated in non-U.S. currencies, or medium-term (not more than
five years to maturity) obligations issued or guaranteed by the U.S.
government or the governments of foreign countries, their agencies or
instrumentalities.
The fund may also invest cash, including cash resulting from purchases and
sales of fund shares, temporarily in short-term debt instruments. To the
extent permitted by exemptions granted under the 1940 Act and the fund's
other investment policies and restrictions, the fund may also invest in
shares of one or more money market funds managed by Franklin Advisers, Inc.
or its affiliates.
When the fund's investments in cash or cash equivalents increase, it may not
participate in market advances or declines to the same extent as it would if
the fund were fully invested in stocks or bonds.
Any decision to make a substantial withdrawal for a sustained period of time
from the fund's investment goals will be reviewed by the board.
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 (a) by the 1940 Act,
or (b) any exemptions therefrom which may be granted by the SEC, or (c) 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 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 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.
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 trying to
maximize 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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NON-DIVERSIFICATION RISK Because the fund is not diversified, there is no
restriction under the 1940 Act on the percentage of its assets that it may
invest at any time in the securities of any issuer. Nevertheless, the fund's
non-diversified status may expose it to greater risk or volatility than
diversified funds with otherwise similar investment policies, since the fund
may invest a larger portion of its assets in securities of a small number of
issuers.
CONCENTRATION The fund will invest more than 25% of its total assets in
equity securities of companies expected to benefit from the development,
advancement and use of technology. Investing in a fund that concentrates its
investments in a specialized market sector involves increased risks.
TECHNOLOGY COMPANIES The securities of technology companies have historically
been volatile in price due to the rapid pace of product change and
development affecting such companies. Prices of the securities of such
companies historically have been more volatile than other securities,
especially over the short term, and can be subject to abrupt or erratic price
movements. By emphasizing technology companies, the fund carries much greater
risks of adverse developments among such companies than the fund that invests
in a wider variety of companies.
SMALLER COMPANIES Historically, smaller company stocks have been more
volatile in price than larger company stocks. Among the reasons for the
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
such stocks, and the greater sensitivity of smaller companies to changing
economic conditions. Besides exhibiting greater volatility, smaller company
stocks may, to a degree, fluctuate independently of larger company stocks.
Small company stocks may decline in price as large company stocks rise, or
rise in price as large company stocks decline. Investors should therefore
expect that the net asset value of the fund that invests a substantial
portion of its net assets in smaller company stocks may be more volatile than
the shares of the fund that invests solely in larger company stocks.
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 foreign companies or
governments compared to the reports and ratings published about U.S.
companies and available information about public entities in the U.S. 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. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing
its portfolio and calculating its net asset value. 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 (the costs associates with buying and selling securities) on foreign
securities markets, including those for custodial services 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.
Investments in securities of issuers in foreign nations may also be affected
by 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. Expropriation of assets refers to the possibility
that a country's laws will prohibit the return to the U.S. of any monies
which the fund has invested in the country. Confiscatory taxation refers to
the possibility that a foreign country will adopt a tax law which has the
effect of requiring the fund to pay significant amounts, if not all, of the
value of the fund's investment to the foreign country's taxing authority.
Diplomatic developments means that all communications and other official
governmental relations between the country and the U.S. could be severed.
This may occur as a result of certain actions occurring within a foreign
country, such as significant civil rights violations, or because of the
actions of the U.S. during a time of crisis in the particular country. As a
result of such diplomatic developments, U.S. investors' money in the
particular country, including that of the fund, could be abandoned with no
way to recover the money.
The fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
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 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 fund's 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 of trustees' appraisal of the risks
will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
EMERGING MARKETS Investments in companies domiciled or operating in emerging
countries may be subject to potentially higher risks, making these
investments more volatile, than investments in developed countries. These
risks include (i) less social, political and economic stability; (ii) the
risk that the small size of the markets for such securities and the low or
nonexistent volume of trading may result in a lack of liquidity and in
greater price volatility; (iii) the existence of 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
many developing countries, of a capital market structure or market-oriented
economy; and (vii) the possibility that recent favorable economic
developments in some emerging countries may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some emerging 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.
Investments in emerging countries may involve increased risks of
nationalization, expropriation and confiscatory taxation. For example, the
Communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of expropriation, the fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in certain emerging countries.
Finally, even though the currencies of some emerging countries, such as
certain Eastern European countries may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the fund's shareholders.
Repatriation, that is, the return to an investor's homeland, of investment
income, capital and proceeds of sales by foreign investors may require
governmental registration or approval in some developing countries. Delays in
or a refusal to grant any required governmental registration or approval for
such repatriation could adversely affect the fund. Further, the economies of
emerging countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries
with which they trade.
LOWER-RATED SECURITIES An investment in any fund that invests in
non-investment grade securities, including those issued by foreign companies
and governments, is subject to a higher degree of risk than an investment in
the fund that invests primarily in higher-quality securities. You should
consider the increased risk of loss to income and 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.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of lower-rated debt securities may be more
complex than for issuers of higher rated securities. The ability of the fund
to achieve its investment goal may, to the extent of investment in
lower-rated debt securities, be more dependent upon such creditworthiness
analysis than would be the case if the fund were investing in higher rated
securities. 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.
Lower-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of lower-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 raising
interest rates, for example, could cause a decline in lower-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, the
fund may incur additional expenses to seek recovery.
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.
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 the 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 fund's net assets.
DERIVATIVE SECURITIES
FUTURES CONTRACTS A purchase or sale of a futures contract may result in
losses in excess of the amount invested. The fund may not be able to properly
hedge its securities where a liquid secondary market is unavailable for the
futures contract the fund wishes to close. In addition, there may be an
imperfect correlation between movements in the securities or foreign currency
on which the futures or options contract is based and movements in the
securities or currency held by the fund. Adverse market movements could cause
the fund to lose up to its full investment in a call option contract and/or
to experience substantial losses on an investment in a futures contract.
There is also the risk of loss by the fund of margin deposits in the event of
bankruptcy of a broker with whom the fund has an open position in a futures
contract or option.
Although the manager believes that the use of futures contracts will benefit
the fund, if the manager's investment judgment about the general direction of
interest or currency exchange rates is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if the fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the fund will lose
part or all of the benefit of the increased value of the bonds which it has
hedged because it will have offsetting losses in its futures positions.
Similarly, if the fund sells a foreign currency futures contract and the U.S.
dollar value of the currency unexpectedly increases, the fund will lose the
beneficial effect of the increase on the value of the security denominated in
that currency. In addition, in such situations, if the fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Sales of bonds may be, but are not necessarily, at
increased prices that reflect the rising market. The fund may have to sell
securities at a time when it may be disadvantageous to do so.
The 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 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.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price. Once the daily
limit has been reached in a futures contract subject to the limit, no more
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and, therefore,
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
The fund intends to purchase or sell futures only on exchanges or boards of
trade where there appears to be an active secondary market, but there is no
assurance that a liquid secondary market will exist for any particular
contract or at any particular time. In addition, many of the futures
contracts available may be relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active
secondary market will develop or continue to exist. The fund may not be able
to achieve a perfect correlation between its futures positions and portfolio
positions in corporate fixed-income securities because futures contracts
based on these securities are not currently available.
Futures contracts that are purchased on foreign exchanges may not be as
liquid as those purchased on CTFC-designated contract markets. In addition,
foreign futures contracts may be subject to varied regulatory oversight. The
price of any foreign futures contract and, therefore, the potential profit
and loss thereon, may be affected by any variance in the foreign exchange
rate between the time a particular order is placed and the time it is
liquidated, offset or exercised.
