As filed with the Securities and Exchange Commission on February 16, 2000.
File Nos.
33-39088
811-6243
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 39 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 42 (X)
FRANKLIN STRATEGIC SERIES
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BOULEVARD, SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
MURRAY L. SIMPSON, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(1)
[ ] on May 1, 2000 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Prospectus
FRANKLIN STRATEGIC SERIES
Franklin Small Cap Growth Fund II
CLASS A, B & C
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]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
FRANKLIN SMALL CAP GROWTH FUND II
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at
least 65% of its total assets in the equity securities of U.S. small
capitalization (small cap) growth companies. Small cap companies are generally
those [with market cap values (share price times the number of common stock
shares outstanding) of less than $1.5 billion,] at the time of purchase. The
manager may continue to hold an investment for further capital growth
opportunities even if the company is no longer small cap. In selecting growth
companies, the fund may invest substantially in technology sectors such as
electronic technology and hardware, computer software, internet-related
services, and health technology.
In addition to its principal investments, the fund may invest in equity
securities of larger companies. The fund may also invest a portion in initial
public offering securities, or a very small portion in private or illiquid
securities. Equities represent ownership interests in individual companies and
give shareholders a claim in the company's earnings and assets. They include
common and preferred stocks, and securities convertible into common stock.
[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined 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. Advantages such as a particular
marketing or product niche, proven technology, and industry leadership are all
factors the manager believes point to strong long-term growth potential. While
the manager diversifies the fund's assets across many industries, from time to
time the fund may invest substantially in certain sectors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue 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.
STOCKS While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the short term.
Individual stock price movements can result from factors affecting individual
companies, industries, or securities markets. Growth stock prices reflect
projections of future earnings or revenues, and can, therefore, fall
dramatically if the company fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. You could lose money
over short or even extended periods. [End callout]
SMALLER COMPANIES While smaller companies may offer greater opportunities for
capital growth than larger, more established companies, they also have more
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 may also suffer significant losses, their securities
can be less liquid, and investments in these companies may be speculative.
Initial public offerings of securities ("IPOs") 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 early trading. Thus, when
the fund is smaller, any such gains will have a larger impact on the fund's
reported performance than when the fund's asset size is larger.
TECHNOLOGY COMPANIES Technology and biotechnology industry stocks can be subject
to abrupt or erratic price movements. They have historically been volatile in
price, especially over the short term, due to the rapid pace of product change
and development affecting such companies. Prices often change collectively
without regard to the merits of individual companies.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other statements
made by companies about their Year 2000 readiness, but could not audit each
company to verify its readiness. Although the risk of the Year 2000 problem
should decrease over time, the possibility remains that the fund and the
companies in which it is invested may be adversely affected by Year 2000
problems until all of their various data processing activities for the year have
been completed.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not insured by the Federal Deposit Insurance Corporation,
the Federal Reserve Board, or any other agency of the U.S. government. Mutual
fund shares involve investment risks, including the possible loss of principal.
[End callout] [Insert graphic of a bull and a bear] PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign]
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Maximum sales charge (load) as a
percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None 1 4.00% 2 0.99% 3
Exchange fee 4 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)5
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Management fees 6 0.55% 0.55% 0.55%
Distribution and service
(12b-1) fees 0.35% 1.00% 1.00%
Other expenses 0.60% 0.60% 0.60%
------------------------------------
Total annual fund operating expenses6 1.50% 2.15% 2.15%
------------------------------------
1. Except for investments of $1 million or more (see page [#])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.(See page [#]).]
5. The management fees and distribution and service (12b-1) fees shown are based
on the fund's maximum contractual amount. Other expenses are estimated.
6. The administrator and manager have agreed in advance to limit their
respective fees and to 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 administrator and manager may end this
arrangement at any time upon notice to the fund's Board of Trustees.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. 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
- -----------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A $719 1 $1,022
CLASS B $618 $ 973
CLASS C $415 $ 766
If you do not sell your shares:
CLASS B $218 $ 673
CLASS C $316 $ 766
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404 is the fund's investment manager. Together, Advisers and its affiliates
manage over $224 billion in assets.
The team responsible for the fund's management is Ed Jamieson, Michael McCarthy
and Aidan O'Connell.
EDWARD B. JAMIESON, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Jamieson has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1987.
MICHAEL MCCARTHY, VICE PRESIDENT OF ADVISERS
Mr. McCarthy has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1992.
AIDAN O'CONNEL, PORTFOLIO MANAGER OF ADVISERS
Mr. O'Connell has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1998. Previously, he was a research
associate and a corporate finance associate at Hambrecht & Quist.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. 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;
o 0.270 of the value of net assets in excess of $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 proceeds if
you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss. For
tax purposes, an exchange of your fund shares for shares of a different Franklin
Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 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
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the 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 THIS % IS DEDUCTED FROM
BUYING THEM YOUR PROCEEDS AS A CDSC
- ---------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page [#]).
After 8 years, your Class B shares automatically convert to Class A shares,
lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
RETIREMENT PLANS Class B shares are 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 1.00% per year for the sale of Class B shares and for services
provided to shareholders. Because these fees are paid out of Class B's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
THE SALES CHARGE
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- -------------------------------------------------------------------------------
Under $1 million 1.00 1.01
WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE
IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER.
CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares
you sell within 18 months of purchase. The way we calculate the CDSC is the same
for each class (please see [below]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the fund to pay distribution and other
fees of up to 1.00% per year for the sale of Class C shares and for services
provided to shareholders. Because these fees are paid out of Class C's assets on
an on-going basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A , B & C
The CDSC for each class is based on the current value of the shares being sold
or their net asset value when purchased, whichever is less. There is no CDSC on
shares you acquire by reinvesting your dividends or capital gains distributions.
[Begin callout]
The holding period for the CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page [#]
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE
APPROPRIATE SECTION OF YOUR ACCOUNT APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days.
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 Plan Services at
1-800/527-2020. A list of available sales charge waivers also may be found in
the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- ---------------------------------------------------------------------------
INITIAL ADDITIONAL
- ---------------------------------------------------------------------------
Regular accounts $1,000 $50
- ---------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- ---------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- ---------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- ---------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs
$250 $50
- ---------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities,
and their immediate family members
$100 $50
- ---------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic of the Fund. the Fund. Include your
envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. Pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. Pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
AUTOMATIC PAYROLL DEDUCTION You may be able to invest automatically in Class A
shares of the fund by transferring money from your paycheck to the fund by
electronic funds transfer. If you are interested, indicate on your application
that you would like to receive an Automatic Payroll Deduction Program kit.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class* of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class*, generally without paying any additional sales charges.
If you exchange shares held for less than six months, however, you may be
charged the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may
exchange into Class A without any sales charge.
SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your
shares and receive regular payments from your account. A CDSC may apply to
withdrawals that exceed certain amounts. Certain terms and minimums apply. To
sign up, complete the appropriate section of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time. 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
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the dollar
value or number of shares you wish to sell. If you own
both Class A and B shares, also specify the class of
shares, otherwise we will sell your Class A shares
first. Be sure to include all necessary signatures and
any additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
- -------------------------------------------------------------------------
[Insert graphic of As long as your transaction is for $100,000 or
phone] less, you do not hold share certificates and
you have not changed your address by phone
BY PHONE within the last 15 days, you can sell your shares
by phone.
1-800/632-2301
A check will be mailed to the name(s) and address on
the account. Written instructions, with a signature
guarantee, are required to send the check to another
address or to make it payable to another person.
- --------------------------------------------------------------------------
[Insert graphic of You can call or write to have redemption
three lightning bolts] proceeds sent to a bank account. See the
policies above for selling shares by mail or
phone.
Before requesting to have redemption proceeds
BY ELECTRONIC FUNDS sent to a bank account, please make sure we
TRANSFER (ACH) 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.
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 has been $1000 but 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 does not allow investments by market timers. You will be
considered a market timer if you have (i) requested an exchange out of the fund
within two weeks of an earlier exchange request, or (ii) exchanged shares out of
the fund more than twice in a calendar quarter, or (iii) exchanged shares equal
to at least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Shares under common ownership or
control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under the
exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days' notice.
o 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 .35% to Distributors or others, out of
which .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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also 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 #_____________ [lit code]
Prospectus
FRANKLIN STRATEGIC SERIES
Franklin Small Cap Growth Fund II - Advisor Class
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]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
FRANKLIN SMALL CAP GROWTH FUND II
[Insert graphic of bullseye and arrows] GOAL AND STRATEGIES
GOAL The fund's investment goal is capital growth.
PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest
at least 65% of its total assets in the equity securities of U.S. small
capitalization (small cap) growth companies. Small cap companies are
generally those [with market cap values (share price times the number of
common stock shares outstanding) of less than $1.5 billion,] at the time of
purchase. The manager may continue to hold an investment for further capital
growth opportunities even if the company is no longer small cap. In
selecting growth companies, the fund may invest substantially in technology
sectors such as electronic technology and hardware, computer software,
internet-related services, and health technology.
In addition to its principal investments, the fund may invest in equity
securities of larger companies. The fund may also invest a portion in
initial public offering securities, or a very small portion in private or
illiquid securities. Equities represent ownership interests in individual
companies and give shareholders a claim in the company's earnings and assets.
They include common and preferred stocks, and securities convertible into
common stock.
[Begin callout]
The fund invests primarily in common stocks of small cap U.S. companies.
[End callout]
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined 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. Advantages
such as a particular marketing or product niche, proven technology, and
industry leadership are all factors the manager believes point to strong
long-term growth potential. While the manager diversifies the fund's assets
across many industries, from time to time the fund may invest substantially
in certain sectors.
TEMPORARY INVESTMENTS When the manager believes market or economic
conditions are unfavorable for investors, is unable to locate suitable
investment opportunities, or seeks to maintain liquidity, it may invest all
or substantially all of the fund's assets in short-term investments,
including cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue 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.
STOCKS While stocks have historically outperformed other asset classes over
the long term, they tend to go
up and down more dramatically over the short term. Individual stock price
movements can result from factors affecting individual companies, industries,
or securities markets. Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections.
[Begin callout]
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. You could lose
money over short or even extended periods.
[End callout]
SMALLER COMPANIES While smaller companies may offer greater opportunities
for capital growth than larger, more established companies, they also have
more 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 may also suffer significant
losses, their securities can be less liquid, and investments in these
companies may be speculative.
Initial public offerings of securities ("IPOs") 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 early trading.
Thus, when the fund is smaller, any such gains will have a larger impact on
the fund's reported performance than when the fund's asset size is larger.
TECHNOLOGY COMPANIES Technology and biotechnology industry stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Prices often change
collectively without regard to the merits of individual companies.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge.
If a company in which the fund is invested develops problems related to Year
2000, the price of its securities may be adversely affected, and this may
have an adverse effect on the fund's performance.
Year 2000 has been one of the many factors the manager considers when making
investment decisions. The manager reviewed public filings and other
statements made by companies about their Year 2000 readiness, but could not
audit each company to verify its readiness. Although the risk of the Year
2000 problem should decrease over time, the possibility remains that the fund
and the companies in which it is invested may be adversely affected by Year
2000 problems until all of their various data processing activities for the
year have been completed.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not 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 5.75%
Exchange fee None
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR
CLASS
- ---------------------------------------------------------
Management fees 1 0.55%
Distribution and service
(12b-1) fees None
Other expenses 2 0.60%
--------------
Total annual fund operating expenses3 1.15%
--------------
1. The maximum fee shown here is based on the fund's maximum contractual
amount.
2. Other expenses are estimated.
3. The administrator and manager have agreed in advance to limit their
respective fees and to 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.
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:
You invest $10,000 for the periods shown;
Your investment has a 5% return each year;
The fund's operating expenses remain the same; and
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
- ----------------------------------------------------------
If you sell your shares at the
end of the period:
$117 $365
[Insert graphic of briefcase] MANAGEMENT
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, CA
94404 is the fund's investment manager. Together, Advisers and its affiliates
manage over $224 billion in assets.
The team responsible for the fund's management is Ed Jamieson, Michael
McCarthy and Aidan O'Connell.
EDWARD B. JAMIESON, EXECUTIVE VICE PRESIDENT OF ADVISERS
Mr. Jamieson has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1987.
MICHAEL MCCARTHY, VICE PRESIDENT OF ADVISERS
Mr. McCarthy has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1992.
AIDAN O'CONNEL, PORTFOLIO MANAGER OF ADVISERS
Mr. O'Connell has been a manager of the fund since its inception. He joined
the Franklin Templeton Group in 1998. Previously, he was a research
associate and a corporate finance associate at Hambrecht & Quist.
The fund pays Advisers a fee for managing the fund's assets and making its
investment decisions. 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;
o 0.270 of the value of net assets in excess of $21.5 billion.
[Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS
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 proceeds
if you do not provide your correct social security or taxpayer identification
number, or if the IRS instructs the fund to do so.
[End callout]
Every January, you will receive a statement that shows the tax status of
distributions you received for the previous year. Distributions declared in
December but paid in January are taxable as if they were paid in December.
When you sell your shares of the fund, you may have a capital gain or loss.
For tax purposes, an exchange of your fund shares for shares of a different
Franklin Templeton Fund is the same as a sale.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
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, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments:
No initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or
profit sharing plans that meet the requirements for qualification under
section 401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries
or participants, in the case of certain retirement plans, have full or
shared investment discretion. Minimum investments: No initial or
additional minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of an established group of 11
or more investors. Minimum investments: $5 million initial and $50
additional. For minimum investment purposes, the group's investments are
added together. The group may combine all of its shares in the Franklin
Templeton Funds for purposes of determining whether it meets the $5
million minimum, as long as $1 million is in Advisor Class or Class Z
shares of any of the Franklin Templeton Funds. There are certain other
requirements and the group must have a purpose other than buying fund
shares without a sales charge.
Please note that Advisor Class shares of the fund generally are not available
to retirement plans through Franklin Templeton's ValuSelect(R) program.
Retirement plans in the ValuSelect program before January 1, 1998, however,
may invest in the fund's Advisor Class shares.
[Insert graphic of 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 or the next page).
BUYING SHARES
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment Contact your investment
THROUGH YOUR representative representative
INVESTMENT
REPRESENTATIVE
- --------------------------------------------------------------------------------
Make your check payable to Make your check payable to
[Insert graphic the fund. the fund. Include your
of envelope] account number on the check.
Mail the check and your
BY MAIL signed application to Fill out the deposit slip
Investor Services. from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------------------------------------------------------
[Insert graphic of Call to receive a wire Call to receive a wire
three lightning control number and wire control number and wire
bolts] instructions. instructions.
Wire the funds and mail your To make a same day wire
signed application to investment, please call us
BY WIRE Investor Services. Please by 1:00 p.m. Pacific time
include the wire control and make sure your wire
1-800/632-2301 number or your new account arrives by 3:00 p.m.
(or 1-650/312-2000 number on the application.
collect)
To make a same day wire
investment, please call us
by 1:00 p.m. Pacific time
and make sure your wire
arrives by 3:00 p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or send
in opposite signed written instructions. signed written instructions.
directions]
BY EXCHANGE
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. To sign up, complete the
appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the
fund in an existing account in the same share class* of the fund or another
Franklin Templeton Fund. To reinvest your distributions in Advisor Class
shares of another Franklin Templeton Fund, you must qualify to buy that
fund's Advisor Class shares. For distributions reinvested in Class A shares
of another Franklin Templeton Fund, initial sales charges and contingent
deferred sales charges (CDSCs) will not apply if you reinvest your
distributions within 365 days. You can also have your distributions deposited
in a bank account, or mailed by check. Deposits to a bank account may be made
by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and
their policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure
or application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to
information about your account or any Franklin Templeton Fund. This service
is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS
brochure, call 1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges
when you open your account, allowing you and your investment representative
to sell or exchange your shares and make certain other changes to your
account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For
all other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not
be responsible for any losses that may occur from unauthorized requests. Of
course, you can decline telephone exchange or redemption privileges on your
account application.
EXCHANGE PRIVILEGE You may also 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 a Franklin Mutual Fund In.
[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 [#]).
*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. 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
o record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the
fund against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with
a check or draft, we may delay sending you the proceeds until your check or
draft has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days
after we receive your request in proper form. We are not able to receive or
pay out cash in the form of currency. Redemption proceeds may be delayed if
we have not yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in
a Franklin Templeton Trust Company retirement plan. For participants under
age 591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
SELLING SHARES
- -------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- -------------------------------------------------------------------------
[Insert graphic of
hands shaking]
Contact your investment representative
THROUGH YOUR
INVESTMENT
REPRESENTATIVE
- -------------------------------------------------------------------------
[Insert graphic of Send written instructions and endorsed share
envelope] certificates (if you hold share certificates)
to Investor Services. Corporate, partnership
BY MAIL or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. 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
phone.
Before requesting to have redemption proceeds
BY ELECTRONIC FUNDS sent to a bank account, please make sure we
TRANSFER (ACH) 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 send signed written instructions. See the
policies above for selling shares by mail or
phone.
If you hold share certificates, you will need
to return them to the fund before your
exchange can be processed.
- -------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of paper and pen] ACCOUNT POLICIES
CALCULATING SHARE PRICE The fund calculates the net asset value per share
(NAV) each business day at the close of trading on the New York Stock
Exchange (normally 1:00 p.m. Pacific time). The NAV for Advisor Class is
calculated by dividing its net assets by the number of its shares
outstanding.
The fund's assets are generally valued at their market value. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.