OPTIONS ON FUTURES CONTRACTS The amount of risk the fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In writing options on futures, the fund's
loss is potentially unlimited and may exceed the amount of the premium
received. Also, the fund may not be able to properly hedge its securities or
close out option contract positions where a liquid secondary market is
unavailable for the option the fund wishes to close. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased.
OPTIONS ON SECURITIES The fund's options investments involve certain risks.
The effectiveness of an options strategy depends on the degree to which price
movements in the underlying securities correlate with price movements in the
relevant portion of the fund's portfolio. In addition, the fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option it has purchased, or that there may be a negative
correlation that would result in a loss on both the securities and the
option. If the manager is not successful in using options in managing the
fund's investments, the fund's performance will be worse than if the manager
did not employ such strategies.
When trading options on foreign exchanges or in the over-the-counter market,
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. The purchaser of an option can lose the amount of the
premium plus related transaction costs. Moreover, the fund as an option
writer could lose amounts substantially in excess of its initial investment,
due to the margin and collateral requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As
a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all
option positions entered into on a national securities exchange are cleared
and guaranteed by the Options Clearing Corporation, thereby reducing the risk
of counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting the fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
Although the fund will generally purchase or write only those options for
which there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
option, or at any particular time. For some options, no secondary market on
an exchange may exist and the fund may have difficulty effecting closing
transactions in particular options. Therefore, the fund would have to
exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities where a buyer
exercises put or call options. If the fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise. There is no assurance that
higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of the Options Clearing
Corporation inadequate, and thereby result in the institution by an exchange
of special procedures which may interfere with the timely execution of
customers' orders.
OPTIONS ON STOCK INDICES The fund's ability effectively to use options on
stock indexes 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, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities underlying the option will not move in the same amount as the
option. It is also possible that there may be a negative correlation between
the index and the hedged securities that would result in a loss on both the
securities and the instrument. Accordingly, successful use by the fund of
options on stock indexes, 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 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 at any
specific time. Thus, it may not be possible to close an option position. The
inability to close options positions could have an adverse impact on the
fund's performance.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to the 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 for the security or the yield available when
the transaction was entered into.
STANDBY COMMITMENT AGREEMENTS There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the
value of the security may be more or less than its purchase price. Since the
issuance of the security is at the option of the issuer, the fund may bear
the risk of a decline in value of the security and may not benefit if the
security appreciates in value during the commitment period.
EURO On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins
will replace the bills and coins of the above countries.
The new European Central Bank has control over each country's monetary
policies. Therefore, the participating countries no longer control their own
monetary policies by directing independent interest rates for their
currencies. The national governments of the participating countries, however,
have retained the authority to set tax and spending policies and public debt
levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the business
or financial condition of European countries and issuers, and issuers in other
regions, whose securities the fund may hold, or the impact, if any, on fund
performance. In the first six months of the euro's existence, the exchange rates
of the euro versus many of the world's major currencies steadily declined. In
this environment, U.S. and other foreign investors experienced erosion of their
investment returns on their euro-denominated securities. 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 service providers are taking steps they
believe are reasonably designed to address the euro issue.
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 (79)
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 28 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food
processing) (until 1996).
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) (until 1998).
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc. and Franklin Templeton Services, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director, Franklin 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; and director or
trustee, as the case may be, of 50 of the investment companies in the
Franklin Templeton Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
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 (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Investment Advisory Services, Inc.; Chairman of the Board,
Franklin Advisers, Inc.; Vice President, 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
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; 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 (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director,
The California Center for Land Recycling (redevelopment); director or
trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, General Partner, Miller &
LaHaye and Peregrine Associates, the general partners of Peregrine Venture
funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); 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) (until
1998) and Hambrecht & Quist Group (investment banking) (until 1992), and
President, National Association of Securities Dealers, Inc. (until 1987).
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President,
Chief Financial Officer and Director, Franklin/Templeton Investor Services,
Inc.; Senior Vice President and Chief Financial Officer, 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.; 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 (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
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,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust, Franklin
Real Estate Management, Inc. and Franklin Properties, Inc.; officer and
director of some of the other subsidiaries of Franklin Resources, Inc.;
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, President, Chief Executive Officer and Director,
Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income
Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial
Clerk, U.S. District Court (District of Massachusetts) (until 1979).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc. and Franklin Advisers, Inc.;
Director, Templeton Investment Counsel, Inc.; President, Franklin Investment
Advisory 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 33 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 29 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
*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 $2,000 per committee
meeting attended, a portion of which is allocated to the trust. Members of a
committee are not compensated for any committee meeting held on the day of a
board meeting. Noninterested board members also may serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to noninterested board members by the
trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST 1 ($) FUNDS 2 ($) EACH SERVES 3
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Frank H. Abbott, III 13,935 156,060 28
Harris J. Ashton 16,280 363,165 48
S. Joseph Fortunato 15,279 363,238 50
Edith E. Holiday 18,975 237,265 25
Frank W.T. LaHaye 16,035 156,060 28
Gordon Macklin.. 16,280 363,165 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, 1999.
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 53 registered investment companies, with
approximately 155 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), 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.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the fund or that are currently held by the fund, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
MANAGEMENT FEES The fund pays the manager a fee equal an annual rate of:
o 0.550% of the value of net assets, up to and including $500 million;
o 0.450% of the value of net assets over $500 million, up to and including
$1 billion;
o 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion, up to and including
$6.5 billion;
o 0.325% of the value of net assets over $6.5 billion, up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and
including $16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and
including $19 billion;
o 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.
The fee is computed according to the terms of the management agreement. Each
class of the fund's shares pays its proportionate share of the fee.
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 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 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 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. Distributions are subject to approval by the board. 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 receive 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, 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 on the sale of debt
securities generally are treated as ordinary losses. These gains when
distributed will be taxable to you as ordinary income, and any losses will
reduce the fund's ordinary income otherwise available for distribution to
you. This treatment could increase or decrease 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 distributions in December (or to pay them in January, in which
case you must treat them as received in December) but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) 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 any 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.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
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 any 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 SECURITIES States grant tax-free status to dividends paid to
you from interest earned on certain U.S. government securities, subject in
some states to minimum investment or reporting 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 only a small percentage of the dividends
paid by the fund are expected to qualify for the dividends-received
deduction. You may 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 (possibly causing the fund to sell securities to raise the
cash for necessary distributions) 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 foreign securities. 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 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.
The 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 Technology Fund - Class A
o Franklin Technology Fund - Class B
o Franklin Technology Fund - Class C
o Franklin Technology 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.
As of May 1, 2000, the principal shareholders of the fund, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE
(%)
- ------------------------------------------------------------------
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class A 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class B 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class C 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Advisor Class 100
1. Franklin Resources, Inc. is a Delaware Corporation.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
trustees of the trust, may be considered beneficial holders of the fund
shares held by Franklin Resources, Inc. (Resources). As principal
shareholders of Resources, they may be able to control the voting of
Resources' shares of the fund.
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 May 1, 2000, 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.
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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. We may deduct any applicable banking
charges imposed by the bank from your account.
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 Templeton Variable Insurance
Products Trust and Templeton Capital Accumulator Fund, Inc.
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 generally does not include a 403(b) plan that only allows
salary deferral contributions.
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 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 Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust. 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.
o 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 may accept orders for these
accounts 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.
Effective June 1, 2000, the requirement to agree to invest at least $1
million in Franklin Templeton Funds over a 13 month period will no longer
apply.
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
In addition, Class C shares may be purchased without an initial sales charge
by any investor who buys Class C shares through an omnibus account with
Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the
shares are sold within 18 months of purchase.
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.
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 (%)
- ---------------------------------------------------------------
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 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.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors or one of its affiliates may pay up to 1%, 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. These payments may be made 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.
In addition to the payments above, Distributors and/or its affiliates may
provide financial support to 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 and/or total assets with the Franklin
Templeton Group of Funds. 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 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 % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
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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 securities dealer of record
received a payment from Distributors of 0.25% or less, or (ii) Distributors
did not make any payment in connection with the purchase, or (iii) 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 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 account
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 goal 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 generally are
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.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account, generally on the 25th day of the month. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day. Beginning June 1, 2000, you may request to change the
processing date to the 1st, 5th, 10th, 15th or 20th of the month. For plans
set up on or after June 1, 2000, we will process redemptions on the day of
the month you have indicated on your account application or, if no day is
indicated, on the 20th day of the month (or 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.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment. The fund
may discontinue a systematic withdrawal plan by notifying you in writing and
will discontinue a systematic withdrawal plan automatically 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.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH 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 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 may be entitled to payment from the fund under the Rule 12b-1
plans, as discussed below. Except as noted, Distributors receives no other
compensation from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan
pursuant to Rule 12b-1 for each class. Although the plans differ in some ways
for each class, each plan is designed to benefit the fund and its
shareholders. The plans are expected to, among other things, increase
advertising of the fund, encourage sales of the fund and service to its
shareholders, and increase or maintain assets of the fund so that certain
fixed expenses may be spread over a broader asset base, resulting in lower
per share expense ratios. In addition, a positive cash flow into the fund is
useful in managing the fund because the manager has more flexibility in
taking advantage of new investment opportunities and handling shareholder
redemptions.
Under each plan, the fund pays Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses also may include service fees paid to securities dealers or others
who have executed a servicing agreement with the fund, Distributors or its
affiliates and who provide service or account maintenance to shareholders
(service fees); the expenses of printing prospectuses and reports used for
sales purposes, and of preparing and distributing sales literature and
advertisements; and a prorated portion of Distributors' overhead expenses
related to these activities. Together, these expenses, including the service
fees, are "eligible expenses." The 12b-1 fees charged to each class are based
only on the fees attributable to that particular class.
The fund may pay up to 0.35% per year of the class's average daily net
assets, out of which 0.25% may be paid for service to shareholders (service
fees). The fund pays Distributors up to 1% per year of the class's average
daily net assets, out of which 0.25% may be paid for service fees. The Class
B and C plans also may be used to pay Distributors for advancing commissions
to securities dealers with respect to the initial sale of Class B and C
shares. Class B plan fees payable to Distributors are used by Distributors to
pay third party financing entities that have provided financing to
Distributors in connection with advancing commissions to securities dealers.
Resources owns a minority interest in one of the third-party financing
entities.
The Class A, B and C plans are compensation plans. They allow the fund to pay
a fee to Distributors that may be more than the eligible expenses
Distributors has incurred at the time of the payment. Distributors must,
however, demonstrate to the board that it has spent or has near-term plans to
spend the amount received on eligible expenses. The fund will not pay more
than the maximum amount allowed under the 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.
To the extent fees are for distribution or marketing functions, as
distinguished from administrative servicing or agency transactions, certain
banks may not participate in the plans because of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banks, however, are allowed to receive fees under the plans for
administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board
may reasonably request to enable it to make an informed determination of
whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The
terms and provisions of each plan also are consistent with Rule 12b-1.
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 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 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.
Because the fund is new, it has no performance history and thus no
performance quotations have been provided. The following SEC formula will be
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, income dividends and capital gain distributions are
reinvested at net asset value, the account was completely redeemed at the end
of each period and the deduction of all applicable charges and fees.
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 Nasdaq Composite Index - a broad-based capitalization-weighted total return
index of all Nasdaq National Market and Small Cap stocks.
o The Hambrecht & Quist Technology Index is comprised of the publicly traded
stocks of approximately 275 technology companies which includes the
electronics, services and other related technology industries. The index is
market-capitalization-weighted and includes reinvested dividends.
o The Standard & Poor's Technology Index is designed to measure the
performance of all the stocks included in the technology sector of the S&P
500 Index. The index is market-capitalization-weighted and includes
reinvested dividends.
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(R) companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R) and Bloomberg(R) 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. 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 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 approximately 3 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 $229 billion in assets under management for
more than 5 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 103 U.S. based open-end
investment companies to the public. The fund may identify itself by its
Nasdaq symbol or CUSIP number.
DESCRIPTION OF RATINGS
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PREFERRED STOCKS RATINGS
STANDARD & POOR'S RATINGS GROUP (S&P(R))
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)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 RATINGS GROUP (S&P(R))
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 TECHNOLOGY FUND
FRANKLIN STRATEGIC SERIES
ADVISOR CLASS
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000
[Insert Franklin Templeton Ben Head]
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 May 1, 2000, 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 PAGE
Goal and Strategies................................ 2
Risks.............................................. 12
Officers and Trustees.............................. 17
Management and Other Services...................... 20
Portfolio Transactions............................. 21
Distributions and Taxes............................ 22
Organization, Voting Rights and Principal
Holders............................................ 23
Buying and Selling Shares.......................... 24
Pricing Shares..................................... 27
The Underwriter.................................... 28
Performance........................................ 28
Miscellaneous Information.......................... 30
Description of Ratings............................. 30
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT 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 fund's principal investment goal is capital appreciation. Under normal
market conditions, the fund will invest at least 65% of its total assets in
equity securities of companies expected to benefit from the development,
advancement, and use of technology. This goal is fundamental, which means it
may not be changed without shareholder approval.
OTHER INVESTMENT POLICIES. Below is more detailed information about some of
the various types of securities the fund may buy and the fund's investment
policies and restrictions.
CONCENTRATION The fund concentrates its investments in equity securities of
companies in the technology sector, including companies expected to benefit
from the development, advancement, and use of technology. The fund may invest
up to 25% of its total assets in any one or more industries within the
technology sector.
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 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 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 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 that convertible
security is "converted," the operating company often issues new stock to the
holder of the convertible security. If, however, the parity price (the price
at which the common stock underlying the convertible security may be
obtained) of the convertible security is less than the call price (the price
of the bond, including any premium related to the conversion feature), the
operating company may pay out cash instead of common stock.
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 of the issuer 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, and 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 proceeds of the convertible
preferred stock offering pass through to the company. The company then issues
a convertible subordinated debenture to the special purpose vehicle. This
convertible subordinated debenture has 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. The fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the fund's ability to dispose of particular securities, when
necessary, to meet the fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an
issuer. Reduced liquidity in the secondary market for certain securities may
also make it more difficult for the fund to obtain market quotations based on
actual trades for purposes of valuing the fund's portfolio. The fund,
however, intends to acquire liquid convertible securities, though there can
be no assurances that this will be achieved.
LATE STAGE PRIVATE PLACEMENTS The fund may invest up to 5% of its assets in
private placements, particularly late stage private placements. Late stage
private placements are sales of securities made in non-public, unregistered
transactions shortly before a company expects to go public. The fund may make
such investments in order to participate in companies whose initial public
offerings are expected to be "hot" issues. There is no public market for
shares sold in these private placements and it is possible that initial
public offering will never be completed. Moreover, even after an initial
public offering, there may be a limited trading market for the securities or
the fund may be subject to contractual limitations on its ability to sell the
shares.
DEBT SECURITIES The fund will invest less than 5% of its net assets in debt
securities. The fund may buy 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. 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 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.
Bond, notes and commercial paper are types of debt securities. Each of these
differs in the length of the issuer's payment schedule, with commercial paper
having the shortest payment schedule.
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.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS Although the fund may invest up to
25% of total assets in foreign securities, it intends to limit its
investments to 15% of total assets.