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 has been $1000 but
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. 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 does not allow investments by market timers. You will
be considered a market timer if you have (i) requested an exchange out of the
fund within two weeks of an earlier exchange request, or (ii) exchanged
shares out of the fund more than twice in a calendar quarter, or (iii)
exchanged shares equal to at least $5 million, or more than 1% of the fund's
net assets, or (iv) otherwise seem to follow a timing pattern. Shares under
common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional policies
and reserves certain rights, including:
o The fund may refuse any order to buy shares, including any purchase under
the exchange privilege.
o At any time, the fund may change its investment minimums or waive or lower
its minimums for certain purchases.
o The fund may modify or discontinue the exchange privilege on 60 days'
notice.
o You may only buy shares of the fund if it is 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 Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies,
financial statements, detailed performance information, portfolio holdings,
and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also 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 #_____________ [lit code]
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
[Begin callout]
INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
[End callout]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES
[End callout]
[insert page #] Choosing a Share Class
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows]
GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL 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 industries:
o technology services, including computer software, data services, and
internet services;
o electronic technology, including computers, computer products, and
electronic components;
o telecommunications, including networking, wireless, and wire-line
services and equipment;
o media and information services;
o semiconductors and semiconductor equipment; and
o precision instruments.
The fund may invest in companies of any size and may invest a significant
portion of its assets in smaller companies. The fund may invest up to 25% of its
total assets in foreign securities (which may include those in emerging
markets), but currently intends to limit such investment to 15%.
[Begin callout]
The fund invests primarily in common stocks of technology companies.
[End callout]
PORTFOLIO SELECTION
The manager is a research driven, fundamental investor, pursuing a disciplined
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, 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 for
investors, is unable to locate suitable investment opportunities, or seeks to
maintain liquidity, it may invest all or substantially all of the fund's assets
in U.S. or non-U.S. currency short-term investments, including cash or cash
equivalents. Under these circumstances, the fund may be unable to pursue its
investment goals.
[Insert graphic of chart with line going up and down]
MAIN RISKS
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 or 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 this may not be the case in foreign markets, in the U.S., stocks
historically have outperformed other asset classes over the long term (over the
short term they tend to go up and down more dramatically). These price movements
may result from factors affecting individual companies or industries, or the
securities market as a whole. Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections.
SMALLER COMPANIES While smaller companies, and to a lesser extent mid-size
companies, may offer greater opportunities for capital growth than larger, more
established companies, they also have more 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, their growth prospects are less certain, their securities are less
liquid, and they can be considered speculative. These companies may suffer
significant losses and can be subject to abrupt or erratic price movements.
Initial public offerings 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 early trading. Thus, when the fund is
smaller, any such gains will have a larger impact on the fund's reported
performance than when the fund's asset size is larger.
FOREIGN SECURITIES Where the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates, including devaluation of
a currency by a country's government, will increase or decrease the fund's
returns from its foreign portfolio holdings. 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 restrictions on removal of currency and other assets, exchange controls,
foreign ownership limitations, expropriation, restrictions on removal of
currency and other assets, nationalization of assets, punitive taxes and certain
custody and settlement risks. Non-U.S. markets or securities may be, or become,
less liquid. Non-U.S. stock exchanges, trading systems, brokers, and companies
generally are subject to less government supervision, regulation, disclosure,
and financial reporting requirements than in the U.S. Emerging market countries
have additional, heightened risks including a greater likelihood of currency
devaluations, less liquidity and greater volatility.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. Because this change to a single currency is new
and untested, it is not possible to predict the impact of the euro on the
business or financial condition of European issuers which the fund may hold in
its portfolio, and their impact on fund performance. To the extent the fund
holds non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the U.S.
dollar.
DIVERSIFICATION The fund is non-diversified under the federal securities laws.
As such, it may invest a greater portion of its assets in one issuer and have a
smaller number or issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet 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 have the risk that the securities cannot be readily sold, can only be
resold at a price significantly lower than their value, or are difficult to
value accurately.
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.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance. Year 2000 has been one of the many
factors the manager considers when making investment decisions. The manager
reviewed public filings and other statements made by companies about their Year
2000 readiness, but could not audit each company to verify its readiness.
Although the risk of the Year 2000 problem should decrease over time the
possibility remains that the fund and the companies in which it is invested may
be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear]
PAST PERFORMANCE
Because the fund is new, it has no performance history.
[Insert graphic of percentage sign]
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
Maximum sales charge (load)
as a percentage of offering price 5.75% 4.00% 1.99%
Load imposed on purchases 5.75% None 1.00%
Maximum deferred sales charge (load) None1 4.00%2 0.99%3
Exchange fee4 $5.00 $5.00 $5.00
Please see "Choosing a Share Class" on page [#] for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C
- -------------------------------------------------------------------------------
Management fees5 0.55% 0.55% 0.55%
Distribution and service
(12b-1) fees 0.35% 1.00% 1.00%
Other expenses5 0.57% 0.57% 0.57%
------------------------------------
Total annual fund operating expenses 1.47% 2.12% 2.12%
------------------------------------
-------------------------------------
1. Except for investments of $1 million or more (see page #) 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 [#]).
5. The administrator and manager 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 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; 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
- --------------------------------------------------------------------------------
If you sell your shares at the end of the period:
CLASS A $7161 $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.
The team responsible for the fund's management is:
MANAGEMENT TEAM
IAN LINK, CFA
VICE PRESIDENT, ADVISERS
Mr. Link has been a manager of the fund since its inception, and has been
with the Franklin Templeton group since 1989.
CANYON CHAN, CFA
VICE PRESIDENT, ADVISERS
Mr. Chan has been a manager of the fund since its inception, and has been
with the Franklin Templeton group since 1991.
CONRAD HERRMANN, CFA
SENIOR VICE PRESIDENT, ADVISERS
Mr. Herrmann has been a manager of the fund since its inception, and has been
with the Franklin Templeton group since 1989.
The fund pays the manager a fee for managing its assets, and making its
investment decisions. 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 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.
Fund distributions and gains from the sale or exchange of your shares
generally will be subject to state and local income tax. Non-U.S. investors
may be subject to U.S. withholding and estate tax. You should consult your
tax advisor about the federal, state, local or foreign tax consequences of
your investment in the fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your investment representative
can help you decide.
CLASS A CLASS B CLASS C
- --------------------------------------------------------------------------------
o Initial sales o No initial sales o Initial sales
charge of 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
MAKES UP THIS % OF WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT THE OFFERING PRICE YOUR NET INVESTMENT
- --------------------------------------------------------------------------------
Under $50,000 5.75 6.10
$50,000 but under $100,000 4.50 4.71
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a
lump sum or through our cumulative quantity discount or letter of intent
programs (see page [#]), you can buy Class A shares without an initial sales
charge. However, there is a 1% contingent deferred sales charge (CDSC) on any
shares you sell within 12 months of purchase. The way we calculate the CDSC is
the same for each class (please see page [#]).
DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes
known as a Rule 12b-1 plan, that allows the 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
- ---------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
With Class B shares, there is no initial sales charge. However, there is a CDSC
if you sell your shares within six years, as described in the table above. The
way we calculate the CDSC is the same for each class (please see page [#]).
After 8 years, your Class B shares automatically convert to Class A shares,
lowering your annual expenses from that time on.
MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at
one time is $249,999. We place any investment of $250,000 or more in Class A
shares, since a reduced initial sales charge is available and Class A's annual
expenses are lower.
RETIREMENT PLANS Class B shares are 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
- -------------------------------------------------------------------------------
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.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one month
on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell
shares we will first sell any shares in your account that are not subject to a
CDSC. If there are not enough of these to meet your request, we will sell the
shares in the order they were purchased. We will use this same method if you
exchange your shares into another Franklin Templeton Fund (please see page [#]
for exchange information).
SALES CHARGE REDUCTIONS AND WAIVERS
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time you make your investment to help ensure you receive the
lower sales charge.
QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in
the Franklin Templeton Funds to take advantage of the lower sales charges for
large purchases of Class A shares.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance
Products Trust, Templeton Capital Accumulator Fund, Inc., and Templeton
Variable Products Series Fund.
[End callout]
o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the
Franklin Templeton Funds for purposes of calculating the sales charge. You
also may combine the shares of your spouse, and your children or
grandchildren, if they are under the age of 21. Certain company and
retirement plan accounts also may be included.
o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge
as if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do not
buy the amount stated in your LOI.
TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR ACCOUNT
APPLICATION.
REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton Fund, you may
reinvest some or all of the proceeds within 365 days without an initial sales
charge. The proceeds must be reinvested within the same share class, except
proceeds from the sale of Class B shares will be reinvested in Class A shares.
If you paid a CDSC when you sold your Class A or C shares, we will credit your
account with the amount of the CDSC paid but a new CDSC will apply. For Class B
shares reinvested in Class A, a new CDSC will not apply, although your account
will not be credited with the amount of any CDSC paid when you sold your Class B
shares.
Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also
may be reinvested without an initial sales charge if you reinvest them within
365 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be subject to
a sales charge.
SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales
charge or CDSC by various individuals, institutions and retirement plans or by
investors who reinvest certain distributions and proceeds within 365 days.
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 Plan Services at
1-800/527-2020. A list of available sales charge waivers also may be found in
the Statement of Additional Information (SAI).
GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to
invest as a group. For sales charge purposes, the group's investments are added
together. There are certain other requirements and the group must have a purpose
other than buying fund shares at a discount.
[Insert graphic of a paper with lines
and someone writing] BUYING SHARES
MINIMUM INVESTMENTS
- --------------------------------------------------------------------------------
INITIAL ADDITIONAL
- --------------------------------------------------------------------------------
Regular accounts 1,000 $50
- --------------------------------------------------------------------------------
UGMA/UTMA accounts $100 $50
- --------------------------------------------------------------------------------
Retirement accounts no minimum no minimum
(other than IRAs, IRA rollovers, Education
IRAs or Roth IRAs)
- --------------------------------------------------------------------------------
IRAs, IRA rollovers, Education IRAs or Roth
IRAs $250 $50
- --------------------------------------------------------------------------------
Broker-dealer sponsored wrap account programs
$250 $50
- --------------------------------------------------------------------------------
Full-time employees, officers, trustees and
directors of Franklin Templeton entities, and
their immediate family members
$100 $50
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------------------------------------------------------
[Insert graphic of
hands shaking]
THROUGH YOUR Contact your investment Contact your investment
INVESTMENT representative representative
REPRESENTATIVE
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
[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 3:00p.m.
- --------------------------------------------------------------------------------
[Insert graphic of Call Shareholder Services at Call Shareholder Services at
two arrows pointing the number below, or send the number below or our
in opposite signed written instructions. automated TeleFACTS system,
directions] The TeleFACTS system cannot or send signed written
be used to open a new instructions.
BY EXCHANGE account.
(Please see page # for (Please see page # for
TeleFACTS(R) information on exchanges.) information on exchanges.)
1-800/247-1753
(around-the-clock
access)
- --------------------------------------------------------------------------------
FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 997151,
SACRAMENTO, CA 95899-9983
CALL TOLL-FREE: 1-800/632-2301
(MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME
SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME)
[Insert graphic of person with a headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. The minimum investment to open an account with
an automatic investment plan is $50 ($25 for an Education IRA). To sign up,
complete the appropriate section of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class* of the fund or another Franklin
Templeton Fund. Initial sales charges and CDSCs will not apply if you reinvest
your distributions within 365 days. You can also have your distributions
deposited in a bank account, or mailed by check. Deposits to a bank account may
be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
*Class B and C shareholders may reinvest their distributions in Class A shares
of any Franklin Templeton money fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class* generally without paying any additional sales charges. If
you exchange shares held for less than six months, however, you may be charged
the difference between the initial sales charge of the two funds if the
difference is more than 0.25%. If you exchange shares from a money fund, a sales
charge may apply no matter how long you have held the shares.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts,
unless you send written instructions with a signature guarantee. Any CDSC will
continue to be calculated from the date of your initial investment and will not
be charged at the time of the exchange. The purchase price for determining a
CDSC on exchanged shares will be the price you paid for the original shares. If
you exchange shares subject to a CDSC into a Class A money fund, the time your
shares are held in the money fund will not count towards the CDSC holding
period.
If you exchange your Class B shares for the same class of shares of another
Franklin Templeton Fund, the time your shares are held in that fund will count
towards the eight year period for automatic conversion to Class A shares.
Frequent exchanges can interfere with fund management or operations and drive up
costs for all shareholders. To protect shareholders, there are limits on the
number and amount of exchanges you may make (please see "Market Timers" on page
[#]).
*Certain Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange
into Class A without any sales charge. SYSTEMATIC WITHDRAWAL PLAN This plan
allows you to automatically sell your shares and receive regular payments from
your account. A CDSC may apply to withdrawals that exceed certain amounts.
Certain terms and minimums apply. To sign up, complete the appropriate section
of your application.
[Insert graphic of a certificate] SELLING SHARES
You can sell your shares at any time. 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
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
SELLING SHARES
- --------------------------------------------------------------------------------
TO SELL SOME OR ALL OF YOUR SHARES
- --------------------------------------------------------------------------------
[Insert graphic of 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 or trust
BY MAIL 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 less,
phone] you do not hold share certificates and you have not
changed your address by phone within the last 15 days,
BY PHONE 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 proceeds
three lightning bolts] sent to a bank account. See the policies above for
selling shares by mail or phone.
BY ELECTRONIC FUNDS
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 are
arrows pointing in considering.
opposite directions]
Call Shareholder Services at the number below or our
BY EXCHANGE automated TeleFACTS system, or send signed written
instructions. See the policies above for selling
TeleFACTS(R) 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 1.001 --- ---
12B-1 FEE TO DEALER 0.252 0.253 1.004
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 .35% to Distributors or others, out of which .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.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services
1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also 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].
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]
[insert page #] Goal and Strategies
[insert page #] Main Risks
[insert page #] Performance
[insert page #] Fees and Expenses
[insert page #] Management
[insert page #] Distributions and Taxes
YOUR ACCOUNT
[Begin callout]
INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND services
[End callout]
[insert page #] Qualified Investors
[insert page #] Buying Shares
[insert page #] Investor Services
[insert page #] Selling Shares
[insert page #] Account Policies
[insert page #] Questions
FOR MORE INFORMATION
[Begin callout]
WHERE TO LEARN MORE ABOUT THE FUND
[End callout]
Back Cover
THE FUND
[Insert graphic of bullseye and arrows]
GOAL AND STRATEGIES
GOAL The fund's investment goal is capital appreciation.
PRINCIPAL 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 industries:
o technology services, including computer software, data services, and
internet services;
o electronic technology, including computers, computer products, and
electronic components;
o telecommunications, including networking, wireless, and wire-line services
and equipment;
o media and information services;
o semiconductors and semiconductor equipment; and o precision instruments.
The fund may invest in companies of any size and may invest a significant
portion of its assets in smaller companies. The fund may invest up to 25% of its
total assets in foreign securities (which may include those in emerging
markets), but currently intends to limit such investment to 15%.
[Begin callout]
The fund invests primarily in common stocks of technology companies.
[End callout]
PORTFOLIO SELECTION
The manager is a research driven, fundamental investor, pursuing a disciplined
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, 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 for
investors, is unable to locate suitable investment opportunities, or seeks to
maintain liquidity, it may invest all or substantially all of the fund's assets
in U.S. or non-U.S. currency short-term investments, including cash or cash
equivalents. Under these circumstances, the fund may be unable to pursue its
investment goals.
[Insert graphic of chart with line going up and down]
MAIN RISKS
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 or 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 this may not be the case in foreign markets, in the U.S., stocks
historically have outperformed other asset classes over the long term (over the
short term they tend to go up and down more dramatically). These price movements
may result from factors affecting individual companies or industries, or the
securities market as a whole. Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections.
SMALLER COMPANIES While smaller companies, and to a lesser extent mid-size
companies, may offer greater opportunities for capital growth than larger, more
established companies, they also have more 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, their growth prospects are less certain, their securities are less
liquid, and they can be considered speculative. These companies may suffer
significant losses and can be subject to abrupt or erratic price movements.
Initial public offerings 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 early trading. Thus, when the fund is
smaller, any such gains will have a larger impact on the fund's reported
performance than when the fund's asset size is larger.
FOREIGN SECURITIES Where the fund's investments are denominated in foreign
currencies, changes in foreign currency exchange rates, including devaluation of
a currency by a country's government, will increase or decrease the fund's
returns from its foreign portfolio holdings. 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 restrictions on removal of currency and other assets, exchange controls,
foreign ownership limitations, expropriation, restrictions on removal of
currency and other assets, nationalization of assets, punitive taxes and certain
custody and settlement risks. Non-U.S. markets or securities may be, or become,
less liquid. Non-U.S. stock exchanges, trading systems, brokers, and companies
generally are subject to less government supervision, regulation, disclosure,
and financial reporting requirements than in the U.S. Emerging market countries
have additional, heightened risks including a greater likelihood of currency
devaluations, less liquidity and greater volatility.
EURO On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. Because this change to a single currency is new
and untested, it is not possible to predict the impact of the euro on the
business or financial condition of European issuers which the fund may hold in
its portfolio, and their impact on fund performance. To the extent the fund
holds non-U.S. dollar (euro or other) denominated securities, it will still be
exposed to currency risk due to fluctuations in those currencies versus the U.S.
dollar.
DIVERSIFICATION The fund is non-diversified under the federal securities laws.