The fund may buy foreign securities traded in the U.S. or directly in foreign
markets and securities issued by companies domiciled in emerging markets. 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 (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 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 The fund generally will 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.
Under a repurchase agreement, the fund agrees to buy securities guaranteed as
to payment of principal and interest by the U.S. government or its agencies
from a qualified bank or broker-dealer and then to sell the securities back
to the bank or broker-dealer 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 market 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 exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency
of the bank or broker-dealer, including possible delays or restrictions upon
the fund's ability to sell the underlying securities. The fund will enter
into repurchase agreements only with parties who meet certain
creditworthiness standards, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase transaction.
REVERSE REPURCHASE AGREEMENTS are the opposite of repurchase agreements but
involve similar mechanics and risks. The fund sells securities to a bank or
dealer and agrees to repurchase them at a mutually agreed price and date.
Cash or liquid high-grade debt securities having an initial market value,
including accrued interest, equal to at least 100% of the dollar amount sold
by the fund are segregated, i.e., set aside, as collateral and
marked-to-market daily to maintain coverage of at least 100%. Reverse
repurchase agreements involve the risk that the market value of the
securities retained by the fund may decline below the price of the securities
the fund has sold but is obligated to repurchase under the agreement. A
default by the purchaser might cause the fund to experience a loss or delay
in the liquidation costs. The fund intends to enter into reverse repurchase
agreements with domestic or foreign banks or securities dealers. The manager
will evaluate the creditworthiness of these entities prior to engaging in
such transactions and it will conduct these activities under the general
supervision of the board.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may
lend certain of its portfolio securities to qualified banks and
broker-dealers. For each loan, the borrower must maintain with the fund's
custodian collateral (consisting of any combination of cash, securities
issued by the U.S. government and its agencies and instrumentalities, 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 also continues to receive any
distributions paid on the loaned securities. The fund may terminate a loan at
any time and obtain the return of the securities loaned within the normal
settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the
lending of the securities, the manager intends to call the loaned securities
to vote proxies, or to use other practicable and legally enforceable means to
obtain voting rights, when the manager has knowledge that, in its opinion, a
material event affecting the loaned securities will occur or the manager
otherwise believes it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in
the event of default or insolvency of the borrower. The fund will lend its
securities only to parties who meet creditworthiness standards approved by
the fund's board of trustees, i.e., banks or broker-dealers that the manager
has determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
SECURITIES INDUSTRY RELATED INVESTMENTS Securities issued by companies
engaged in securities related businesses, including companies that are
securities brokers, dealers, underwriters or investment advisors are
considered to be part of the financial services industry. Generally, under
the Investment Company Act of 1940, as amended (the "1940 Act"), the fund may
not acquire a security or any interest in a securities related business to
the extent such acquisition would result in the fund acquiring in excess of
5% of a class of an issuer's outstanding equity securities or 10% of the
outstanding principal amount of an issuer's debt securities, or investing
more than 5% of the value of the fund's total assets in securities of the
issuer. In addition, any equity security of a securities-related business
must be a marginable security under Federal Reserve Board regulations and any
debt security of a securities-related business must be investment grade as
determined by the fund's board of trustees. The fund does not believe that
these limitations will impede the attainment of its investment goals.
BORROWING The fund may borrow in excess of 5% of its total assets only from
banks for temporary or emergency purposes and up to 5% for any purpose other
than direct investments in securities. The fund may borrow from banks up to
33 1/3% of its total net assets. In addition, the fund may enter into
borrowing arrangements with non-banks under specified conditions. Under
federal securities laws, the fund may borrow from banks and is required to
maintain continuous asset coverage of 300% with respect to such borrowings
and to sell (within three days) sufficient portfolio holdings to restore such
coverage if it should decline to less than 300% due to market fluctuations or
otherwise, even if disadvantageous from an investment standpoint.
Leveraging by means of borrowing may make any change in the fund's net asset
value even greater and thus result in increased volatility of returns. The
fund's assets that are used as collateral to secure the borrowing may
decrease in value while the borrowing is outstanding, which may force the
fund to use its other assets to increase the collateral. In addition, the
money borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances). The
cost of borrowing may exceed the income received from the securities
purchased with borrowed funds.
In addition to borrowing for leverage purposes, the fund also may borrow
money to meet redemptions in order to avoid forced, unplanned sales of
portfolio securities. This allows the fund greater flexibility to buy and
sell portfolio securities for investment or tax considerations, rather than
cash flow considerations. See "Investment restrictions" for more information
about the fund's policies with respect to borrowing.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) 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 within 15 to 60 days. Purchases of securities on
a when-issued or delayed delivery basis are subject to the risk that the
value or the yields at delivery may be more or less than the purchase price
or yields available when the transaction was entered into. To the extent the
fund engages in these transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with its investment objectives and
policies, and not for the purpose of investment leverage. Although the fund
will generally buy securities on a when-issued or TBA basis with the
intention of holding the securities, it may sell the securities before the
settlement date if the manager believes it is advisable to do so.
When the fund is the buyer in this type of transaction, it will maintain, in
a segregated account with its custodian bank, cash or marketable securities
having an aggregate value equal to the amount of the fund's purchase
commitments until payment is made. As a buyer in one of these 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, delayed delivery or TBA transaction is a
form of leverage that may affect changes in net asset value to a greater
extent.
STANDBY COMMITMENT AGREEMENTS 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 the manager
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."
Unless otherwise noted in the fund's policies, the value of the underlying
securities on which options may be written at any one time will not exceed
15% of the fund's assets. Nor will the fund purchase put or call options if
the aggregate premium paid for such options would exceed 5% of its assets at
the time of purchase. The fund 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 and
related options. The fund may purchase or sell futures contracts or options
on futures contracts if, immediately thereafter, the aggregate amount of
initial margin deposits on all the futures positions of the fund and the
premiums paid on options on futures contracts would exceed 5% of the market
value of the fund's total assets.
OPTIONS - GENERAL. The fund may write (sell) covered put and call options and
buy put and call options on securities listed on a national securities
exchange and in the over-the-counter (OTC) market. Additionally, the fund may
"close out" options it has entered into.
A call option gives the option holder the right to buy the underlying
security from the option writer at the option exercise price at any time
prior to the expiration of the option. A put option gives the option holder
the right to sell the underlying security to the option writer at the option
exercise price at any time prior to the expiration of the option. The OTC
market is the dealer-to-dealer market in securities, in this case, option
securities in which the fund may buy or sell.
WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. The fund may write
options to generate additional income and to hedge its portfolio against
market or exchange rate movements. The writer of covered calls gives up the
potential for capital appreciation above the exercise price of the option
should the underlying stock rise in value. If the value of the underlying
stock rises above the exercise price of the call option, the security may be
"called away" and the fund required to sell shares of the stock at the
exercise price. The fund will realize a gain or loss from the sale of the
underlying security depending on whether the exercise price is greater or
less than the purchase price of the stock. Any gain will be increased by the
amount of the premium received from the sale of the call; any loss will be
decreased by the amount of the premium received. If a covered call option
expires unexercised, the fund will realize a gain in the amount of the
premium received. If, however, the stock price decreases, the hedging benefit
of the covered call option is limited to the amount of the premium received.
A call option written by the fund is "covered" if:
(a) the fund owns the underlying security that is subject to the call; or
(b) the fund 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
in exercise prices is maintained by the fund in cash or high- grade debt
securities in a segregated account with its custodian bank.
Options may be written in connection with "buy-and-write" transactions; that
is, the fund may purchase a security and then write a call option against
that security. The exercise price of the call will depend upon the expected
price movement of the underlying security. The exercise price of a call
option may be below ("in-the-money"), equal to ("at-the-money"), or above
("out-of- the-money") the current value of the underlying security at the
time the option is written.
The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines
below the exercise price of the put option, the security may be "put to" the
fund and the fund required to buy the stock at the exercise price. The fund
will incur an unrealized loss to the extent that the current market value of
the underlying security is less than the exercise price of the put option.
However, the loss will be offset at least in part by the premium received
from the sale of the put. If a put option written by the fund expires
unexercised, the fund will realize a gain in the amount of the premium
received.
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 in a
segregated account with its custodian bank. A put option 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 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 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.
BUYING CALL AND PUT OPTIONS ON SECURITIES. 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 the volatility of the underlying security, the
remaining term of the option, supply and demand and interest rates.
The fund may buy call options on securities that it intends to buy in order
to limit the risk of a substantial increase in the market price of the
security before the purchase is effected. The fund may also buy call options
on securities held in its portfolio and on which it has written call options.
As the holder of a put option, the fund has the right to sell the underlying
security at the exercise price at any time during the option period. The fund
may enter into closing sale transactions with respect to put options,
exercise them or permit them to expire.
The fund may buy a put option on an underlying security or currency owned by
the fund ("a protective put") as a hedging technique in order to protect
against an anticipated decline in the market value of the security. Such
hedge protection is provided only during the life of the put option when the
fund, as the holder of the put option, is able to sell the underlying
security at the put exercise price, regardless of any decline in the
underlying security's market price or currency's exchange value. For example,
a put option may be purchased in order to protect unrealized appreciation of
a security when 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 short-term capital gain
that may be available for distribution when the security is eventually sold.
The fund may also buy put options at a time when it does not own the
underlying security. By buying put options on a security it does not own, the
fund seeks to benefit from a decline in the market price of the underlying
security. If the put option is not sold when it has remaining value, and if
the market price of the underlying security remains equal to or greater than
the exercise price during the life of the put option, the fund will lose its
entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
OVER-THE-COUNTER (OTC) OPTIONS. 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. OTC options, however, 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.
There can be no assurance that a continuous liquid secondary market will
exist for any particular OTC option at any specific time. 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. The fund may suffer a loss if it is not able to exercise or
sell its position on a timely basis. 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 with which the fund
originally wrote the option. If the fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise.
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 also buy and sell both call and put
options on stock indices in order to hedge against the risk of market or
industry-wide stock price fluctuations or to increase income to the fund.
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 (or less, in the case of puts) than 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 the price movements in
the stock market generally (or in a particular industry or segment of the
market) rather than price movements in individual stock.
When the fund writes an option on a stock index, the fund may cover the
option by owning securities whose price changes, in the opinion of the
manager, are expected to be similar to those of the index, or in such other
manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations. The fund may also cover
by establishing 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. The fund will maintain the
account while the option is open or it will otherwise cover the transaction.
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 fund will
incur brokerage fees when it buys or sells financial futures contracts.
The fund may invest in futures contracts only to hedge against changes in the
value of its securities or those it intends to buy. The fund will not enter
into a futures contract if the amounts paid for open contracts, including
required initial deposits, would exceed 5% of net assets.
FINANCIAL FUTURES. Financial futures contracts are commodity contracts that
obligate the purchaser or seller 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. 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 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, that is a member of the
relevant contract market. The exchanges guarantee performance of the
contracts as between the clearing members of the exchange.
The fund may enter into futures contracts on foreign currencies, interest
rates, or on debt securities that are backed by the full faith and credit of
the U.S. government, such as long-term U.S. Treasury bonds, Treasury notes,
Government National Mortgage Association modified pass-through
mortgage-backed securities, and three-month U.S. Treasury bills. The fund may
also enter into futures contracts on corporate securities and non-U.S.
government debt securities, but such futures contracts are not currently
available.
At the same time a futures contract is purchased or sold, the fund must
allocate cash or securities as a deposit payment ("initial deposit"). Daily
thereafter, the futures contract is valued and the payment of "variation
margin" may be required since each day the fund would provide or receive cash
that reflects any decline or increase in the contract's value. In addition,
the fund must 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.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a
futures contract may not have been issued when the contract was written.
Although financial futures contracts by their terms call for the actual
delivery or acquisition of securities, or the cash value of the index, in
most cases the contractual obligation is fulfilled before the date of the
contract without having to make or take delivery of the securities or cash.
The obligation to make or take delivery is ended by buying (or selling, as
the case may be) on an exchange an identical financial futures contract
calling for delivery in the same month. All transactions in the futures
market are made, offset or fulfilled through a clearinghouse associated with
the exchange on which the contracts are traded. The fund will incur brokerage
fees when it buys or sells financial futures.
The fund will not engage in transactions in futures contracts for
speculation. Futures contracts will be used as a hedge against changes
resulting from market conditions in the values of its securities or
securities that it intends to buy or to attempt to protect the fund from
fluctuations in price of portfolio securities without actually buying or
selling the underlying security. When the fund buys futures contracts or
related call options, marketable instruments 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 will be
deposited in a segregated account with the custodian bank to collateralize
such long positions.
OPTIONS ON FUTURES CONTRACTS. The fund may purchase and write options on
futures contracts for hedging purposes only. The purchase of a call option on
a futures contract is similar in some respects to the purchase of a call
option on an individual security or currency. Depending on the price of the
option compared to either the price of the futures contract upon which it is
based or the price of the underlying securities or currency, the option may
be less risky than direct ownership of the futures contract or the underlying
securities or currency. As with the purchase of futures contracts, when the
fund is not fully invested, it may purchase a call option on a futures
contract to hedge against a market advance due to declining interest rates or
appreciation in the value of a foreign currency against the U.S. dollar.
If the fund writes a call option on a futures contract and the futures price
at expiration of the option is below the exercise price, the fund will retain
the full amount of the option premium, which may provide a partial hedge
against any decline that may have occurred in the value of the fund's
holdings. If the futures price at expiration of the option is higher than the
exercise price, the fund will retain the full amount of the option premium,
which may provide a partial hedge against any increase in the price of
securities that the fund intends to purchase. If a put or call option the
fund has written is exercised, the fund will incur a loss that will be
reduced by the amount of the premium it received. Depending on the degree of
correlation between changes in the value of its portfolio securities and
changes in the value of its futures positions, the fund's losses from
existing options on futures may be affected by changes in the value of its
portfolio securities.
STOCK INDEX FUTURES AND OPTIONS ON THESE FUTURES. The fund may buy and sell
stock index futures contracts and options on stock index futures contracts
that trade on domestic exchanges and, to the extent such contracts have been
approved by the CFTC for sale to customers in the U.S., on foreign exchanges.
In general, the fund may invest in index futures for hedging purposes. Open
futures contracts are valued on a daily basis and the fund may be obligated
to provide or receive cash reflecting any decline or increase in the
contracts value.
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 a possible decrease in market value of
its equity securities. 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. To hedge against risks of market price
fluctuations, the fund may buy and sell call and put options on stock index
futures. 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 writer of the option will
deliver to the holder of the option the accumulated balance in the writer's
futures margin account representing the amount that 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.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area
of options, futures, and options in futures and any other derivative
investments that are not presently contemplated for use by the fund or that
are not currently available but which may be developed, to the extent such
opportunities are consistent with the fund's investment goal and legally
permissible for the fund.
ILLIQUID SECURITIES The fund may invest in securities that cannot be offered
to the public for sale without first being registered under the Securities
Act of 1933 ("restricted securities"), or in other securities which, in the
opinion of the board, may be illiquid.
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. Reduced liquidity in the secondary market for
certain securities may make it more difficult for the fund to obtain market
quotations based on actual trades for purposes of valuing the fund's
portfolio.