As such, it may invest a greater portion of its assets in one issuer and have a
smaller number or issuers than a diversified fund. Therefore, the fund may be
more sensitive to economic, business, political or other changes affecting
similar issuers or securities. The fund will, however, meet 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 have the risk that the securities cannot be readily sold, can only be
resold at a price significantly lower than their value, or are difficult to
value accurately.
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.
YEAR 2000 At this date, it appears neither the fund's operations nor those of
the companies in which it invests were adversely affected by Year 2000
computer-related problems. However, Year 2000 problems could still emerge. If a
company in which the fund is invested develops problems related to Year 2000,
the price of its securities may be adversely affected, and this may have an
adverse effect on the fund's performance. Year 2000 has been one of the many
factors the manager considers when making investment decisions. The manager
reviewed public filings and other statements made by companies about their Year
2000 readiness, but could not audit each company to verify its readiness.
Although the risk of the Year 2000 problem should decrease over time the
possibility remains that the fund and the companies in which it is invested may
be adversely affected by Year 2000 problems until all of their various data
processing activities for the year have been completed.
More detailed information about the fund, its policies (including temporary
investments), and risks can be found in the fund's Statement of Additional
Information (SAI).
[Begin callout]
Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the possible
loss of principal.
[End callout]
[Insert graphic of a bull and a bear]
PAST 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 fee1 $5.00
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
ADVISOR CLASS
Management fees 0.55%
Distribution and service (12b-1) fees None
Other expenses 0.57%
==================
Total annual fund operating expenses(2),3 1.12%
==================
1. This fee is only for market timers (see page [#]).
2. The management fees shown are based on the fund's maximum contractual amount.
Other expenses are estimated.
3. The administrator and manager 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.
The team responsible for the fund's management is:
MANAGEMENT TEAM
IAN LINK, CFA
Vice President, Advisers
Mr. Link has been a manager of the fund since its inception, and has been with
the Franklin Templeton group since 1989.
CANYON CHAN, CFA
VICE PRESIDENT, ADVISERS
Mr. Chan has been a manager of the fund since its inception, and has been with
the Franklin Templeton group since 1991.
CONRAD HERRMANN, CFA
Senior Vice President, Advisers
Mr. Herrmann has been a manager of the fund since its inception, and has been
with the Franklin Templeton group since 1989.
The fund pays the manager a fee for managing its assets, and making its
investment decisions. 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 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.
Fund distributions and gains from the sale or exchange of your shares generally
will be subject to state and local income tax. Non-U.S. investors may be subject
to U.S. withholding and estate tax. You should consult your tax advisor about
the federal, state, local or foreign tax consequences of your investment in the
fund.
YOUR ACCOUNT
[Insert graphic of pencil marking an X] QUALIFIED INVESTORS
The following investors may qualify to buy Advisor Class shares of the fund.
o Qualified registered investment advisors with clients invested in any
series of Franklin Mutual Series Fund Inc. on October 31, 1996, or who buy
through a broker-dealer or service agent who has an agreement with Franklin
Templeton Distributors, Inc. (Distributors). Minimum investments: $1,000
initial and $50 additional.
o Broker-dealers, registered investment advisors or certified financial
planners who have an agreement with Distributors for clients participating
in comprehensive fee programs. Minimum investments: $250,000 initial
($100,000 initial for an individual client) and $50 additional.
o Officers, trustees, directors and full-time employees of Franklin Templeton
and their immediate family members. Minimum investments: $100 initial ($50
for accounts with an automatic investment plan) and $50 additional.
o Each series of the Franklin Templeton Fund Allocator Series. Minimum
investments: $1,000 initial and $1,000 additional.
[Begin callout]
The FRANKLIN TEMPLETON FUNDS include all of the Franklin Templeton U.S.
registered mutual funds, except Franklin Templeton Variable Insurance Products
Trust, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
[End callout]
o Governments, municipalities, and tax-exempt entities that meet the
requirements for qualification under section 501 of the Internal Revenue
Code. Minimum investments: $1 million initial investment in Advisor Class
or Class Z shares of any of the Franklin Templeton Funds and $50
additional.
o Accounts managed by the Franklin Templeton Group. Minimum investments: No
initial minimum and $50 additional.
o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments: No
initial or additional minimums.
o Defined contribution plans such as employer stock, bonus, pension or profit
sharing plans that meet the requirements for qualification under section
401 of the Internal Revenue Code, including salary reduction plans
qualified under section 401(k) of the Internal Revenue Code, and that are
sponsored by an employer (i) with at least 10,000 employees, or (ii) with
retirement plan assets of $100 million or more. Minimum investments: No
initial or additional minimums.
o Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a fiduciary,
agency, advisory, custodial or similar capacity and over which the trust
companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. Minimum investments: No initial or additional
minimums.
o Individual investors. Minimum investments: $5 million initial and $50
additional. You may combine all of your shares in the Franklin Templeton
Funds for purposes of determining whether you meet the $5 million minimum,
as long as $1 million is in Advisor Class or Class Z shares of any of the
Franklin Templeton Funds.
o Any other investor, including a private investment vehicle such as a family
trust or foundation, who is a member of an established group of 11 or more
investors. Minimum investments: $5 million initial and $50 additional. For
minimum investment purposes, the group's investments are added together.
The group may combine all of its shares in the Franklin Templeton Funds for
purposes of determining whether it meets the $5 million minimum, as long as
$1 million is in Advisor Class or Class Z shares of any of the Franklin
Templeton Funds. There are certain other requirements and the group must
have a purpose other than buying fund shares without a sales charge.
Please note that Advisor Class shares of the fund generally are not available to
retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement
plans in the ValuSelect program before January 1, 1998, however, may invest in
the fund's Advisor Class shares.
[Insert graphic of 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 or the next page]).
<TABLE>
<CAPTION>
BUYING SHARES
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
- --------------------------------- ------------------------------- ------------------------------
[Insert graphic of hands Contact your investment Contact your investment
shaking] representative representative
THROUGH YOUR INVESTMENT
REPRESENTATIVE
- --------------------------------- ------------------------------- ------------------------------
[Insert graphic of envelope] Make your check payable to Make your check payable to
the Franklin Technology Fund. the Franklin Technology Fund.
BY MAIL Include your account number
Mail the check and your on the check.
signed application to
Investor Services. Fill out the deposit slip
from your account statement.
If you do not have a slip,
include a note with your
name, the fund name, and
your account number.
Mail the check and deposit
slip or note to Investor
Services.
- --------------------------------- ------------------------------- -------------------------------
[Insert graphic of three Call to receive a wire Call to receive a wire
lightning bolts] control number and wire control number and wire
instructions. instructions.
BY WIRE
Wire the funds and mail your To make a same day wire
1-800/632-2301 (or signed application to investment, please call us by
1-650/312-2000 collect) Investor Services. Please 1:00 p.m. Pacific time and
include the wire control make sure your wire arrives
number or your new account 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 two arrows Call Shareholder Services at Call Shareholder Services at
pointing in opposite directions] the number below, or send the number below, or send
signed written instructions. signed written instructions.
BY EXCHANGE (Please see page [#] for (Please see page [#] for
information on exchanges.) information on exchanges.)
- --------------------------------- ------------------------------- -------------------------------
</TABLE>
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 headset] INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in
the fund by automatically transferring money from your checking or savings
account each month to buy shares. To sign up, complete the appropriate section
of your account application.
DISTRIBUTION OPTIONS You may reinvest distributions you receive from the fund in
an existing account in the same share class of the fund or in Advisor Class or
Class A shares of another Franklin Templeton Fund. To reinvest your
distributions in Advisor Class shares of another Franklin Templeton Fund, you
must qualify to buy that fund's Advisor Class shares. For distributions
reinvested in Class A shares of another Franklin Templeton Fund, initial sales
charges and contingent deferred sales charges (CDSCs) will not apply if you
reinvest your distributions within 365 days. You can also have your
distributions deposited in a bank account, or mailed by check. Deposits to a
bank account may be made by electronic funds transfer.
[Begin callout]
For Franklin Templeton Trust Company retirement plans, special forms may be
needed to receive distributions in cash. Please call 1-800/527-2020 for
information.
[End callout]
Please indicate on your application the distribution option you have chosen,
otherwise we will reinvest your distributions in the same share class of the
fund.
RETIREMENT PLANS Franklin Templeton offers a variety of retirement plans for
individuals and businesses. These plans require separate applications and their
policies and procedures may be different than those described in this
prospectus. For more information, including a free retirement plan brochure or
application, please call Retirement Plan Services at 1-800/527-2020.
TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information
about your account or any Franklin Templeton Fund. This service is available
from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call
1-800/DIAL BEN.
TELEPHONE PRIVILEGES You will automatically receive telephone privileges when
you open your account, allowing you and your investment representative to sell
or exchange your shares and make certain other changes to your account by phone.
For accounts with more than one registered owner, telephone privileges also
allow the fund to accept written instructions signed by only one owner for
transactions and account changes that could otherwise be made by phone. For all
other transactions and changes, all registered owners must sign the
instructions.
As long as we take certain measures to verify telephone requests, we will not be
responsible for any losses that may occur from unauthorized requests. Of course,
you can decline telephone exchange or redemption privileges on your account
application.
EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton Funds
within the same class. You also may exchange your Advisor Class shares for Class
A shares of a fund that does not currently offer an Advisor Class (without any
sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase of
another. In general, the same policies that apply to purchases and sales apply
to exchanges, including minimum investment amounts. Exchanges also have the same
tax consequences as ordinary sales and purchases.
[End callout]
If you do not qualify to buy Advisor Class shares of Templeton Developing
Markets Trust 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
[#]).
*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 certificate] SELLING SHARES
You can sell your shares at any time.
SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be
made over the phone or with a simple letter. Sometimes, however, to protect you
and the fund we will need written instructions signed by all registered owners,
with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a
signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record,
or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an
agent, not the registered owners, or when we believe it would protect the fund
against potential claims based on the instructions received.
SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased with a
check or draft, we may delay sending you the proceeds until your check or draft
has cleared, which may take seven business days or more. A certified or
cashier's check may clear in less time.
REDEMPTION PROCEEDS Your redemption check will be sent within seven days after
we receive your request in proper form. We are not able to receive or pay out
cash in the form of currency. Redemption proceeds may be delayed if we have not
yet received your signed account application.
RETIREMENT PLANS You may need to complete additional forms to sell shares in a
Franklin Templeton Trust Company retirement plan. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at 1-800/527-2020
for details.
<TABLE>
<CAPTION>
SELLING SHARES
- -------------------------------------------------------------------------------------------------
<S> <C>
TO SELL SOME OR ALL OF YOUR SHARES
- ------------------------------------------------- -----------------------------------------------
[Insert graphic of hands shaking] Contact your investment representative
THROUGH YOUR INVESTMENT REPRESENTATIVE
- ------------------------------------------------- -----------------------------------------------
[Insert graphic of envelope] Send written instructions and endorsed share
certificates (if you hold share certificates)
BY MAIL to Investor Services. Corporate, partnership
or trust accounts may need to send additional
documents.
Specify the fund, the account number and the
dollar value or number of shares you wish to
sell. Be sure to include all necessary
signatures and any additional documents, as
well as signature guarantees if required.
A check will be mailed to the name(s) and
address on the account, or otherwise
according to your written instructions.
- ------------------------------------------------- -----------------------------------------------
[Insert graphic of phone] As long as your transaction is for $100,000
or less, you do not hold share certificates
BY PHONE and you have not changed your address by
phone within the last 15 days, you can sell
1-800/632-2301 your shares by phone.
A check will be mailed to the name(s) and
address on the account. Written instructions,
with a signature guarantee, are required to
send the check to another address or to make
it payable to another person.
- ------------------------------------------------- -----------------------------------------------
[Insert graphic of three lightning bolts] You can call or write to have redemption
proceeds sent to a bank account. See the
BY ELECTRONIC FUNDS TRANSFER (ACH) policies above for selling shares
by mail or phone.
Before requesting to have redemption
proceeds sent to a bank account, plase
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 arrows pointing in Obtain a current prospectus for the fund you
opposite directions] are considering.
BY EXCHANGE Call Shareholder Services at the number below,
or send signed written instructions. See the
policies above for selling shares by mail or
phone.
If you hold share certificates, you will
need to return them to the fund before your
exchange can be processed.
- ------------------------------------------------- -----------------------------------------------
</TABLE>
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 maintain 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 their investment minimums or waive or
lower their 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 Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
FOR MORE INFORMATION
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and fund strategies, financial
statements, detailed performance information, portfolio holdings, and the
auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please
contact your investment representative or call us at the number below.
FRANKLIN(R)TEMPLETON(R)
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
www.franklintempleton.com
You can also obtain information about the fund by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your
request and a duplicating fee to the SEC's Public Reference Section, Washington,
D.C. 20549-6009. You can also visit the SEC's Internet site at
HTTP://WWW.SEC.GOV.
Investment Company Act file #811-6243 []
FRANKLIN
STRATEGIC SERIES
FRANKLIN SMALL CAP GROWTH FUND II - CLASS A, B & C
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 or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies .................................. 2
Risks ................................................ 16
Officers and Trustees ................................ 19
Management and Other Services ........................ 21
Portfolio Transactions ............................... 23
Distributions and Taxes .............................. 24
Organization, Voting Rights
and Principal Holders ............................... 26
Buying and Selling Shares ............................ 27
Pricing Shares ....................................... 33
The Underwriter ...................................... 34
Performance .......................................... 36
Miscellaneous Information ............................ 40
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
GOAL AND STRATEGIES
- --------------------------
FRANKLIN SMALL CAP GROWTH FUND II The fund's investment goal is long-term
capital growth. This goal is fundamental, which means it may not be changed
without shareholder approval.
Under normal market conditions, the fund invests most of its assets in equity
securities of U.S. small capitalization (small cap) growth companies.
The manager is a research driven, fundamental investor, pursuing a disciplined
strategy. The manager uses a "bottom-up" analysis primarily to select small cap
companies that it believes are positioned for rapid growth in revenues, earnings
or assets.
The fund may from time to time make private investments in companies whose
securities are not publicly traded. These investments typically will take the
form of letter stock or convertible preferred stock. Because these securities
are not publicly traded, there is no secondary market for these securities. The
fund will treat these securities as illiquid.
Although the fund may invest up to 25% of its total assets in foreign
securities, including those of developing or emerging markets, the fund
currently intends to limit its investment in foreign securities to 10% of its
total assets.
The fund may invest up to 10% of its total assets in REITs. The fund will not
invest in securities issued without stock certificates or comparable stock
documents. The fund may not invest more than 10% of its net assets in securities
of issuers with less than three years continuous operation.
The fund may invest up to 5% of its total assets in corporate debt securities
that the manager believes have the potential for capital appreciation as a
result of improvement in the creditworthiness of the issuer. The receipt of
income from debt securities is incidental to the fund's investment goal. The
fund may buy both rated and unrated debt securities. The fund will invest in
securities rated B or better by Moody's or S&P or unrated securities of
comparable quality.
Below is more detailed information about some of the various types of securities
the fund may buy and the fund's investment policies and restrictions.
EQUITY SECURITIES represent a proportionate share of the ownership of a company;
their value is based on the success of the company's business, any income paid
to stockholders, the value of its assets, and general market conditions. The
purchaser of an equity security typically receives an ownership interest in the
company as well as certain voting rights. The owner of an equity security may
participate in a company's success through the receipt of dividends, which are
distributions of earnings by the company to its owners. Equity security owners
may also participate in a company's success or lack of success through increases
or decreases in the value of the company's shares as traded in the public
trading market for such shares. Equity securities generally take the form of
common stock or preferred stock. Preferred stockholders typically receive
greater dividends but may receive less appreciation than common stockholders and
may have greater voting rights as well. Equity securities may also include
convertible securities, warrants, or rights. Warrants or rights give the holder
the right to purchase a common stock at a given time for a specified price.
CONVERTIBLE SECURITIES The fund may invest in convertible securities without
limit and enhanced convertible securities.
A convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security provides
a fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because both interest rate and market movements can
influence its value, a convertible security is not as sensitive to interest
rates as a similar fixed-income security, nor is it as sensitive to changes in
share price as its underlying stock.
When issued by an operating company, a convertible security tends to be senior
to common stock, but sub-ordinate to other types of fixed-income securities
issued by that company. When a convertible security issued by an operating
company is "converted," the operating company often issues new stock to the
holder of the convertible security, but if the parity price of the convertible
security is less than the call price, the operating company may pay out cash
instead of common stock. If the convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly dividends. Through this structure the company establishes a
wholly owned special purpose vehicle whose sole purpose is to issue convertible
preferred stock. The 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 securities, though there can be no assurances that this will be achieved.
DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes, and
commercial paper differ in the length of the issuer's payment schedule, with
bonds carrying the longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS The fund may invest in foreign
securities. Although the Fund may invest up to 25% of total assets in foreign
securities, it intends to limit its investments to 10% of total assets.
The fund may buy foreign securities traded in the U.S. or directly in foreign
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-CAP COMPANIES Market capitalization is defined as the total market value
of a company's outstanding stock. Small cap companies generally have market
capitalization of up to $1.5 billion at the time of the fund's investment.
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.
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 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.