Securities acquired outside of the U.S. and that are publicly traded in the
U.S. or on a foreign securities market are not considered 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.
Subject to the fund's percentage limitation on illiquid securities, the board
has authorized the fund to invest in restricted securities where such
investment is consistent with the fund's investment goal. The fund considers
these securities to be liquid to the extent the manager determines that there
is a liquid institutional or other market for such securities - for example,
restricted securities which may be freely transferred among qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933,
as amended, and for which a liquid institutional market has developed. In
spite of the manager's determinations in this regard, the board will remain
responsible for such determinations and will consider appropriate action,
consistent with the fund's goals and policies, if the security should become
illiquid after purchase. In determining whether a restricted security is
properly considered a liquid security, the investment manager and the board
will take into account, among others, the following factors: (i) the
frequency of trades and quotes for the security; (ii) the number of dealers
willing to buy or sell the security and the number of other potential buyers;
(iii) dealer undertakings to make a market in the security; and (iv) the
nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer). To the extent the fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in the
fund may be increased if qualified institutional buyers become uninterested
in buying these securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility, that is, sharp
price movements over relatively short time periods, or a prolonged general
decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the
fund may invest up to 100% of its assets in high quality money market
instruments. High quality money market instruments include high-grade
commercial paper, repurchase agreements, and other money market equivalents.
In addition, the fund may also invest in short-term (less than twelve months
to maturity) fixed-income securities, non-U.S. currency, short-term
instruments denominated in non-U.S. currencies, or medium-term (not more than
five years to maturity) obligations issued or guaranteed by the U.S.
government or the governments of foreign countries, their agencies or
instrumentalities.
The fund may also invest cash, including cash resulting from purchases and
sales of fund shares, temporarily in short-term debt instruments. To the
extent permitted by exemptions granted under the 1940 Act and the fund's
other investment policies and restrictions, the fund may also invest in
shares of one or more money market funds managed by Franklin Advisers, Inc.
or its affiliates.
When the fund's investments in cash or cash equivalents increase, it may not
participate in market advances or declines to the same extent as it would if
the fund were fully invested in stocks or bonds.
Any decision to make a substantial withdrawal for a sustained period of time
from the fund's investment goals will be reviewed by the board.
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 (a) by the 1940 Act,
or (b) any exemptions therefrom which may be granted by the SEC, or (c) 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 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 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.
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 trying to
maximize 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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NON-DIVERSIFICATION RISK Because the fund is not diversified, there is no
restriction under the 1940 Act on the percentage of its assets that it may
invest at any time in the securities of any issuer. Nevertheless, the fund's
non-diversified status may expose it to greater risk or volatility than
diversified funds with otherwise similar investment policies, since the fund
may invest a larger portion of its assets in securities of a small number of
issuers.
CONCENTRATION The fund will invest more than 25% of its total assets in
equity securities of companies expected to benefit from the development,
advancement and use of technology. Investing in a fund that concentrates its
investments in a specialized market sector involves increased risks.
TECHNOLOGY COMPANIES The securities of technology companies have historically
been volatile in price due to the rapid pace of product change and
development affecting such companies. Prices of the securities of such
companies historically have been more volatile than other securities,
especially over the short term, and can be subject to abrupt or erratic price
movements. By emphasizing technology companies, the fund carries much greater
risks of adverse developments among such companies than the fund that invests
in a wider variety of companies.
SMALLER COMPANIES Historically, smaller company stocks have been more
volatile in price than larger company stocks. Among the reasons for the
greater price volatility of these securities are the less certain growth
prospects of smaller firms, the lower degree of liquidity in the markets for
such stocks, and the greater sensitivity of smaller companies to changing
economic conditions. Besides exhibiting greater volatility, smaller company
stocks may, to a degree, fluctuate independently of larger company stocks.
Small company stocks may decline in price as large company stocks rise, or
rise in price as large company stocks decline. Investors should therefore
expect that the net asset value of the fund that invests a substantial
portion of its net assets in smaller company stocks may be more volatile than
the shares of the fund that invests solely in larger company stocks.
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 foreign companies or
governments compared to the reports and ratings published about U.S.
companies and available information about public entities in the U.S. 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. The fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing
its portfolio and calculating its net asset value. 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 (the costs associates with buying and selling securities) on foreign
securities markets, including those for custodial services 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.
Investments in securities of issuers in foreign nations may also be affected
by 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. Expropriation of assets refers to the possibility
that a country's laws will prohibit the return to the U.S. of any monies
which the fund has invested in the country. Confiscatory taxation refers to
the possibility that a foreign country will adopt a tax law which has the
effect of requiring the fund to pay significant amounts, if not all, of the
value of the fund's investment to the foreign country's taxing authority.
Diplomatic developments means that all communications and other official
governmental relations between the country and the U.S. could be severed.
This may occur as a result of certain actions occurring within a foreign
country, such as significant civil rights violations, or because of the
actions of the U.S. during a time of crisis in the particular country. As a
result of such diplomatic developments, U.S. investors' money in the
particular country, including that of the fund, could be abandoned with no
way to recover the money.
The fund's investments in foreign securities may increase the risks with
respect to the liquidity of the fund's portfolio. This could inhibit the
fund's ability to meet a large number of shareholder redemption requests in
the event of economic or political turmoil in a country in which the fund has
a substantial portion of its assets invested or deterioration in relations
between the U.S. and the foreign country.
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 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 fund's 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 of trustees' appraisal of the risks
will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.
EMERGING MARKETS Investments in companies domiciled or operating in emerging
countries may be subject to potentially higher risks, making these
investments more volatile, than investments in developed countries. These
risks include (i) less social, political and economic stability; (ii) the
risk that the small size of the markets for such securities and the low or
nonexistent volume of trading may result in a lack of liquidity and in
greater price volatility; (iii) the existence of 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
many developing countries, of a capital market structure or market-oriented
economy; and (vii) the possibility that recent favorable economic
developments in some emerging countries may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some emerging 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.
Investments in emerging countries may involve increased risks of
nationalization, expropriation and confiscatory taxation. For example, the
Communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of expropriation, the fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in certain emerging countries.
Finally, even though the currencies of some emerging countries, such as
certain Eastern European countries may be convertible into U.S. dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to the fund's shareholders.
Repatriation, that is, the return to an investor's homeland, of investment
income, capital and proceeds of sales by foreign investors may require
governmental registration or approval in some developing countries. Delays in
or a refusal to grant any required governmental registration or approval for
such repatriation could adversely affect the fund. Further, the economies of
emerging countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures imposed or negotiated by the
countries with which they trade. These economies also have been and may
continue to be adversely affected by economic conditions in the countries
with which they trade.
LOWER-RATED SECURITIES An investment in any fund that invests in
non-investment grade securities, including those issued by foreign companies
and governments, is subject to a higher degree of risk than an investment in
the fund that invests primarily in higher-quality securities. You should
consider the increased risk of loss to income and 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.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower-rated
debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of lower-rated debt securities may be more
complex than for issuers of higher rated securities. The ability of the fund
to achieve its investment goal may, to the extent of investment in
lower-rated debt securities, be more dependent upon such creditworthiness
analysis than would be the case if the fund were investing in higher rated
securities. 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.
Lower-rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of lower-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 raising
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 lower-rated debt securities defaults, the
fund may incur additional expenses to seek recovery.
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.
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 the 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 fund's net assets.
DERIVATIVE SECURITIES
FUTURES CONTRACTS A purchase or sale of a futures contract may result in
losses in excess of the amount invested. The fund may not be able to properly
hedge its securities where a liquid secondary market is unavailable for the
futures contract the fund wishes to close. In addition, there may be an
imperfect correlation between movements in the securities or foreign currency
on which the futures or options contract is based and movements in the
securities or currency held by the fund. Adverse market movements could cause
the fund to lose up to its full investment in a call option contract and/or
to experience substantial losses on an investment in a futures contract.
There is also the risk of loss by the fund of margin deposits in the event of
bankruptcy of a broker with whom the fund has an open position in a futures
contract or option.
Although the manager believes that the use of futures contracts will benefit
the fund, if the manager's investment judgment about the general direction of
interest or currency exchange rates is incorrect, the fund's overall
performance would be poorer than if it had not entered into any such
contract. For example, if the fund has hedged against the possibility of an
increase in interest rates that would adversely affect the price of bonds
held in its portfolio and interest rates decrease instead, the fund will lose
part or all of the benefit of the increased value of the bonds which it has
hedged because it will have offsetting losses in its futures positions.
Similarly, if the fund sells a foreign currency futures contract and the U.S.
dollar value of the currency unexpectedly increases, the fund will lose the
beneficial effect of the increase on the value of the security denominated in
that currency. In addition, in such situations, if the fund has insufficient
cash, it may have to sell bonds from its portfolio to meet daily variation
margin requirements. Sales of bonds may be, but are not necessarily, at
increased prices that reflect the rising market. The fund may have to sell
securities at a time when it may be disadvantageous to do so.
The 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 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.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price. Once the daily
limit has been reached in a futures contract subject to the limit, no more
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movements during a particular trading day and, therefore,
does not limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
The fund intends to purchase or sell futures only on exchanges or boards of
trade where there appears to be an active secondary market, but there is no
assurance that a liquid secondary market will exist for any particular
contract or at any particular time. In addition, many of the futures
contracts available may be relatively new instruments without a significant
trading history. As a result, there can be no assurance that an active
secondary market will develop or continue to exist. The fund may not be able
to achieve a perfect correlation between its futures positions and portfolio
positions in corporate fixed-income securities because futures contracts
based on these securities are not currently available.
Futures contracts that are purchased on foreign exchanges may not be as
liquid as those purchased on CTFC-designated contract markets. In addition,
foreign futures contracts may be subject to varied regulatory oversight. The
price of any foreign futures contract and, therefore, the potential profit
and loss thereon, may be affected by any variance in the foreign exchange
rate between the time a particular order is placed and the time it is
liquidated, offset or exercised.
OPTIONS ON FUTURES CONTRACTS The amount of risk the fund assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In writing options on futures, the fund's
loss is potentially unlimited and may exceed the amount of the premium
received. Also, the fund may not be able to properly hedge its securities or
close out option contract positions where a liquid secondary market is
unavailable for the option the fund wishes to close. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased.
OPTIONS ON SECURITIES The fund's options investments involve certain risks.
The effectiveness of an options strategy depends on the degree to which price
movements in the underlying securities correlate with price movements in the
relevant portion of the fund's portfolio. In addition, the fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option it has purchased, or that there may be a negative
correlation that would result in a loss on both the securities and the
option. If the manager is not successful in using options in managing the
fund's investments, the fund's performance will be worse than if the manager
did not employ such strategies.
When trading options on foreign exchanges or in the over-the-counter market,
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. The purchaser of an option can lose the amount of the
premium plus related transaction costs. Moreover, the fund as an option
writer could lose amounts substantially in excess of its initial investment,
due to the margin and collateral requirements associated with option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As
a result, many of the protections provided to traders on organized exchanges
will be available with respect to such transactions. In particular, all
option positions entered into on a national securities exchange are cleared
and guaranteed by the Options Clearing Corporation, thereby reducing the risk
of counterparty default. Further, a liquid secondary market in options traded
on a national securities exchange may be more readily available than in the
over- the-counter market, potentially permitting the fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in
the event of adverse market movements.
Although the fund will generally purchase or write only those options for
which there appears to be an active secondary market, there is no assurance
that a liquid secondary market on an exchange will exist for any particular
option, or at any particular time. For some options, no secondary market on
an exchange may exist and the fund may have difficulty effecting closing
transactions in particular options. Therefore, the fund would have to
exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities where a buyer
exercises put or call options. If the fund as a covered call option writer is
unable to effect a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until the option expires or
it delivers the underlying security upon exercise. There is no assurance that
higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of the Options Clearing
Corporation inadequate, and thereby result in the institution by an exchange
of special procedures which may interfere with the timely execution of
customers' orders.
OPTIONS ON STOCK INDICES The fund's ability effectively to use options on
stock indexes 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, the correlation will not be
perfect. Consequently, the fund bears the risk that the prices of the
securities underlying the option will not move in the same amount as the
option. It is also possible that there may be a negative correlation between
the index and the hedged securities that would result in a loss on both the
securities and the instrument. Accordingly, successful use by the fund of
options on stock indexes, 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 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 at any
specific time. Thus, it may not be possible to close an option position. The
inability to close options positions could have an adverse impact on the
fund's performance.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to the 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 for the security or the yield available when
the transaction was entered into.
STANDBY COMMITMENT AGREEMENTS There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the
value of the security may be more or less than its purchase price. Since the
issuance of the security is at the option of the issuer, the fund may bear
the risk of a decline in value of the security and may not benefit if the
security appreciates in value during the commitment period.
EURO On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national
currencies of the following member countries: Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transactions. The participating countries currently issue sovereign
debt exclusively in euro. By July 1, 2002, euro-denominated bills and coins
will replace the bills and coins of the above countries.
The new European Central Bank has control over each country's monetary
policies. Therefore, the participating countries no longer control their own
monetary policies by directing independent interest rates for their
currencies. The national governments of the participating countries, however,
have retained the authority to set tax and spending policies and public debt
levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the
business or financial condition of European countries and issuers, and
issuers in other regions, whose securities the fund may hold, or the impact,
if any, on fund performance. In the first six months of the euro's existence,
the exchange rates of the euro versus many of the world's major currencies
steadily declined. In this environment, U.S. and other foreign investors
experienced erosion of their investment returns on their euro-denominated
securities. 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 service providers are taking
steps they believe are reasonably designed to address the euro issue.
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 (79)
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 28 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food
processing) (until 1996).
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) (until 1998).
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc. and Franklin Templeton Services, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director, Franklin 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; and director or
trustee, as the case may be, of 50 of the investment companies in the
Franklin Templeton Group of Funds.
Edith E. Holiday (48)
3239 38th Street, N.W., Washington, DC 20016
TRUSTEE
Director, Amerada Hess Corporation (exploration and refining of oil and gas)
(1993-present), Hercules Incorporated (chemicals, fibers and resins)
(1993-present), Beverly Enterprises, Inc. (health care) (1995-present), H.J.
Heinz Company (processed foods and allied products) (1994-present) and RTI
International Metals, Inc. (manufacture and distribution of titanium) (July
1999-present); director or trustee, as the case may be, of 25 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
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 (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the
Chairman and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Investment Advisory Services, Inc.; Chairman of the Board,
Franklin Advisers, Inc.; Vice President, 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
Vice Chairman, Member - Office of the Chairman and Director, Franklin
Resources, Inc.; Executive Vice President and Director, Franklin Templeton
Distributors, Inc.; Director, Franklin Advisers, Inc., Franklin Investment
Advisory Services, Inc. and Franklin/Templeton Investor Services, Inc.;
Senior Vice President, Franklin Advisory Services, LLC; 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 (71)
20833 Stevens Creek Blvd., Suite 102,
Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director,
The California Center for Land Recycling (redevelopment); director or
trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, General Partner, Miller &
LaHaye and Peregrine Associates, the general partners of Peregrine Venture
funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet
services), White Mountains Insurance Group, Ltd. (holding company) and
Spacehab, Inc. (aerospace services); 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) (until
1998) and Hambrecht & Quist Group (investment banking) (until 1992), and
President, National Association of Securities Dealers, Inc. (until 1987).