The fund may also enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the fund agrees to sell a security in its portfolio and
then to repurchase the security at an agreed-upon price, date, and interest
payment. The fund will maintain cash or high-grade liquid debt securities with a
value equal to the value of the fund's obligation under the agreement, including
accrued interest, in a segregated account with the fund's custodian bank. The
securities subject to the reverse repurchase agreement will be marked-to-market
daily. Although reverse repurchase agreements are borrowings under federal
securities laws, the fund does not treat them as borrowings for purposes of its
investment restrictions below, provided the segregated account is properly
maintained.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 33 1/3% of the value of the fund's total assets, measured
at the time of the most recent loan. For each loan, the borrower must maintain
with the fund's custodian collateral (consisting of any combination of cash,
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 loan 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 To the extent it is consistent with its
investment goals and certain limitations under the Investment Company Act of
1940, as amended ("1940 Act"), the fund may invest its assets in securities
issued by companies engaged in securities related businesses, including
companies that are securities brokers, dealers, underwriters or investment
advisors. These companies are considered to be part of the financial services
industry. Generally, under the 1940 Act, the fund may not acquire a security or
any interest in a securities related business to the extent such acquisition
would result in the fund acquiring in excess of 5% of a class of an issuer's
outstanding equity securities or 10% of the outstanding principal amount of an
issuer's debt securities, or investing more than 5% of the value of the fund's
total assets in securities of the issuer. In addition, any equity security of a
securities-related business must be a marginable security under Federal Reserve
Board regulations and any debt security of a securities-related business must be
investment grade as determined by the Board. The fund does not believe that
these limitations will impede the attainment of its investment goals.
OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and end of the contract period. Options, futures, and
options on futures are considered "derivative securities."
The fund may buy and sell options on securities and securities indices. The fund
may only buy options if the premiums paid for such options total 5% or less of
net assets.
The fund may buy and sell futures contracts for securities and currencies. The
fund may also buy and sell securities index futures and options on securities
index futures. 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.
OPTIONS. The fund may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter (OTC)
market. All options written by the fund will be covered. The fund may also buy
or write put and call options on securities indices.
A call option written by the fund is covered if the fund
(a) owns the underlying security that is subject to the call or (b) has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian bank) upon conversion or exchange of other securities held in
its portfolio. A call option is also covered if the fund holds a call on the
same security and in the same principal amount as the call written where the
exercise price of the call held is (a) equal to or less than the exercise price
of the call written or (b) greater than the exercise price of the call written
if the difference is held in cash or high-grade debt securities in a segregated
account with the fund's custodian bank.
A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same series
as the option previously written. The effect of the purchase is that the
clearing corporation will cancel the writer's position. However, a writer may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, the holder of an option may liquidate its position by
effecting a "closing sale transaction" by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction may be made at the time desired by the
fund.
Effecting a closing transaction in the case of a written call option allows the
fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other fund investments.
If the fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, the fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to buy
the option. Increases in the market price of a call option will generally
reflect increases in the market price of the underlying security. As a result,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the fund may elect to close the
position or take delivery of the security at the exercise price. The fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.
The fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. The fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option. The ability to buy put options allows the
fund to protect the unrealized gain in an appreciated security in its portfolio
without actually selling the security. In addition, the fund continues to
receive interest or dividend income on the security. The fund may sell a put
option it has previously purchased prior to the sale of the security underlying
the option. The sale of the option will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option. Any gain or loss may be wholly
or partially offset by a change in the value of the underlying security that the
fund owns or has the right to acquire.
The fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in exchange
traded options. Like exchange traded options, OTC options give the holder the
right to buy, in the case of OTC call options, or sell, in the case of OTC put
options, an underlying security from or to the writer at a stated exercise
price. However, OTC options differ from exchange traded options in certain
material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options, and the writer of an OTC option is paid the premium in advance
by the dealer.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (or less than, in the case of a put) the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of the
underlying stock index. The fund will maintain the account while the option is
open or will otherwise cover the transaction.
FINANCIAL FUTURES. The fund may enter into contracts for the purchase or sale of
futures contracts based upon financial indices (financial futures). Financial
futures contracts are commodity contracts that obligate the long or short holder
to take or make delivery of the cash value of a securities index during a
specified future period at a specified price. A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver such cash value
called for by the contract on a specified date. A "purchase" of a futures
contract means the acquisition of a contractual obligation to take delivery of
the cash value called for by the contract at a specified date. The purpose of
the acquisition or sale of a futures contract is to attempt to protect the fund
from fluctuations in price of portfolio securities without actually buying or
selling the underlying security. Futures contracts have been designed by
exchanges designated "contracts markets" by the Commodity Futures Trading
Commission (CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.
The fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intend to buy
and, to the extent consistent therewith, to accommodate cash flows. The fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one third of total assets would be
represented by futures contracts or related options. In addition, the fund may
not buy or sell futures contracts or buy or sell related options if, immediately
thereafter, the sum of the amount of initial deposits on existing financial
futures and premiums paid on options on financial futures contracts would exceed
5% of total assets (taken at current value). To the extent the fund enters into
a futures contract or related call option, it will maintain with its custodian
bank, to the extent required by the rules of the Securities and Exchange
Commission ("SEC"), assets in a segregated account to cover its obligations with
respect to such contract which will consist of cash, cash equivalents or high
quality debt securities from its portfolio in an amount equal to the market
value of such futures contract or related option.
STOCK INDEX FUTURES. The fund may buy and sell stock index futures contracts. A
stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market price movements. The
need to hedge against these risks will depend on the extent of diversification
of the fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. The fund's
investment strategies in employing futures contracts based on an index of debt
securities will be similar to that used in other financial futures transactions.
The fund may also buy and write put and call options on bond index futures and
enter into closing transactions with respect to such options.
FUTURES CONTRACTS FOR SECURITIES AND CURRENCIES. The fund may buy and sell
futures contracts for securities, and currencies. The fund may also enter into
closing purchase and sale transactions with respect to these futures contracts.
The fund will engage in futures transactions only for bona fide hedging or other
appropriate risk management purposes. All futures contracts entered into by the
fund is traded on U.S. exchanges or boards of trade licensed and regulated by
the CFTC or on foreign exchanges.
When securities prices are falling, the fund may offset a decline in the value
of its current portfolio securities through the sale of futures contracts. When
prices are rising, the fund can attempt to secure better prices than might be
available when it intends to buy securities through the purchase of futures
contracts. Similarly, the fund can sell futures contracts on a specified
currency in an attempt to protect against a decline in the value of that
currency and its portfolio securities denominated in that currency. The fund can
buy futures contracts on a foreign currency to fix the price in U.S. dollars of
a security denominated in that currency that the fund has purchased or expects
to buy.
Positions taken in the futures markets are not normally held to maturity, but
are liquidated through offsetting transactions that may result in a profit or a
loss. While the fund's futures contracts on securities and currencies will
usually be liquidated in this manner, the fund may instead make or take delivery
of the underlying securities or currencies whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currencies are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
initial margin), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily. Should
the value of the futures contract decline relative to the fund's position, the
fund, if required by law, will pay the futures commission merchant an amount
equal to the change in value.
FUTURES CONTRACTS - GENERAL. Although financial futures contracts by their terms
call for the actual delivery or acquisition of securities, or the cash value of
the index, in most cases the contractual obligation is fulfilled before the date
of the contract without having to make or take delivery of the securities or
cash. A contractual obligation is offset by buying (or selling, as the case may
be) on a commodities exchange an identical financial futures contract calling
for delivery in the same month. This transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
securities or cash. Since all transactions in the futures market are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the fund will incur brokerage fees when it buys
or sells financial futures contracts.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options, futures, and options on futures and any other derivative investments
that are not presently contemplated for use by the fund or that are not
currently available but which may be developed, to the extent such opportunities
are consistent with the fund's investment goals and legally permissible for the
fund.
ILLIQUID SECURITIES The fund's policy is not to invest more than 10% of its net
assets in illiquid securities. Generally, an illiquid security is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the fund has valued it.
The fund does not consider securities that it acquires outside of the U.S. and
that are publicly traded in the U.S. or on a foreign securities market to be
illiquid assets if: (a) the fund reasonably believes it can readily dispose of
the securities for cash in the U.S. or foreign market, or (b) current market
quotations are readily available. The fund will not acquire the securities of
foreign issuers outside of the U.S. if, at the time of acquisition, the fund has
reason to believe that it could not resell the securities in a public trading
market.
The fund's board of trustees has authorized the fund to invest in restricted
securities. To the extent the manager determines there is a liquid institutional
or other market for these securities, the fund considers them to be liquid
securities. An example of these securities are restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The fund's board of trustees will review any
determination by the manager to treat a restricted security as a liquid security
on an ongoing basis, including the manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
manager and the fund's board of trustees will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to buy or sell the security and the number of other
potential buyers; (iii) dealer undertakings to make a market in the security;
and (iv) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). To the extent the fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the fund may increase if qualified institutional buyers become uninterested
in buying these securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of assets in short-term debt instruments. The fund may
also invest cash, including cash resulting from purchases and sales of fund
shares, temporarily in short-term debt instruments. Short-term debt instruments
include high-grade commercial paper, repurchase agreements, and other money
market equivalents. To the extent permitted by exemptions granted under the 1940
Act and the fund's other investment policies and restrictions, the fund may also
invest in shares of one or more money market funds managed by Franklin Advisers,
Inc. or its affiliates.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The fund MAY NOT:
1. borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted by the 1940 Act, or any
exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission, or for temporary or emergency purposes and then in an
amount not exceeding 33-1/3% of the value of the fund's total assets
(including the amount borrowed);
2. act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares;
3. make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
goals 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 U.S. Securities and
Exchange Commission;
4. purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase
or sell currencies, may enter into futures contracts on securities,
currencies, and other indices or any other financial instruments, and may
purchase and sell options on such futures contracts;
5. issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages
or pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making
short sales of securities to the extent permitted by the 1940 Act and any
rule or order thereunder, or SEC staff interpretations thereof;
6. purchase the securities of any one issuer (other than the U.S. Government or
any of its agencies or instrumentalities, or securities of other investment
companies) if immediately after such investment (a) more than 5% of the
value of the fund's total assets would be invested in such issuer or (b)
more than 10% of the outstanding voting securities of such issuer would be
owned by the fund, except that up to 25% of the value of the fund's total
assets may be invested without regard to such 5% limitations.
7. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any industry, except that all or substantially all of the
assets of the fund may be invested in another registered investment company
having the same investment goal and policies as the fund.
The fund presently has the following additional restriction, which is not
fundamental and may be changed without shareholder approval.
The fund MAY NOT: (1) pledge, mortgage or hypothecate its assets as securities
for loans, nor to engage in joint or joint and several trading accounts in
securities, except that it may: (i) participate in joint repurchase
arrangements; (ii) invest in shares of one or more money market funds managed by
Franklin Advisers, Inc. or its affiliates, to the extent permitted by exemptions
granted under the 1940 Act; or (iii) combine orders to buy or sell with orders
from other persons to obtain lower brokerage commissions.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.
RISKS
- ----------------------
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 focusing
on technology companies the fund carries much greater risks of adverse
developments among such companies than a 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 market 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 a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish the fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for the
fund to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities. The ability of the fund to achieve its investment goal
may, to the extent of investment in low rated debt securities, be more dependent
upon such creditworthiness analysis than would be the case if the fund were
invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery.
BIOTECHNOLOGY COMPANIES The biotechnology industry is subject to extensive
government regulation. The industry will be affected by government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability, and similar matters. For example, in the past
several years, the U.S. Congress has considered legislation concerning
healthcare reform and changes to the U.S. Food and Drug Administration's (FDA)
approval process. If such legislation is passed it may affect the biotechnology
industry. As these factors impact the biotechnology industry, the value of your
shares may fluctuate significantly over relatively short periods of time.
Because the biotechnology industry is relatively new, investors may be quick to
react to developments that affect the industry. In the past, biotechnology
securities have exhibited considerable volatility in reaction to research and
other developments. In comparison to more developed industries, there may be a
thin trading market in biotechnology securities, and adverse developments in the
biotechnology industry may be more likely to result in decreases in the value of
biotechnology stocks.
Biotechnology companies are often small, start-up ventures whose products are
only in the research stage. Only a limited number of biotechnology companies
have reached the point of approval of products by the FDA and subsequent
commercial production and distribution of such products. Therefore, the success
of investments in the biotechnology industry is often based upon speculation and
expectations about future products, research progress, and new product filings
with regulatory authorities. Such investments are speculative and may drop
sharply in value in response to regulatory or research setbacks.
HEALTH CARE COMPANIES The activities of health care companies may be funded or
subsidized by federal and state governments. If government subsidies are
discontinued, the profitability of these companies could be adversely affected.
Stocks of these companies will be affected by government policies on health care
reimbursements, regulatory approval for new drugs and medical instruments, and
similar matters. Health care companies are also subject to legislative risk,
which is the risk of a reform of the health care system through legislation.
Health care companies may face lawsuits related to product liability issues.
Also, many products and services provided by health care companies are subject
to rapid obsolescence. The value of an investment in the fund may fluctuate
significantly over relatively short periods of time.
UNSEASONED COMPANIES To the extent that 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.
REAL ESTATE SECURITIES Investments in real estate securities are subject to the
risks associated with the real estate industry. Economic, regulatory, and social
factors that affect the value of real estate will affect the value of real
estate securities. These factors include overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
casualty or condemnation losses, variations in rental income, changes in
neighborhood values, the appeal of properties to tenants, and increases in
interest rates. REITs are subject to risks related to the skill of their
management, changes in value of the properties the REITs own, the quality of any
credit extended by the REITs, and general economic and other factors.
DERIVATIVE SECURITIES The fund's transactions in options, futures, and options
on futures involve certain risks. These risks include, among others, the risk
that the effectiveness of a transaction depends on the degree that price
movements in the underlying securities, index, or currency correlate with price
movements in the relevant portion of the fund's portfolio. The fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation that would result in a loss on both the underlying securities and
the derivative security.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the fund of margin deposits in the event of bankruptcy of a broker with whom the
fund has an open position.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions may have an
adverse impact on the fund's ability to effectively hedge its securities.
Furthermore, if the fund is unable to close out a position and if prices move
adversely, the fund will have to continue to make daily cash payments to
maintain its required margin. If the fund does not have sufficient cash to do
this, it may have to sell portfolio securities at a disadvantageous time. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the options or futures.
Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only by
exercising it or by entering into a closing sale transaction with the dealer
that issued it. When the fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote it.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will be implemented in stages through July 1,
2002, to replace the national currency for participating member countries. The
participating countries are Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, and Spain. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the funds, the funds' manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of 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 27 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 47 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).
Edward J. Bonach (46)
Allianz Life Insurance Company, 1750 Hennepin Avenue
Minneapolis, MN 55403-2195
TRUSTEE
Senior Vice President and Chief Financial Officer, Allianz Life Insurance
Company of North America; President and Chief Executive Officer, Canadian
American Financial Corporation; and Director, Preferred Life Insurance Company
of New York and Life USA Holding, Inc.
Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE
Member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS); director or trustee, as the case may be, of nine
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (66)
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 Advisers, Inc. and Franklin Investment Advisory Services, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and 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 32 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
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.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 Reclamation (redevelopment); director or trustee, as
the case may be, of 27 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 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) and Hambrecht & Quist
Group (investment banking), and President, National Association of Securities
Dealers, Inc.
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
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 51 of the investment companies in the Franklin Templeton
Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, 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.; President and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be, of
51 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 33 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).
Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $675 per month plus $550 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 $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST1 ($) FUNDS2 ($) EACH SERVES3
- -------------------------------------------------------------------------------
Frank H. Abbott 156,060 27
Harris Ashton 363,165 47
Robert F. Carlson 89.690 9
S. Joseph Fortunato 363.238 49
Frank W.T. LaHaye 138,700 27
Gordon Macklin 363,165 47
1. For the fiscal year ended December 31, 1999.
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 the fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- --------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
(Advisers), 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 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;
o 0.270 of the value of net assets in excess of $21.5 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of 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 manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES For the fund, the manager pays FT Services a monthly fee
equal to an annual rate of 0.20% of the fund's average daily net assets
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division,
90 Washington Street, New York, NY 10286, acts as custodian of the fund's
securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- ----------------------------------
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the fund's
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
Because the fund may, from time to time, invest in broker-dealers, it is
possible that the fund will own more than 5% of the voting securities of one or
more broker-dealers through whom the fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the fund. To the extent the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to adhere
to certain rules relating to the payment of commissions to an affiliated
broker-dealer. These rules require the fund to adhere to procedures adopted by
the board relating to ensuring that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary brokerage
commissions for similar transactions.
DISTRIBUTIONS AND TAXES
- --------------------------------------
The 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 their
shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes the fund's net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of its 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 regulated investment
companies under Subchapter M of the Internal Revenue Code. As a regulated
investment company, the fund generally pays no federal income tax on the income
and gains it distributes to you. The board reserves the right not to maintain
the qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
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 gain or loss on the redemption of your original shares in
the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government, subject
in some states to minimum investment requirements that must be met by the fund.
Investments in Government National Mortgage Association or Federal National
Mortgage Association securities, bankers' acceptances, commercial paper and
repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 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 is
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- -----------------------------------------------------
The fund is a diversified series of Franklin Strategic Series, 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 Small Cap Growth Fund II - Class A
o Franklin Small Cap Growth Fund II - Class B
o Franklin Small Cap Growth Fund II - Class C
o Franklin Small Cap Growth Fund II - 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
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 the fund and class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
- ---------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the 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, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares you
own, and we will pay or reinvest dividend and capital gain distributions on
the reserved shares according to the distribution option you have chosen.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, or to any penalty as a result of the early termination
of a plan, nor are these plans entitled to receive retroactive adjustments in
price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, to Class C shareholders who chose to
reinvest their distributions in Class A shares of the fund before November
17, 1997, and to Advisor Class or Class Z shareholders of a Franklin
Templeton Fund who may reinvest their distributions in the fund's Class A
shares. This waiver category also applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option the
Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months. If you
immediately placed your redemption proceeds in a Franklin Bank CD or a
Franklin Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date the CD matures,
including any rollover, or the date you redeem your money fund shares.
o Redemption proceeds from the sale of Class A shares of any of the Templeton
Global Strategy Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Templeton
Global Strategy Fund, a new CDSC will apply to your purchase of fund shares
and the CDSC holding period will begin again. We will, however, credit your
fund account with additional shares based on the CDSC you previously paid
and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton
money fund, you may reinvest them as described above. The proceeds must be
reinvested within 365 days from the date they are redeemed from the money
fund.
o Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an
initial sales charge or CDSC by various individuals and institutions due to
anticipated economies in sales efforts and expenses, including:
o Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held in
a fiduciary, agency, advisory, custodial or similar capacity and over which
the trust companies and bank trust departments or other plan fiduciaries or
participants, in the case of certain retirement plans, have full or shared
investment discretion. We will accept orders for these accounts by mail
accompanied by a check or by telephone or other means of electronic data
transfer directly from the bank or trust company, with payment by federal
funds received by the close of business on the next business day following
the order.
o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined the fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in the fund is permissible and suitable for you and the effect,
if any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z
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.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, the fund's shares are available to these banks' trust accounts without a
sales charge. The banks may charge service fees to their customers who
participate in the trusts. A portion of these service fees may be paid to
Distributors or one of its affiliates to help defray expenses of maintaining a
service office in Taiwan, including expenses related to local literature
fulfillment and communication facilities.
The fund's Class A shares may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class A
shares may be offered with the following schedule of sales charges:
SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%)
- ---------------------------------------- --------------------------------------
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 opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- ----------------------------------------- ---------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's net asset value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The 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.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan also may be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the board reserves the right to make
payments in whole or in part in securities or other assets of the fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
fund's net assets and you may incur brokerage fees in converting the securities
to cash. Redemptions in kind are taxable transactions. The fund does not intend
to redeem illiquid securities in kind. If this happens, however, you may not be
able to recover your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks. The fund is not responsible for tracking down uncashed checks, unless a
check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
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 or 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
- -----------------------------------
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 its realizable
amount, and records interest as accrued and dividends on the ex-dividend date.
If market quotations are readily available for portfolio securities listed on a
securities exchange or on the NASDAQ National Market System, the fund values
those securities at the last quoted sale price of the day or, if there is no
reported sale, within the range of the most recent quoted bid and ask prices.
The fund values over-the-counter portfolio securities within the range of the
most recent quoted bid and ask prices. If portfolio securities trade both in the
over-the-counter market and on a stock exchange, the fund values them according
to the broadest and most representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- -----------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors may be entitled to reimbursement under the Rule 12b-1 plans, as
discussed below. Except as noted, Distributors received no other compensation
from the fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES 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 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 distribution and service (12b-1) fees charged to each class are
based only on the fees attributable to that particular class.
THE CLASS A PLAN. The fund may pay up to 0.35% per year of Class A's average
daily net assets.
The Class A plan is a reimbursement plan. It allows the fund to reimburse
Distributors for eligible expenses that Distributors has shown it has incurred.
The fund will not reimburse more than the maximum amount allowed under the plan.
THE CLASS B AND C PLANS. The fund pays Distributors up to 1.00% per year of the
class's average daily net assets, of which 0.25% may be used 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.
The Class 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 immediate plans to spend the amount received
on eligible expenses. The fund will not pay more than the maximum amount allowed
under the plans.
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the fund, the manager or Distributors or other parties on behalf of the
fund, the manager or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of fund
shares within the context of Rule 12b-1 under the 1940 Act, 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
- -----------------------------------
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 is based on the
standardized methods of computing performance mandated by the SEC. Performance
figures reflect Rule 12b-1 fees from the date of the plan's implementation. An
explanation of these and other methods used by the fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
Because the fund is new, it has no performance history and thus no performance
quotations have been provided.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum initial sales charge is deducted from the
initial $1,000 purchase, and income dividends and capital gain distributions are
reinvested at net asset value. The quotation assumes the account was completely
redeemed at the end of each period and the deduction of all applicable charges
and fees. If a change is made to the sales charge structure, historical
performance information will be restated to reflect the maximum initial sales
charge currently in effect.
When considering the average annual total return quotations 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.
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 the 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 - an unmanaged
capitalization-weighted index designed to measure performance of the broad
domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the
price of goods and services in major expenditure groups.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000 total
market capitalization, this is Russell's Small Cap Index.
o The Russell 2500 Index - consists of the bottom 500 securities in the
Russell Index, as ranked by total market capitalization, and all 2,000
securities in the Russell 2000 Index. This Index is a measure of small to
medium-small stock performance.
o The Russell 2000 Growth Index - consists of the [description to be
completed].
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- ----------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 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 $224 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 113 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
You will receive the fund's financial reports every six months. If you would
like to receive an interim report of the fund's portfolio holdings, please call
1-800/DIAL BEN(R).
FRANKLIN
STRATEGIC SERIES
FRANKLIN SMALL CAP GROWTH FUND II - 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)
- ------------------------------------------------------------------------
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 or annual report, contact your
investment representative or call 1-800/DIAL BEN (1-800/342-5236).
CONTENTS
Goal and Strategies .................................. 2
Risks ................................................ 16
Officers and Trustees ................................ 19
Management and Other Services ........................ 21
Portfolio Transactions ............................... 23
Distributions and Taxes .............................. 24
Organization, Voting Rights
and Principal Holders ............................... 26
Buying and Selling Shares ............................ 27
Pricing Shares ....................................... 33
The Underwriter ...................................... 34
Performance .......................................... 36
Miscellaneous Information ............................ 40
- -------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- -------------------------------------------------------------------------------
GOAL AND STRATEGIES
- -----------------------------------
FRANKLIN SMALL CAP GROWTH FUND II The fund's investment goal is long-term
capital growth. This goal is fundamental, which means it may not be changed
without shareholder approval.
Under normal market conditions, the fund invests most of its assets in equity
securities of U.S. small capitalization (small cap) growth companies.
The manager is a research driven, fundamental investor, pursuing a disciplined
strategy. The manager uses a "bottom-up" analysis primarily to select small cap
companies that it believes are positioned for rapid growth in revenues, earnings
or assets.
The fund may from time to time make private investments in companies whose
securities are not publicly traded. These investments typically will take the
form of letter stock or convertible preferred stock. Because these securities
are not publicly traded, there is no secondary market for these securities. The
fund will treat these securities as illiquid.
Although the fund may invest up to 25% of its total assets in foreign
securities, including those of developing or emerging markets, the fund
currently intends to limit its investment in foreign securities to 10% of its
total assets.
The fund may invest up to 10% of its total assets in REITs. The fund will not
invest in securities issued without stock certificates or comparable stock
documents. The fund may not invest more than 10% of its net assets in securities
of issuers with less than three years continuous operation.
The fund may invest up to 5% of its total assets in corporate debt securities
that the manager believes have the potential for capital appreciation as a
result of improvement in the creditworthiness of the issuer. The receipt of
income from debt securities is incidental to the fund's investment goal. The
fund may buy both rated and unrated debt securities. The fund will invest in
securities rated B or better by Moody's or S&P or unrated securities of
comparable quality.
Below is more detailed information about some of the various types of securities
the fund may buy and the fund's investment policies and restrictions.
EQUITY SECURITIES represent a proportionate share of the ownership of a company;
their value is based on the success of the company's business, any income paid
to stockholders, the value of its assets, and general market conditions. The
purchaser of an equity security typically receives an ownership interest in the
company as well as certain voting rights. The owner of an equity security may
participate in a company's success through the receipt of dividends, which are
distributions of earnings by the company to its owners. Equity security owners
may also participate in a company's success or lack of success through increases
or decreases in the value of the company's shares as traded in the public
trading market for such shares. Equity securities generally take the form of
common stock or preferred stock. Preferred stockholders typically receive
greater dividends but may receive less appreciation than common stockholders and
may have greater voting rights as well. Equity securities may also include
convertible securities, warrants, or rights. Warrants or rights give the holder
the right to purchase a common stock at a given time for a specified price.
CONVERTIBLE SECURITIES The fund may invest in convertible securities without
limit and enhanced convertible securities.
A convertible security is generally a debt obligation or preferred stock that
may be converted within a specified period of time into a certain amount of
common stock of the same or a different issuer. A convertible security provides
a fixed-income stream and the opportunity, through its conversion feature, to
participate in the capital appreciation resulting from a market price advance in
its underlying common stock. As with a straight fixed-income security, a
convertible security tends to increase in market value when interest rates
decline and decrease in value when interest rates rise. Like a common stock, the
value of a convertible security also tends to increase as the market value of
the underlying stock rises, and it tends to decrease as the market value of the
underlying stock declines. Because both interest rate and market movements can
influence its value, a convertible security is not as sensitive to interest
rates as a similar fixed-income security, nor is it as sensitive to changes in
share price as its underlying stock.
When issued by an operating company, a convertible security tends to be senior
to common stock, but sub-ordinate to other types of fixed-income securities
issued by that company. When a convertible security issued by an operating
company is "converted," the operating company often issues new stock to the
holder of the convertible security, but if the parity price of the convertible
security is less than the call price, the operating company may pay out cash
instead of common stock. If the convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly dividends. Through this structure the company establishes a
wholly owned special purpose vehicle whose sole purpose is to issue convertible
preferred stock. The 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 securities, though there can be no assurances that this will be achieved.
DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes, and
commercial paper differ in the length of the issuer's payment schedule, with
bonds carrying the longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer.
Generally, a lower rating indicates higher risk.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS The fund may invest in foreign
securities. Although the Fund may invest up to 25% of total assets in foreign
securities, it intends to limit its investments to 10% of total assets.
The fund may buy foreign securities traded in the U.S. or directly in foreign
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-CAP COMPANIES Market capitalization is defined as the total market value
of a company's outstanding stock. Small cap companies generally have market
capitalization of up to $1.5 billion at the time of the fund's investment.
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.
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 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.
The fund may also enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the fund agrees to sell a security in its portfolio and
then to repurchase the security at an agreed-upon price, date, and interest
payment. The fund will maintain cash or high-grade liquid debt securities with a
value equal to the value of the fund's obligation under the agreement, including
accrued interest, in a segregated account with the fund's custodian bank. The
securities subject to the reverse repurchase agreement will be marked-to-market
daily. Although reverse repurchase agreements are borrowings under federal
securities laws, the fund does not treat them as borrowings for purposes of its
investment restrictions below, provided the segregated account is properly
maintained.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 33 1/3% of the value of the fund's total assets, measured
at the time of the most recent loan. For each loan, the borrower must maintain
with the fund's custodian collateral (consisting of any combination of cash,
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 loan 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 To the extent it is consistent with its
investment goals and certain limitations under the Investment Company Act of
1940, as amended ("1940 Act"), the fund may invest its assets in securities
issued by companies engaged in securities related businesses, including
companies that are securities brokers, dealers, underwriters or investment
advisors. These companies are considered to be part of the financial services
industry. Generally, under the 1940 Act, the fund may not acquire a security or
any interest in a securities related business to the extent such acquisition
would result in the fund acquiring in excess of 5% of a class of an issuer's
outstanding equity securities or 10% of the outstanding principal amount of an
issuer's debt securities, or investing more than 5% of the value of the fund's
total assets in securities of the issuer. In addition, any equity security of a
securities-related business must be a marginable security under Federal Reserve
Board regulations and any debt security of a securities-related business must be
investment grade as determined by the Board. The fund does not believe that
these limitations will impede the attainment of its investment goals.
OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and end of the contract period. Options, futures, and
options on futures are considered "derivative securities."
The fund may buy and sell options on securities and securities indices. The fund
may only buy options if the premiums paid for such options total 5% or less of
net assets.
The fund may buy and sell futures contracts for securities and currencies. The
fund may also buy and sell securities index futures and options on securities
index futures. 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.
OPTIONS. The fund may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter (OTC)
market. All options written by the fund will be covered. The fund may also buy
or write put and call options on securities indices.
A call option written by the fund is covered if the fund
(a) owns the underlying security that is subject to the call or (b) has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian bank) upon conversion or exchange of other securities held in
its portfolio. A call option is also covered if the fund holds a call on the
same security and in the same principal amount as the call written where the
exercise price of the call held is (a) equal to or less than the exercise price
of the call written or (b) greater than the exercise price of the call written
if the difference is held in cash or high-grade debt securities in a segregated
account with the fund's custodian bank.
A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same series
as the option previously written. The effect of the purchase is that the
clearing corporation will cancel the writer's position. However, a writer may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, the holder of an option may liquidate its position by
effecting a "closing sale transaction" by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction may be made at the time desired by the
fund.
Effecting a closing transaction in the case of a written call option allows the
fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other fund investments.
If the fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, the fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to buy
the option. Increases in the market price of a call option will generally
reflect increases in the market price of the underlying security. As a result,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the fund may elect to close the
position or take delivery of the security at the exercise price. The fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.
The fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. The fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option. The ability to buy put options allows the
fund to protect the unrealized gain in an appreciated security in its portfolio
without actually selling the security. In addition, the fund continues to
receive interest or dividend income on the security. The fund may sell a put
option it has previously purchased prior to the sale of the security underlying
the option. The sale of the option will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option. Any gain or loss may be wholly
or partially offset by a change in the value of the underlying security that the
fund owns or has the right to acquire.
The fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in exchange
traded options. Like exchange traded options, OTC options give the holder the
right to buy, in the case of OTC call options, or sell, in the case of OTC put
options, an underlying security from or to the writer at a stated exercise
price. However, OTC options differ from exchange traded options in certain
material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options, and the writer of an OTC option is paid the premium in advance
by the dealer.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (or less than, in the case of a put) the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of the
underlying stock index. The fund will maintain the account while the option is
open or will otherwise cover the transaction.
FINANCIAL FUTURES. The fund may enter into contracts for the purchase or sale of
futures contracts based upon financial indices (financial futures). Financial
futures contracts are commodity contracts that obligate the long or short holder
to take or make delivery of the cash value of a securities index during a
specified future period at a specified price. A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver such cash value
called for by the contract on a specified date. A "purchase" of a futures
contract means the acquisition of a contractual obligation to take delivery of
the cash value called for by the contract at a specified date. The purpose of
the acquisition or sale of a futures contract is to attempt to protect the fund
from fluctuations in price of portfolio securities without actually buying or
selling the underlying security. Futures contracts have been designed by
exchanges designated "contracts markets" by the Commodity Futures Trading
Commission (CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.
The fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intend to buy
and, to the extent consistent therewith, to accommodate cash flows. The fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one third of total assets would be
represented by futures contracts or related options. In addition, the fund may
not buy or sell futures contracts or buy or sell related options if, immediately
thereafter, the sum of the amount of initial deposits on existing financial
futures and premiums paid on options on financial futures contracts would exceed
5% of total assets (taken at current value). To the extent the fund enters into
a futures contract or related call option, it will maintain with its custodian
bank, to the extent required by the rules of the Securities and Exchange
Commission ("SEC"), assets in a segregated account to cover its obligations with
respect to such contract which will consist of cash, cash equivalents or high
quality debt securities from its portfolio in an amount equal to the market
value of such futures contract or related option.
STOCK INDEX FUTURES. The fund may buy and sell stock index futures contracts. A
stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market price movements. The
need to hedge against these risks will depend on the extent of diversification
of the fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
BOND INDEX FUTURES AND RELATED OPTIONS. The fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. The fund's
investment strategies in employing futures contracts based on an index of debt
securities will be similar to that used in other financial futures transactions.
The fund may also buy and write put and call options on bond index futures and
enter into closing transactions with respect to such options.
FUTURES CONTRACTS FOR SECURITIES AND CURRENCIES. The fund may buy and sell
futures contracts for securities, and currencies. The fund may also enter into
closing purchase and sale transactions with respect to these futures contracts.
The fund will engage in futures transactions only for bona fide hedging or other
appropriate risk management purposes. All futures contracts entered into by the
fund is traded on U.S. exchanges or boards of trade licensed and regulated by
the CFTC or on foreign exchanges.
When securities prices are falling, the fund may offset a decline in the value
of its current portfolio securities through the sale of futures contracts. When
prices are rising, the fund can attempt to secure better prices than might be
available when it intends to buy securities through the purchase of futures
contracts. Similarly, the fund can sell futures contracts on a specified
currency in an attempt to protect against a decline in the value of that
currency and its portfolio securities denominated in that currency. The fund can
buy futures contracts on a foreign currency to fix the price in U.S. dollars of
a security denominated in that currency that the fund has purchased or expects
to buy.
Positions taken in the futures markets are not normally held to maturity, but
are liquidated through offsetting transactions that may result in a profit or a
loss. While the fund's futures contracts on securities and currencies will
usually be liquidated in this manner, the fund may instead make or take delivery
of the underlying securities or currencies whenever it appears economically
advantageous to do so. A clearing corporation associated with the exchange on
which futures on securities or currencies are traded guarantees that, if still
open, the sale or purchase will be performed on the settlement date.
To the extent the fund enters into a futures contract, it will deposit in a
segregated account with its custodian bank cash or U.S. Treasury obligations
equal to a specified percentage of the value of the futures contract (the
initial margin), as required by the relevant contract market and futures
commission merchant. The futures contract will be marked-to-market daily. Should
the value of the futures contract decline relative to the fund's position, the
fund, if required by law, will pay the futures commission merchant an amount
equal to the change in value.