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Chief Financial Officer and
Chief Operating Officer, Franklin Resources, Inc.; Senior Vice President,
Chief Financial Officer and Director, Franklin/Templeton Investor Services,
Inc.; Senior Vice President and Chief Financial Officer, 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.; 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 (51)
1840 Gateway Drive, San Mateo, CA 94404
SECRETARY
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
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,
and Vice President, Chief Legal Officer and Chief Operating Officer, Franklin
Investment Advisory Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Chief Executive Officer and Director, Franklin Select Realty
Trust, Property Resources, Inc., Property Resources Equity Trust, Franklin
Real Estate Management, Inc. and Franklin Properties, Inc.; officer and
director of some of the other subsidiaries of Franklin Resources, Inc.;
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, President, Chief Executive Officer and Director,
Franklin Real Estate Income Fund and Franklin Advantage Real Estate Income
Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior
Vice President, Templeton Worldwide, Inc. and Templeton Global Investors,
Inc.; officer of some of the other subsidiaries of Franklin Resources, Inc.
and of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986- 1995), Attorney, Rogers & Wells (until 1986), and Judicial
Clerk, U.S. District Court (District of Massachusetts) (until 1979).
Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc. and Franklin Advisers, Inc.;
Director, Templeton Investment Counsel, Inc.; President, Franklin Investment
Advisory 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 33 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 29 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
TREASURER AND PRINCIPAL ACCOUNTING OFFICER
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.;
officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; officer of 53 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, Chief Executive Officer and Managing Director,
Templeton Franklin Investment Services (Asia) Limited (until January 2000)
and Director, Templeton Asset Management Ltd. (until 1999).
*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 $2,000 per committee
meeting attended, a portion of which is allocated to the trust. Members of a
committee are not compensated for any committee meeting held on the day of a
board meeting. Noninterested board members may also serve as directors or
trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve
on other boards within the Franklin Templeton Group of Funds. The following
table provides the total fees paid to noninterested board members by the
trust and by the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST 1 ($) FUNDS 2 ($) EACH SERVES 3
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Frank H. Abbott, III 13,935 156,060 28
Harris J. Ashton 16,280 363,165 48
S. Joseph Fortunato 15,279 363,238 50
Edith E. Holiday 18,975 237,265 25
Frank W.T. LaHaye 16,035 156,060 28
Gordon Macklin 16,280 363,165 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, 1999.
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 53 registered investment companies, with
approximately 155 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), 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.
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal
securities transactions, including transactions involving securities that are
being considered for the fund or that are currently held by the fund, subject
to certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics.
MANAGEMENT FEES The fund pays the manager a fee equal an annual rate of:
o 0.550% of the value of net assets, up to and including $500 million;
o 0.450% of the value of net assets over $500 million, up to and including
$1 billion;
o 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
o 0.350% of the value of net assets over $1.5 billion, up to and including
$6.5 billion;
o 0.325% of the value of net assets over $6.5 billion, up to and including
$11.5 billion;
o 0.300% of the value of net assets over $11.5 billion, up to and
including $16.5 billion;
o 0.290% of the value of net assets over $16.5 billion, up to and
including $19 billion;
o 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
o 0.270% of the value of net assets over $21.5 billion.
The fee is computed according to the terms of the management agreement. Each
class of the fund's shares pays its proportionate share of the fee.
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 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 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 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. Distributions are subject to approval by the board. 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, 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 on the sale of debt
securities generally are treated as ordinary losses. These gains when
distributed will be taxable to you as ordinary income, and any losses will
reduce the fund's ordinary income otherwise available for distribution to
you. This treatment could increase or decrease 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 distributions in December (or to pay them in January, in which
case you must treat them as received in December) but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions (including redemptions in kind) 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 any 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.
Beginning after the year 2005 (2000 for certain shareholders), gains from the
sale of fund shares held for more than five years may be subject to a reduced
tax rate.
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 SECURITIES States grant tax-free status to dividends paid to
you from interest earned on certain U.S. government securities, subject in
some states to minimum investment or reporting 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 only a small percentage of the dividends
paid by the fund are expected to qualify for the dividends-received
deduction. You may 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 (possibly causing the fund to sell securities to raise the
cash for necessary distributions) 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. 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 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.
The 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 Technology Fund - Class A
o Franklin Technology Fund - Class B
o Franklin Technology Fund - Class C
o Franklin Technology 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.
As of May 1, 2000, the principal shareholders of the fund, beneficial or of
record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
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Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class A 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class B 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Class C 100
Franklin Resources, Inc. 1
Corporate Accounting
Attn: Michael Corcoran
555 Airport Blvd., 4th Flr.
Burlingame, CA 94010 Advisor Class 100
1.Franklin Resources, Inc. is a Delaware Corporation.
Note: Charles B. Johnson and Rupert H. Johnson, Jr., who are officers and/or
trustees of the trust, may be considered beneficial holders of the fund
shares held by Franklin Resources, Inc. (Resources). As principal
shareholders of Resources, they may be able to control the voting of
Resources' shares of the fund.
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 May 1, 2000, 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. We may deduct any applicable banking
charges imposed by the bank from your account.
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 may provide financial
support to 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 and/or total assets with the Franklin Templeton Group of Funds.
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 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 generally are
not available until the seventh day following the sale. The fund 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.
Each month in which a payment is scheduled, we will redeem an equivalent
amount of shares in your account, generally on the 25th day of the month. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day. Beginning June 1, 2000, you may request to change the
processing date to the 1st, 5th, 10th, 15th or 20th of the month. For plans
set up on or after June 1, 2000, we will process redemptions on the day of
the month you have indicated on your account application or, if no day is
indicated, on the 20th day of the month (or 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.
To discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment, we must receive instructions
from you at least three business days before a scheduled payment. The fund
may discontinue a systematic withdrawal plan by notifying you in writing and
will discontinue a systematic withdrawal plan automatically 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.
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.
Sending redemption proceeds by wire or electronic funds transfer (ACH) 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 or ACH 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 shares.
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 quotations used by the fund are based on the
standardized methods of computing performance mandated by the SEC.
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.
Because the fund is new, it has no performance history and thus no
performance quotations have been provided. The following SEC formula will be
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, the account was completely redeemed at the end of each
period and the deduction of all applicable charges and fees. 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 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 Nasdaq Composite Index - a broad-based capitalization-weighted total return
index of all Nasdaq National Market and Small Cap stocks.
o The Hambrecht & Quist Technology Index is comprised of the publicly traded
stocks of approximately 275 technology companies which includes the
electronics, services and other related technology industries. The index is
market-capitalization-weighted and includes reinvested dividends.
o The Standard & Poor's Technology Index is designed to measure the
performance of all the stocks included in the technology sector of the S&P
500 Index. The index is market-capitalization-weighted and includes
reinvested dividends.
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(R) companies, Salomon Smith Barney Inc.,
Merrill Lynch, Lehman Brothers(R) and Bloomberg(R) 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. 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 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 approximately 3 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 $229 billion in assets under management for
more than 5 million U.S. based mutual fund shareholder and other accounts.
The Franklin Templeton Group of Funds offers 103 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.
DESCRIPTION OF RATINGS
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PREFERRED STOCKS RATINGS
STANDARD & POOR'S RATINGS GROUP (S&P (R))
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)
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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
INVESTMENT GRADE
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.
BELOW INVESTMENT GRADE
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 AND 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.