FUTURES CONTRACTS - GENERAL. Although financial futures contracts by their terms
call for the actual delivery or acquisition of securities, or the cash value of
the index, in most cases the contractual obligation is fulfilled before the date
of the contract without having to make or take delivery of the securities or
cash. A contractual obligation is offset by buying (or selling, as the case may
be) on a commodities exchange an identical financial futures contract calling
for delivery in the same month. This transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
securities or cash. Since all transactions in the futures market are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the fund will incur brokerage fees when it buys
or sells financial futures contracts.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options, futures, and options on futures and any other derivative investments
that are not presently contemplated for use by the fund or that are not
currently available but which may be developed, to the extent such opportunities
are consistent with the fund's investment goals and legally permissible for the
fund.
ILLIQUID SECURITIES The fund's policy is not to invest more than 10% of its net
assets in illiquid securities. Generally, an illiquid security is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the fund has valued it.
The fund does not consider securities that it acquires outside of the U.S. and
that are publicly traded in the U.S. or on a foreign securities market to be
illiquid assets if: (a) the fund reasonably believes it can readily dispose of
the securities for cash in the U.S. or foreign market, or (b) current market
quotations are readily available. The fund will not acquire the securities of
foreign issuers outside of the U.S. if, at the time of acquisition, the fund has
reason to believe that it could not resell the securities in a public trading
market.
The fund's board of trustees has authorized the fund to invest in restricted
securities. To the extent the manager determines there is a liquid institutional
or other market for these securities, the fund considers them to be liquid
securities. An example of these securities are restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The fund's board of trustees will review any
determination by the manager to treat a restricted security as a liquid security
on an ongoing basis, including the manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
manager and the fund's board of trustees will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to buy or sell the security and the number of other
potential buyers; (iii) dealer undertakings to make a market in the security;
and (iv) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). To the extent the fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the fund may increase if qualified institutional buyers become uninterested
in buying these securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of assets in short-term debt instruments. The fund may
also invest cash, including cash resulting from purchases and sales of fund
shares, temporarily in short-term debt instruments. Short-term debt instruments
include high-grade commercial paper, repurchase agreements, and other money
market equivalents. To the extent permitted by exemptions granted under the 1940
Act and the fund's other investment policies and restrictions, the fund may also
invest in shares of one or more money market funds managed by Franklin Advisers,
Inc. or its affiliates.
INVESTMENT RESTRICTIONS The fund has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
The fund MAY NOT:
1. borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted by the 1940 Act, or any
exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission, or for temporary or emergency purposes and then in an
amount not exceeding 33-1/3% of the value of the fund's total assets
(including the amount borrowed);
2. act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares;
3. make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
goals 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 U.S. Securities and
Exchange Commission;
4. purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase
or sell currencies, may enter into futures contracts on securities,
currencies, and other indices or any other financial instruments, and may
purchase and sell options on such futures contracts;
5. issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages
or pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making
short sales of securities to the extent permitted by the 1940 Act and any
rule or order thereunder, or SEC staff interpretations thereof;
6. purchase the securities of any one issuer (other than the U.S. Government or
any of its agencies or instrumentalities, or securities of other investment
companies) if immediately after such investment (a) more than 5% of the
value of the fund's total assets would be invested in such issuer or (b)
more than 10% of the outstanding voting securities of such issuer would be
owned by the fund, except that up to 25% of the value of the fund's total
assets may be invested without regard to such 5% limitations.
7. Invest more than 25% of the fund's assets (at the time of the most recent
investment) in any industry, except that all or substantially all of the
assets of the fund may be invested in another registered investment company
having the same investment goal and policies as the fund.
The fund presently has the following additional restriction, which is not
fundamental and may be changed without shareholder approval.
The fund MAY NOT: (1) pledge, mortgage or hypothecate its assets as securities
for loans, nor to engage in joint or joint and several trading accounts in
securities, except that it may: (i) participate in joint repurchase
arrangements; (ii) invest in shares of one or more money market funds managed by
Franklin Advisers, Inc. or its affiliates, to the extent permitted by exemptions
granted under the 1940 Act; or (iii) combine orders to buy or sell with orders
from other persons to obtain lower brokerage commissions.
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectus apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of the fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.
RISKS
- -----------------------------------
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 focusing
on technology companies the fund carries much greater risks of adverse
developments among such companies than a 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 market 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 a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
LOWER-RATED SECURITIES Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish the fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for the
fund to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities. The ability of the fund to achieve its investment goal
may, to the extent of investment in low rated debt securities, be more dependent
upon such creditworthiness analysis than would be the case if the fund were
invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery.
BIOTECHNOLOGY COMPANIES The biotechnology industry is subject to extensive
government regulation. The industry will be affected by government regulatory
requirements, regulatory approval for new drugs and medical products, patent
considerations, product liability, and similar matters. For example, in the past
several years, the U.S. Congress has considered legislation concerning
healthcare reform and changes to the U.S. Food and Drug Administration's (FDA)
approval process. If such legislation is passed it may affect the biotechnology
industry. As these factors impact the biotechnology industry, the value of your
shares may fluctuate significantly over relatively short periods of time.
Because the biotechnology industry is relatively new, investors may be quick to
react to developments that affect the industry. In the past, biotechnology
securities have exhibited considerable volatility in reaction to research and
other developments. In comparison to more developed industries, there may be a
thin trading market in biotechnology securities, and adverse developments in the
biotechnology industry may be more likely to result in decreases in the value of
biotechnology stocks.
Biotechnology companies are often small, start-up ventures whose products are
only in the research stage. Only a limited number of biotechnology companies
have reached the point of approval of products by the FDA and subsequent
commercial production and distribution of such products. Therefore, the success
of investments in the biotechnology industry is often based upon speculation and
expectations about future products, research progress, and new product filings
with regulatory authorities. Such investments are speculative and may drop
sharply in value in response to regulatory or research setbacks.
HEALTH CARE COMPANIES The activities of health care companies may be funded or
subsidized by federal and state governments. If government subsidies are
discontinued, the profitability of these companies could be adversely affected.
Stocks of these companies will be affected by government policies on health care
reimbursements, regulatory approval for new drugs and medical instruments, and
similar matters. Health care companies are also subject to legislative risk,
which is the risk of a reform of the health care system through legislation.
Health care companies may face lawsuits related to product liability issues.
Also, many products and services provided by health care companies are subject
to rapid obsolescence. The value of an investment in the fund may fluctuate
significantly over relatively short periods of time.
UNSEASONED COMPANIES To the extent that 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.
REAL ESTATE SECURITIES Investments in real estate securities are subject to the
risks associated with the real estate industry. Economic, regulatory, and social
factors that affect the value of real estate will affect the value of real
estate securities. These factors include overbuilding and increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
casualty or condemnation losses, variations in rental income, changes in
neighborhood values, the appeal of properties to tenants, and increases in
interest rates. REITs are subject to risks related to the skill of their
management, changes in value of the properties the REITs own, the quality of any
credit extended by the REITs, and general economic and other factors.
DERIVATIVE SECURITIES The fund's transactions in options, futures, and options
on futures involve certain risks. These risks include, among others, the risk
that the effectiveness of a transaction depends on the degree that price
movements in the underlying securities, index, or currency correlate with price
movements in the relevant portion of the fund's portfolio. The fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation that would result in a loss on both the underlying securities and
the derivative security.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the fund of margin deposits in the event of bankruptcy of a broker with whom the
fund has an open position.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions may have an
adverse impact on the fund's ability to effectively hedge its securities.
Furthermore, if the fund is unable to close out a position and if prices move
adversely, the fund will have to continue to make daily cash payments to
maintain its required margin. If the fund does not have sufficient cash to do
this, it may have to sell portfolio securities at a disadvantageous time. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the options or futures.
Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only by
exercising it or by entering into a closing sale transaction with the dealer
that issued it. When the fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote it.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will be implemented in stages through July 1,
2002, to replace the national currency for participating member countries. The
participating countries are Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, and Spain. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to handle all
euro-related changes to enable the Franklin Templeton Funds to process
transactions accurately and completely with minimal disruption to business
activities. While the implementation of the euro could have a negative effect on
the funds, the funds' manager and its affiliated services providers are taking
steps they believe are reasonably designed to address the euro issue.
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of 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 27 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 47 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).
Edward J. Bonach (46)
Allianz Life Insurance Company, 1750 Hennepin Avenue
Minneapolis, MN 55403-2195
TRUSTEE
Senior Vice President and Chief Financial Officer, Allianz Life Insurance
Company of North America; President and Chief Executive Officer, Canadian
American Financial Corporation; and Director, Preferred Life Insurance Company
of New York and Life USA Holding, Inc.
Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE
Member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS); director or trustee, as the case may be, of nine
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (66)
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 Advisers, Inc. and Franklin Investment Advisory Services, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and 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 32 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
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.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 Reclamation (redevelopment); director or trustee, as
the case may be, of 27 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 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) and Hambrecht & Quist
Group (investment banking), and President, National Association of Securities
Dealers, Inc.
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
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 51 of the investment companies in the Franklin Templeton
Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, 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.; President and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be, of
51 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 33 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).
Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $675 per month plus $550 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 $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST1 ($) FUNDS2 ($) EACH SERVES3
- -------------------------------------------------------------------------------
Frank H. Abbott 156,060 27
Harris Ashton 363,165 47
Robert F. Carlson 89.690 9
S. Joseph Fortunato 363.238 49
Frank W.T. LaHaye 138,700 27
Gordon Macklin 363,165 47
1. For the fiscal year ended December 31, 1999.
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 the fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- -------------------------------------------------
MANAGER AND SERVICES PROVIDED The fund's manager is Franklin Advisers, Inc.
(Advisers), 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 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;
o 0.270 of the value of net assets in excess of $21.5 billion.
The fee is computed at the close of business on the last business day of each
month according to the terms of the management agreement. Each class of 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 manager to provide certain administrative
services and facilities for the fund. FT Services is wholly owned by Resources
and is an affiliate of the fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and
maintaining books, records, and tax and financial reports, and monitoring
compliance with regulatory requirements.
ADMINISTRATION FEES For the fund, the manager pays FT Services a monthly fee
equal to an annual rate of 0.20% of the fund's average daily net assets
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/ Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., San Mateo, CA 94404. Please send all
correspondence to Investor Services to P.O. Box 997151, Sacramento, CA
95899-9983.
For its services, Investor Services receives a fixed fee per account. The fund
also will reimburse Investor Services for certain out-of-pocket expenses, which
may include payments by Investor Services to entities, including affiliated
entities, that provide sub-shareholder services, recordkeeping and/or transfer
agency services to beneficial owners of the fund. The amount of reimbursements
for these services per benefit plan participant fund account per year will not
exceed the per account fee payable by the fund to Investor Services in
connection with maintaining shareholder accounts.
CUSTODIAN Bank of New York, Mutual Funds Division,
90 Washington Street, New York, NY 10286, acts as custodian of the fund's
securities and other assets.
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105,
is the fund's independent auditor. The auditor gives an opinion on the financial
statements included in the trust's Annual Report to Shareholders and reviews the
trust's registration statement filed with the U.S. Securities and Exchange
Commission (SEC).
PORTFOLIO TRANSACTIONS
- -----------------------------------------------
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the fund's
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
Because the fund may, from time to time, invest in broker-dealers, it is
possible that the fund will own more than 5% of the voting securities of one or
more broker-dealers through whom the fund places portfolio brokerage
transactions. In such circumstances, the broker-dealer would be considered an
affiliated person of the fund. To the extent the fund places brokerage
transactions through such a broker-dealer at a time when the broker-dealer is
considered to be an affiliate of the fund, the fund will be required to adhere
to certain rules relating to the payment of commissions to an affiliated
broker-dealer. These rules require the fund to adhere to procedures adopted by
the board relating to ensuring that the commissions paid to such broker-dealers
do not exceed what would otherwise be the usual and customary brokerage
commissions for similar transactions.
DISTRIBUTIONS AND TAXES
- -----------------------------------------------
The 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 their
shares.
DISTRIBUTIONS OF NET INVESTMENT INCOME The fund receives income generally in the
form of dividends and interest on its investments. This income, less expenses
incurred in the operation of the fund, constitutes the fund's net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS The fund may derive capital gains and losses in
connection with sales or other dispositions of its portfolio securities.
Distributions from net short-term capital gains will be taxable to you as
ordinary income. Distributions from net long-term capital gains will be taxable
to you as long-term capital gain, regardless of how long you have held your
shares in the fund. Any net capital gains realized by the fund generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate excise or income taxes on the fund.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by the
fund. Similarly, foreign exchange losses realized by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or reduce the fund's ordinary
income distributions to you, and may cause some or all of the fund's previously
distributed income to be classified as a return of capital.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS The fund will inform you of
the amount of your ordinary income dividends and capital gains distributions at
the time they are paid, and will advise you of its 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 regulated investment
companies under Subchapter M of the Internal Revenue Code. As a regulated
investment company, the fund generally pays no federal income tax on the income
and gains it distributes to you. The board reserves the right not to maintain
the qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these amounts in
December (or in January that are treated by you as received in December) to
avoid these excise taxes, but can give no assurances that its distributions will
be sufficient to eliminate all taxes.
REDEMPTION OF FUND SHARES Redemptions and exchanges of fund shares are taxable
transactions for federal and state income tax purposes. If you redeem your fund
shares, or exchange your fund shares for shares of a different Franklin
Templeton Fund, the IRS will require that you report a gain or loss on your
redemption or exchange. If you hold your shares as a capital asset, the gain or
loss that you realize will be capital gain or loss and will be long-term or
short-term, generally depending on how long you hold your shares. Any loss
incurred on the redemption or exchange of shares held for six months or less
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the fund on those shares.
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 gain or loss on the redemption of your original shares in
the fund. In doing so, all or a portion of the sales charge that you paid for
your original shares in the fund will be excluded from your tax basis in the
shares sold (for the purpose of determining gain or loss upon the sale of such
shares). The portion of the sales charge excluded will equal the amount that the
sales charge is reduced on your reinvestment. Any portion of the sales charge
excluded from your tax basis in the shares sold will be added to the tax basis
of the shares you acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government, subject
in some states to minimum investment requirements that must be met by the fund.
Investments in Government National Mortgage Association or Federal National
Mortgage Association securities, bankers' acceptances, commercial paper and
repurchase agreements collateralized by U.S. government securities do not
generally qualify for tax-free treatment. The rules on exclusion of this income
are different for corporations.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS If you are a corporate
shareholder, you should note that 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 is
treated as ordinary income or capital gain, accelerate the recognition of income
to the fund and/or defer the fund's ability to recognize losses, and, in limited
cases, subject the fund to U.S. federal income tax on income from certain of its
foreign securities. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- ------------------------------------------------------
The fund is a diversified series of Franklin Strategic Series, 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 Small Cap Growth Fund II - Class A
o Franklin Small Cap Growth Fund II - Class B
o Franklin Small Cap Growth Fund II - Class C
o Franklin Small Cap Growth Fund II - 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
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 the fund and class.
The board members may own shares in other funds in the Franklin Templeton Group
of Funds.
BUYING AND SELLING SHARES
- ---------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the 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 goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The 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.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the 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 or 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
- ----------------------------------------
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 its realizable
amount, and records interest as accrued and dividends on the ex-dividend date.
If market quotations are readily available for portfolio securities listed on a
securities exchange or on the NASDAQ National Market System, the fund values
those securities at the last quoted sale price of the day or, if there is no
reported sale, within the range of the most recent quoted bid and ask prices.
The fund values over-the-counter portfolio securities within the range of the
most recent quoted bid and ask prices. If portfolio securities trade both in the
over-the-counter market and on a stock exchange, the fund values them according
to the broadest and most representative market as determined by the manager.
The fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
The fund determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- ----------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
PERFORMANCE
- ----------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return quotations used by the fund is 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.
Because the fund is new, it has no performance history and thus no performance
quotations have been provided.
AVERAGE ANNUAL TOTAL RETURN Average annual total return is determined by finding
the average annual rates of return over the periods indicated below that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes 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.
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 the 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 - an
unmanaged capitalization-weighted index designed to measure performance of
the broad domestic economy through changes in the aggregate market value of
500 stocks representing all major industries.
o The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
o Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J. P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Financial publications: THE WALL STREET JOURNAL, and BUSINESS WEEK,
FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines - provide performance
statistics over specified time periods.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o The Russell 2000 Index - consists of the 2,000 smallest securities in the
Russell 3000 Index. Representing approximately 11% of the Russell 3000
total market capitalization, this is Russell's Small Cap Index.
o The Russell 2500 Index - consists of the bottom 500 securities in the
Russell Index, as ranked by total market capitalization, and all 2,000
securities in the Russell 2000 Index. This Index is a measure of small to
medium-small stock performance.
o The Russell 2000 Growth Index - consists of the [description to be
completed].
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to decrease. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to any fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- ----------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
fund cannot guarantee that these goals will be met.
The fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services more than 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 $224 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 113 U.S. based open-end investment companies to the public. The
fund may identify itself by its NASDAQ symbol or CUSIP number.
You will receive the fund's financial reports every six months. If you would
like to receive an interim report of the fund's portfolio holdings, please call
1-800/DIAL BEN(R).
FRANKLIN TECHNOLOGY FUND - CLASS A, B AND 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
Goals and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
The fund's principal investment goal is 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.
The fund will invest in securities of large, well-established companies, as well
as small to medium size companies that the manager believes provide good
emerging growth opportunities. The fund may invest up to 25% of its total assets
in foreign securities, including Depositary Receipts and emerging markets, but
currently intends to limit such investment to 15%. The fund will be
non-diversified.
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.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends, which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants, or rights.
Warrants or rights give the holder the right to purchase a common stock at a
given time for a specified price.
CONVERTIBLE SECURITIES The fund may invest in convertible securities without
limit, principally in preferred stocks. A convertible security is generally a
debt obligation or preferred stock that may be converted within a specified
period of time into a certain amount of common stock of the same or a different
issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like a common stock, the value of a convertible security
also tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
both interest rate and market movements can influence its value, a convertible
security is not as sensitive to interest rates as a similar fixed-income
security, nor is it as sensitive to changes in share price as its underlying
stock.
When issued by an operating company, a convertible security tends to be senior
to common stock, but sub-ordinate to other types of fixed-income securities
issued by that company. When a convertible security issued by an operating
company is "converted," the operating company often issues new stock to the
holder of the convertible security, but if the parity price of the convertible
security is less than the call price, the operating company may pay out cash
instead of common stock. If the convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly dividends. Through this structure the company establishes a
wholly owned special purpose vehicle whose sole purpose is to issue convertible
preferred stock. The 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 securities, though there can be no assurances that this will be achieved.
DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. The fund will invest less than 5% of its net assets in debt
securities. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes, and
commercial paper differ in the length of the issuer's payment schedule, with
bonds carrying the longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS 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. 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 Market capitalization is defined as the total market
value of a company's outstanding stock. Small cap companies generally have
market capitalizations of up to $1.5 billion at the time of the fund's
investment. Mid-cap companies generally have market capitalizations of $1 to $8
billion at the time of the fund's investment.
Small cap companies are often overlooked by investors or undervalued in relation
to their earnings power. Because small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, they may provide greater opportunities for long-term capital growth
as a result of inefficiencies in the marketplace. These companies may be
undervalued because they are part of an industry that is out of favor with
investors, although the individual companies may have high rates of earnings
growth and be financially sound.
Mid-cap companies may offer greater potential for capital appreciation than
larger companies, because mid-cap companies are often growing more rapidly than
larger companies, but tend to be more stable and established than small cap or
emerging companies.
REPURCHASE AGREEMENTS 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 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.
The fund may also enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the fund agrees to sell a security in its portfolio and
then to repurchase the security at an agreed-upon price, date, and interest
payment. The fund will maintain cash or high-grade liquid debt securities with a
value equal to the value of the fund's obligation under the agreement, including
accrued interest, in a segregated account with the fund's custodian bank. The
securities subject to the reverse repurchase agreement will be marked-to-market
daily. Although reverse repurchase agreements are borrowings under federal
securities laws, the fund does not treat them as borrowings for purposes of its
investment restrictions below, provided the segregated account is properly
maintained.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 33 1/3% of the value of the fund's total assets, measured
at the time of the most recent loan. For each loan, the borrower must maintain
with the fund's custodian collateral (consisting of any combination of cash,
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 loan 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 The fund may invest its assets in
securities issued by companies engaged in securities related businesses,
including companies that are securities brokers, dealers, underwriters or
investment advisors. These companies are considered to be part of the financial
services industry. Generally, under the 1940 Act, a fund may not acquire a
security or any interest in a securities related business to the extent such
acquisition would result in the fund acquiring in excess of 5% of a class of an
issuer's outstanding equity securities or 10% of the outstanding principal
amount of an issuer's debt securities, or investing more than 5% of the value of
the fund's total assets in securities of the issuer. In addition, any equity
security of a securities-related business must be a marginable security under
Federal Reserve Board regulations and any debt security of a securities-related
business must be investment grade as determined by the Board. The fund does not
believe that these limitations will impede the attainment of its investment
goals.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The fund may buy equity securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements whereby the fund buys securities with payment and delivery
scheduled for a future time, generally within 15 to 60 days.
If the fund buys securities on a when-issued basis, it will do so for the
purpose of acquiring securities consistent with its investment objective and
polices and not for investment leverage. The fund may sell securities purchased
on a when-issued basis before the settlement date, however, if the manager
believes it is advisable to do so.
When the fund is the buyer in one of these transactions, it relies on the seller
to complete the transaction. If the seller fails to do so, the fund may miss an
advantageous price or yield for the underlying security. When the fund is the
buyer, it will keep cash or high-grade marketable securities in a segregated
account with its custodian bank until payment is made. The amount held in the
account will equal the amount the fund must pay for the securities at delivery.
STANDBY COMMITMENT AGREEMENTS The fund may buy equity securities under a standby
commitment agreement. If the fund enters into a standby commitment agreement, it
will be obligated, for a set period of time, to buy a certain amount of a
security that may be issued and sold to the fund at the option of the issuer.
The price of the security is set at the time of the agreement. The fund will
receive a commitment fee typically equal to 0.5% of the purchase price of the
security. The fund will receive this fee regardless of whether the security is
actually issued.
The fund may enter into a standby commitment agreement to invest in the security
underlying the commitment at a yield or price that Advisers believes is
advantageous to the fund. The fund will not enter into a standby commitment if
the remaining term of the commitment is more than 45 days. If the fund enters
into a standby commitment, it will keep cash or high-grade marketable securities
in a segregated account with its custodian bank in an amount equal to the
purchase price of the securities underlying the commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the fund's books on the date the
security can reasonably be expected to be issued. The value of the security will
then be reflected in the calculation of the fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. If
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and end of the contract period. Options, futures, and
options on futures are considered "derivative securities."
The fund may buy and sell options on securities and securities indices. The fund
may only buy options if the premiums paid for such options total 5% or less of
net assets.
The fund may buy and sell futures contracts for securities and currencies. The
fund may also buy and sell securities index futures and options on securities
index futures. 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.
OPTIONS. The fund may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter (OTC)
market. All options written by the fund will be covered. The fund may also buy
or write put and call options on securities indices.
A call option written by the fund is covered if the fund (a) owns the underlying
security that is subject to the call or (b) has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian
bank) upon conversion or exchange of other securities held in its portfolio. A
call option is also covered if the fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written or
(b) greater than the exercise price of the call written if the difference is
held in cash or high-grade debt securities in a segregated account with the
fund's custodian bank.
A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same series
as the option previously written. The effect of the purchase is that the
clearing corporation will cancel the writer's position. However, a writer may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, the holder of an option may liquidate its position by
effecting a "closing sale transaction" by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction may be made at the time desired by the
fund.
Effecting a closing transaction in the case of a written call option allows the
fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other fund investments.
If the fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, the fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to buy
the option. Increases in the market price of a call option will generally
reflect increases in the market price of the underlying security. As a result,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the fund may elect to close the
position or take delivery of the security at the exercise price. The fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.
The fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. The fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option. The ability to buy put options allows the
fund to protect the unrealized gain in an appreciated security in its portfolio
without actually selling the security. In addition, the fund continues to
receive interest or dividend income on the security. The fund may sell a put
option it has previously purchased prior to the sale of the security underlying
the option. The sale of the option will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option. Any gain or loss may be wholly
or partially offset by a change in the value of the underlying security that the
fund owns or has the right to acquire.
The fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in exchange
traded options. Like exchange traded options, OTC options give the holder the
right to buy, in the case of OTC call options, or sell, in the case of OTC put
options, an underlying security from or to the writer at a stated exercise
price.
However, OTC options differ from exchange traded options in certain material
respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options, and the writer of an OTC option is paid the premium in advance
by the dealer.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (or less than, in the case of a put) the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of the
underlying stock index. The fund will maintain the account while the option is
open or will otherwise cover the transaction.
FINANCIAL FUTURES. The fund may enter into contracts for the purchase or sale of
futures contracts based upon financial indices (financial futures). Financial
futures contracts are commodity contracts that obligate the long or short holder
to take or make delivery of the cash value of a securities index during a
specified future period at a specified price. A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver such cash value
called for by the contract on a specified date. A "purchase" of a futures
contract means the acquisition of a contractual obligation to take delivery of
the cash value called for by the contract at a specified date. The purpose of
the acquisition or sale of a futures contract is to attempt to protect the fund
from fluctuations in price of portfolio securities without actually buying or
selling the underlying security. Futures contracts have been designed by
exchanges designated "contracts markets" by the Commodity Futures Trading
Commission (CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.
The fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that they intend to buy
and, to the extent consistent therewith, to accommodate cash flows. The fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one third of total assets would be
represented by futures contracts or related options. In addition, the fund may
not buy or sell futures contracts or buy or sell related options if, immediately
thereafter, the sum of the amount of initial deposits on existing financial
futures and premiums paid on options on financial futures contracts would exceed
5% of total assets (taken at current value). To the extent the fund enters into
a futures contract or related call option, it will maintain with its custodian
bank, to the extent required by the rules of the Securities and Exchange
Commission (SEC), assets in a segregated account to cover its obligations with
respect to such contract which will consist of cash, cash equivalents or high
quality debt securities from its portfolio in an amount equal to the market
value of such futures contract or related option.
STOCK INDEX FUTURES. The fund may buy and sell stock index futures contracts. A
stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of their equity
securities that might otherwise result. When the fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market price movements. The
need to hedge against these risks will depend on the extent of diversification
of the fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
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.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options, futures, and options on futures and any other derivative investments
that are not presently contemplated for use by the fund or that are not
currently available but which may be developed, to the extent such opportunities
are consistent with the fund's investment goals and legally permissible for the
fund.
ILLIQUID SECURITIES The fund's policy is not to invest more than 15% of its net
assets in illiquid securities. Generally, an illiquid security is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the fund has valued it.
The fund does not consider securities that it acquires outside of the U.S. and
that are publicly traded in the U.S. or on a foreign securities market to be
illiquid assets if: (a) the fund reasonably believes it can readily dispose of
the securities for cash in the U.S. or foreign market, or (b) current market
quotations are readily available. The fund will not acquire the securities of
foreign issuers outside of the U.S. if, at the time of acquisition, the fund has
reason to believe that it could not resell the securities in a public trading
market.
The fund's board of trustees has authorized the fund to invest in restricted
securities. To the extent the manager determines there is a liquid institutional
or other market for these securities, the fund considers them to be liquid
securities. An example of these securities are restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The fund's board of trustees will review any
determination by the manager to treat a restricted security as a liquid security
on an ongoing basis, including the manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
manager and the fund's board of trustees will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to buy or sell the security and the number of other
potential buyers; (iii) dealer undertakings to make a market in the security;
and (iv) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). To the extent the fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the fund may increase if qualified institutional buyers become uninterested
in buying these securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of assets in short-term debt instruments. The fund may
also invest cash, including cash resulting from purchases and sales of fund
shares, temporarily in short-term debt instruments. Short-term debt instruments
include high-grade commercial paper, repurchase agreements, and other money
market equivalents. To the extent permitted by exemptions granted under the 1940
Act and the fund's other investment policies and restrictions, the fund may also
invest in shares of one or more money market funds managed by Franklin Advisers,
Inc. or its affiliates.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies. This
means they may only be changed if the change is approved by (i) more than 50% of
the fund's outstanding shares or (ii) 67% or more of the fund's shares present
at a shareholder meeting if more than 50% of the fund's outstanding shares are
represented at the meeting in person or by proxy, whichever is less.
The fund may not:
1. borrow money, except that the fund may borrow money from banks or
affiliated investment companies to the extent permitted by the 1940 Act, or
any exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission, or for temporary or emergency purposes and then in an
amount not exceeding 33-1/3% of the value of the fund's total assets
(including the amount borrowed);
2. act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares;
3. make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with
its investment objectives and policies, and (c) to the extent the entry
into a repurchase agreement is deemed to be a loan. The fund may also make
loans to affiliated investment companies to the extent permitted by the
1940 Act or any exemptions therefrom which may be granted by the U.S.
Securities and Exchange Commission;
4. purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase
or sell currencies, may enter into futures contracts on securities,
currencies, and other indices or any other financial instruments, and may
purchase and sell options on such futures contracts; and
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 owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
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
NON-DIVERSIFICATION RISK Because the fund is not diversified, there is no
restriction under the Investment Company Act of 1940 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 focusing
on technology companies the fund carries much greater risks of adverse
developments among such companies than a 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 market 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 a
fund that invests a substantial portion of its net assets in smaller company
stocks may be more volatile than the shares of a 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 a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
EMERGING MARKETS. Investments in companies domiciled 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 each 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 funds may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. Moreover,
the economies of some 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 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, each
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 a funds' 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 funds.
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 Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish the fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for the
fund to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities. The ability of the fund to achieve its investment goal
may, to the extent of investment in low rated debt securities, be more dependent
upon such creditworthiness analysis than would be the case if the fund were
invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery.
DERIVATIVE SECURITIES The fund's transactions in options, futures, and options
on futures involve certain risks. These risks include, among others, the risk
that the effectiveness of a transaction depends on the degree that price
movements in the underlying securities, index, or currency correlate with price
movements in the relevant portion of the fund's portfolio. The fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation that would result in a loss on both the underlying securities and
the derivative security.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the fund of margin deposits in the event of bankruptcy of a broker with whom the
fund has an open position.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions may have an
adverse impact on the fund's ability to effectively hedge its securities.
Furthermore, if the fund is unable to close out a position and if prices move
adversely, the fund will have to continue to make daily cash payments to
maintain its required margin. If the fund does not have sufficient cash to do
this, it may have to sell portfolio securities at a disadvantageous time. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the options or futures.
Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only by
exercising it or by entering into a closing sale transaction with the dealer
that issued it. When the fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote it.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to delivery and generally
do not earn interest until their scheduled delivery date. There is the risk that
the value or yield of the security at the time of delivery may be more or less
than the price paid for the security or the yield available when the transaction
was entered into.
STANDBY COMMITMENT AGREEMENTS There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the value
of the security may be more or less than its purchase price. Since the issuance
of the security is at the option of the issuer, the fund may bear the risk of a
decline in value of the security and may not benefit if the security appreciates
in value during the commitment period.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (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 27 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 47 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).
Edward J. Bonach (46)
Allianz Life Insurance Company, 1750 Hennepin Avenue
Minneapolis, MN 55403-2195
TRUSTEE
Senior Vice President and Chief Financial Officer, Allianz Life Insurance
Company of North America; President and Chief Executive Officer, Canadian
American Financial Corporation; and Director, Preferred Life Insurance Company
of New York and Life USA Holding, Inc.
Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE
Member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS); director or trustee, as the case may be, of nine
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (66)
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 Advisers, Inc. and Franklin Investment Advisory Services, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and 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 32 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
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.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 Reclamation (redevelopment); director or trustee, as
the case may be, of 27 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 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) and Hambrecht & Quist
Group (investment banking), and President, National Association of Securities
Dealers, Inc.
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
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 51 of the investment companies in the Franklin Templeton
Group of Funds.
Martin L. Flanagan (6/28/60)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, 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.; President and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be, of
51 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 33 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).
Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $675 per month plus $550 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 $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST1 ($) FUNDS2 ($) EACH SERVES3
- ------------------------------------------------------------------------------
Frank H. Abbott 156,060 27
Harris Ashton 363,165 47
Robert F. Carlson 89.690 9
S. Joseph Fortunato 363.238 49
Frank W.T. LaHaye 138,700 27
Gordon Macklin 363,165 47
1. For the fiscal year ended December 31, 1999.
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
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 $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][1177 Avenue of the Americas, New York, NY 10036, is the fund's
independent auditor. The auditor gives an opinion on the financial statements
included in the trust's Annual Report to Shareholders and reviews the trust's
registration statement filed with the U.S. Securities and Exchange Commission
(SEC).
PORTFOLIO TRANSACTIONS
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
To the extent the fund invests in bonds or participates in other principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker.
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 prices. The fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the fund's
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
DISTRIBUTIONS AND TAXES
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 by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or 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 has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these 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 OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government, subject
in some states to minimum investment 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.
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. In turn, these rules may affect the amount,
timing or character of the income distributed to you by the fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while still exempt from regular federal income tax, is a preference item
for taxpayers when determining their alternative minimum tax under the Internal
Revenue Code and under the income tax provisions of several states. Private
activity bond interest could subject you to or increase your liability under
federal and state alternative minimum taxes, depending on your individual or
corporate tax position. Persons who are defined in the Internal Revenue Code as
substantial users (or persons related to such users) of facilities financed by
private activity bonds should consult with their tax advisors before buying fund
shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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 as a Delaware business trust on January 25, 1991, and is
registered with the SEC.
Certain Franklin Templeton Funds offer multiple classes of shares. The different
classes have proportionate interests in the same portfolio of investment
securities. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
The 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:
Franklin Technology Fund - Class A
Franklin Technology Fund - Class B
Franklin Technology Fund - Class C
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.
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 February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class. The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- ----------------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the 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, Templeton Capital Accumulator Fund, Inc., and Templeton Variable Products
Series Fund.
CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on
Class A shares, you may combine the amount of your current purchase with the
cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds. You also may combine the shares of your spouse,
children under the age of 21 or grandchildren under the age of 21. If you are
the sole owner of a company, you also may add any company accounts, including
retirement plan accounts. Companies with one or more retirement plans may add
together the total plan assets invested in the Franklin Templeton Funds to
determine the sales charge that applies.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by
completing the letter of intent section of your account application. A letter of
intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. By completing the letter of intent section of the application, you
acknowledge and agree to the following:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class A shares registered in your name until you fulfill your LOI. Your
periodic statements will include the reserved shares in the total shares
you own, and we will pay or reinvest dividend and capital gain
distributions on the reserved shares according to the distribution option
you have chosen.
o You give Distributors a security interest in the reserved shares and
appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the LOI or pay the higher sales charge.
After you file your LOI with the fund, you may buy Class A shares at the sales
charge applicable to the amount specified in your LOI. Sales charge reductions
based on purchases in more than one Franklin Templeton Fund will be effective
only after notification to Distributors that the investment qualifies for a
discount. Any Class A purchases you made within 90 days before you filed your
LOI also may qualify for a retroactive reduction in the sales charge. If you
file your LOI with the fund before a change in the fund's sales charge, you may
complete the LOI at the lower of the new sales charge or the sales charge in
effect when the LOI was filed.
Your holdings in the Franklin Templeton Funds acquired more than 90 days before
you filed your LOI will be counted towards the completion of the LOI, but they
will not be entitled to a retroactive reduction in the sales charge. Any
redemptions you make during the 13 month period, except in the case of certain
retirement plans, will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an
account in your name or delivered to you or as you direct. If the amount of your
total purchases, less redemptions, is more than the amount specified in your LOI
and is an amount that would qualify for a further sales charge reduction, a
retroactive price adjustment will be made by Distributors and the securities
dealer through whom purchases were made. The price adjustment will be made on
purchases made within 90 days before and on those made after you filed your LOI
and will be applied towards the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount of the total
purchases.
If the amount of your total purchases, less redemptions, is less than the amount
specified in your LOI, the sales charge will be adjusted upward, depending on
the actual amount purchased (less redemptions) during the period. You will need
to send Distributors an amount equal to the difference in the actual dollar
amount of sales charge paid and the amount of sales charge that would have
applied to the total purchases if the total of the purchases had been made at
one time. Upon payment of this amount, the reserved shares held for your account
will be deposited to an account in your name or delivered to you or as you
direct. If within 20 days after written request the difference in sales charge
is not paid, we will redeem an appropriate number of reserved shares to realize
the difference. If you redeem the total amount in your account before you
fulfill your LOI, we will deduct the additional sales charge due from the sale
proceeds and forward the balance to you.
For LOIs filed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the LOI. These plans are not subject to the requirement to reserve 5% of
the total intended purchase or to the policy on upward adjustments in sales
charges described above, or to any penalty as a result of the early termination
of a plan, nor are these plans entitled to receive retroactive adjustments in
price for investments made before executing the LOI.
GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A
shares at a reduced sales charge that applies to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group generally does not include a 403(b) plan that only allows
salary deferral contributions, although any such plan that purchased the fund's
Class A shares at a reduced sales charge under the group purchase privilege
before February 1, 1998, may continue to do so.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased
without an initial sales charge or contingent deferred sales charge (CDSC) by
investors who reinvest within 365 days:
o Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same share class.
Certain exceptions apply, however, and to Advisor Class or Class Z
shareholders of a Franklin Templeton Fund who may reinvest their
distributions in the fund's Class A shares. This waiver category also
applies to Class B and C shares.
o Dividend or capital gain distributions from a real estate investment trust
(REIT) sponsored or advised by Franklin Properties, Inc.
o Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers as an investment option
the Franklin Templeton Variable Insurance Products Trust or the Templeton
Variable Products Series Fund. You should contact your tax advisor for
information on any tax consequences that may apply.
o Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
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 will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
o Any state or local government or any instrumentality, department, authority
or agency thereof that has determined the fund is a legally permissible
investment and that can only buy fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an
investment in the fund is permissible and suitable for you and the effect,
if any, of payments by the fund on arbitrage rebate calculations.
o Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
o Qualified registered investment advisors who buy through a broker-dealer or
service agent who has entered into an agreement with Distributors
o Registered securities dealers and their affiliates, for their investment
accounts only
o Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
o Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
o Any investor who is currently a Class Z shareholder of Franklin Mutual
Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z
shareholder who had an account in any Mutual Series fund on October 31,
1996, or who sold his or her shares of Mutual Series Class Z within the
past 365 days
o Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
o Accounts managed by the Franklin Templeton Group
o Certain unit investment trusts and their holders reinvesting distributions
from the trusts
o Group annuity separate accounts offered to retirement plans
o Chilean retirement plans that meet the requirements described under
"Retirement plans" below
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.
For retirement plan accounts opened on or after May 1, 1997, a CDSC may apply if
the retirement plan is transferred out of the Franklin Templeton Funds or
terminated within 365 days of the retirement plan account's initial purchase in
the Franklin Templeton Funds.
SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of
China, 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 opened on or after May 1, 1997, and that
qualify to buy Class A shares without an initial sales charge also may be
subject to a CDSC if the retirement plan is transferred out of the Franklin
Templeton Funds or terminated within 365 days of the account's initial purchase
in the Franklin Templeton Funds.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the value of the shares
sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM
THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC
- ------------------------------------------ --------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Account fees
o Sales of Class A shares purchased without an initial sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the securities dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the securities dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived
its commission in connection with the purchase
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class
B)
o Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for
Class B, this applies to all retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
EXCHANGE PRIVILEGE If you request the exchange of the total value of your
account, declared but unpaid income dividends and capital gain distributions
will be reinvested in the fund and exchanged into the new fund at net asset
value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell
their fund shares under the exchange privilege, the fund might have to sell
portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
each fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the fund's investment goals exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company are generally not
available until the seventh day following the sale. The funds you are seeking to
exchange into may delay issuing shares pursuant to an exchange until that
seventh day. The sale of fund shares to complete an exchange will be effected at
net asset value at the close of business on the day the request for exchange is
received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell
your shares and receive regular payments from your account on a monthly,
quarterly, semiannual or annual basis. The value of your account must be at
least $5,000 and the minimum payment amount for each withdrawal must be at least
$50. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. There are no service charges for establishing or
maintaining a systematic withdrawal plan.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan also may be
subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. Redemptions in kind are taxable transactions.
The fund does not intend to redeem illiquid securities in kind. If this happens,
however, you may not be able to recover your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your fund account. We do not
issue share certificates unless you specifically request them. This eliminates
the costly problem of replacing lost, stolen or destroyed certificates. If a
certificate is lost, stolen or destroyed, you may have to pay an insurance
premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
GENERAL INFORMATION If dividend checks are returned to the fund marked "unable
to forward" by the postal service, we will consider this a request by you to
change your dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at net asset value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the funds nor their
affiliates will be liable for any loss caused by your failure to cash such
checks. The funds are not responsible for tracking down uncashed checks, unless
a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to find
you from your account. These costs may include a percentage of the account when
a search company charges a percentage fee in exchange for its location services.
The wiring of redemption proceeds is a special service that we make available
whenever possible. By offering this service to you, the funds are not bound to
meet any redemption request in less than the seven day period prescribed by law.
Neither the funds nor their agents shall be liable to you or any other person
if, for any reason, a redemption request by wire is not processed as described
in the prospectus.
Franklin Templeton Investor Services, Inc. (Investor Services) may pay certain
financial institutions that maintain omnibus accounts with the funds on behalf
of numerous beneficial owners for recordkeeping operations performed with
respect to such owners. For each beneficial owner in the omnibus account, the
fund may reimburse Investor Services an amount not to exceed the per account fee
that the fund normally pays Investor Services. These financial institutions also
may charge a fee for their services directly to their clients.
If you buy or sell shares through your securities dealer, we use the net asset
value next calculated after your securities dealer receives your request, which
is promptly transmitted to the fund. If you sell shares through your securities
dealer, it is your dealer's responsibility to transmit the order to the fund in
a timely fashion. Your redemption proceeds will not earn interest between the
time we receive the order from your dealer and the time we receive any required
documents. Any loss to you resulting from your dealer's failure to transmit your
redemption order to the fund in a timely fashion must be settled between you and
your securities dealer.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
For institutional accounts, there may be additional methods of buying or selling
fund shares than those described in this SAI or in the prospectus.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a notice of levy.
PRICING SHARES
When you buy shares, you pay the offering price. The offering price is the net
asset value (NAV) per share plus any applicable sales charge, calculated to two
decimal places using standard rounding criteria. When you sell shares, you
receive the NAV minus any applicable CDSC.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
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 determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, each
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- --------------------------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of fund's shares. Distributors is
located at 777 Mariners Island Blvd., San Mateo, CA 94404.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors may be entitled to reimbursement under the Rule 12b-1 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 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 distribution and service (12b-1) fees charged to each class are
based only on the fees attributable to that particular class.
THE CLASS A PLAN. The fund may pay up to 0.35% per year of Class A's average
daily net assets.
The Class A plan is a reimbursement plan. It allows the fund to reimburse
Distributors for eligible expenses that Distributors has shown it has incurred.
The fund will not reimburse more than the maximum amount allowed under the plan.
This includes expenses not reimbursed because they had exceeded the applicable
limit under the plan.
THE CLASS B AND C PLANS. The fund pays Distributors up to 1% per year of the
class's average daily net assets, out of which 0.25% may be used 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.
The Class 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 immediate 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.
THE CLASS A, B AND C PLANS. 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
- -------------------------------------------------------
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 Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
o Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield for
the mutual fund industry and rank individual mutual fund performance over
specified time periods, assuming reinvestment of all distributions,
exclusive of any applicable sales charges.
o CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
o Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
o Financial publications: The WALL STREET JOURNAL, and BUSINESS WEEK,
CHANGING TIMES, FINANCIAL WORLD, FORBES, FORTUNE, and MONEY magazines -
provide performance statistics over specified time periods.
o Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
o Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
o Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
o Historical data supplied by the research departments of CS First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to fall. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- -----------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis 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 $224 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
- -----------------------------------
PREFERRED STOCKS RATINGS
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated AA also qualifies as a high quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
BB, B and CCC: Preferred stock rated BB, B, and CCC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay preferred
stock obligations. BB indicates the lowest degree of speculation and CCC the
highest degree of speculation. While these issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of preferred stock
quality, the ratings from "AA" to "CCC" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's commercial paper
ratings are opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designations for both short-term debt and
commercial paper, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN TECHNOLOGY FUND - ADVISOR CLASS
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
Goals and Strategies
Goal and Strategies
Risks
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Buying and Selling Shares
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Ratings
- ------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
o ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
GOALS AND STRATEGIES
The fund's principal investment goal is 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.
The fund will invest in securities of large, well-established companies, as well
as small to medium size companies that the manager believes provide good
emerging growth opportunities. The fund may invest up to 25% of its total assets
in foreign securities, including Depositary Receipts and emerging markets, but
currently intends to limit such investment to 15%. The fund will be
non-diversified.
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.
EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends, which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants, or rights.
Warrants or rights give the holder the right to purchase a common stock at a
given time for a specified price.
CONVERTIBLE SECURITIES The fund may invest in convertible securities without
limit, principally in preferred stocks. A convertible security is generally a
debt obligation or preferred stock that may be converted within a specified
period of time into a certain amount of common stock of the same or a different
issuer. A convertible security provides a fixed-income stream and the
opportunity, through its conversion feature, to participate in the capital
appreciation resulting from a market price advance in its underlying common
stock. As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like a common stock, the value of a convertible security
also tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
both interest rate and market movements can influence its value, a convertible
security is not as sensitive to interest rates as a similar fixed-income
security, nor is it as sensitive to changes in share price as its underlying
stock.
When issued by an operating company, a convertible security tends to be senior
to common stock, but sub-ordinate to other types of fixed-income securities
issued by that company. When a convertible security issued by an operating
company is "converted," the operating company often issues new stock to the
holder of the convertible security, but if the parity price of the convertible
security is less than the call price, the operating company may pay out cash
instead of common stock. If the convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly dividends. Through this structure the company establishes a
wholly owned special purpose vehicle whose sole purpose is to issue convertible
preferred stock. The 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 securities, though there can be no assurances that this will be achieved.
DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. The fund will invest less than 5% of its net assets in debt
securities. A debt security typically has a fixed payment schedule which
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes, and
commercial paper differ in the length of the issuer's payment schedule, with
bonds carrying the longest repayment schedule and commercial paper the shortest.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS 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. 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 Market capitalization is defined as the total market
value of a company's outstanding stock. Small cap companies generally have
market capitalizations of up to $1.5 billion at the time of the fund's
investment. Mid-cap companies generally have market capitalizations of $1 to $8
billion at the time of the fund's investment.
Small cap companies are often overlooked by investors or undervalued in relation
to their earnings power. Because small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, they may provide greater opportunities for long-term capital growth
as a result of inefficiencies in the marketplace. These companies may be
undervalued because they are part of an industry that is out of favor with
investors, although the individual companies may have high rates of earnings
growth and be financially sound.
Mid-cap companies may offer greater potential for capital appreciation than
larger companies, because mid-cap companies are often growing more rapidly than
larger companies, but tend to be more stable and established than small cap or
emerging companies.
REPURCHASE AGREEMENTS 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 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.
The fund may also enter into reverse repurchase agreements. Under a reverse
repurchase agreement, the fund agrees to sell a security in its portfolio and
then to repurchase the security at an agreed-upon price, date, and interest
payment. The fund will maintain cash or high-grade liquid debt securities with a
value equal to the value of the fund's obligation under the agreement, including
accrued interest, in a segregated account with the fund's custodian bank. The
securities subject to the reverse repurchase agreement will be marked-to-market
daily. Although reverse repurchase agreements are borrowings under federal
securities laws, the fund does not treat them as borrowings for purposes of its
investment restrictions below, provided the segregated account is properly
maintained.
LOANS OF PORTFOLIO SECURITIES To generate additional income, the fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. These
loans may not exceed 33 1/3% of the value of the fund's total assets, measured
at the time of the most recent loan. For each loan, the borrower must maintain
with the fund's custodian collateral (consisting of any combination of cash,
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 loan 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 The fund may invest its assets in
securities issued by companies engaged in securities related businesses,
including companies that are securities brokers, dealers, underwriters or
investment advisors. These companies are considered to be part of the financial
services industry. Generally, under the 1940 Act, a fund may not acquire a
security or any interest in a securities related business to the extent such
acquisition would result in the fund acquiring in excess of 5% of a class of an
issuer's outstanding equity securities or 10% of the outstanding principal
amount of an issuer's debt securities, or investing more than 5% of the value of
the fund's total assets in securities of the issuer. In addition, any equity
security of a securities-related business must be a marginable security under
Federal Reserve Board regulations and any debt security of a securities-related
business must be investment grade as determined by the Board. The fund does not
believe that these limitations will impede the attainment of its investment
goals.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The fund may buy equity securities
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements whereby the fund buys securities with payment and delivery
scheduled for a future time, generally within 15 to 60 days.
If the fund buys securities on a when-issued basis, it will do so for the
purpose of acquiring securities consistent with its investment objective and
polices and not for investment leverage. The fund may sell securities purchased
on a when-issued basis before the settlement date, however, if the manager
believes it is advisable to do so.
When the fund is the buyer in one of these transactions, it relies on the seller
to complete the transaction. If the seller fails to do so, the fund may miss an
advantageous price or yield for the underlying security. When the fund is the
buyer, it will keep cash or high-grade marketable securities in a segregated
account with its custodian bank until payment is made. The amount held in the
account will equal the amount the fund must pay for the securities at delivery.
STANDBY COMMITMENT AGREEMENTS The fund may buy equity securities under a standby
commitment agreement. If the fund enters into a standby commitment agreement, it
will be obligated, for a set period of time, to buy a certain amount of a
security that may be issued and sold to the fund at the option of the issuer.
The price of the security is set at the time of the agreement. The fund will
receive a commitment fee typically equal to 0.5% of the purchase price of the
security. The fund will receive this fee regardless of whether the security is
actually issued.
The fund may enter into a standby commitment agreement to invest in the security
underlying the commitment at a yield or price that Advisers believes is
advantageous to the fund. The fund will not enter into a standby commitment if
the remaining term of the commitment is more than 45 days. If the fund enters
into a standby commitment, it will keep cash or high-grade marketable securities
in a segregated account with its custodian bank in an amount equal to the
purchase price of the securities underlying the commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the fund's books on the date the
security can reasonably be expected to be issued. The value of the security will
then be reflected in the calculation of the fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. If
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
OPTIONS, FUTURES, AND OPTIONS ON FUTURES A stock option is a contract that
provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and end of the contract period. Options, futures, and
options on futures are considered "derivative securities."
The fund may buy and sell options on securities and securities indices. The fund
may only buy options if the premiums paid for such options total 5% or less of
net assets.
The fund may buy and sell futures contracts for securities and currencies. The
fund may also buy and sell securities index futures and options on securities
index futures. 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.
OPTIONS. The fund may buy or write (sell) put and call options on securities
listed on a national securities exchange and in the over-the-counter (OTC)
market. All options written by the fund will be covered. The fund may also buy
or write put and call options on securities indices.
A call option written by the fund is covered if the fund (a) owns the underlying
security that is subject to the call or (b) has an absolute and immediate right
to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian
bank) upon conversion or exchange of other securities held in its portfolio. A
call option is also covered if the fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held is (a) equal to or less than the exercise price of the call written or
(b) greater than the exercise price of the call written if the difference is
held in cash or high-grade debt securities in a segregated account with the
fund's custodian bank.
A put option written by the fund is covered if the fund maintains cash or
high-grade debt securities with a value equal to the exercise price of the
written put in a segregated account with its custodian bank. A put is also
covered if the fund holds a put on the same security and in the same principal
amount as the put written where the exercise price of the put held is equal to
or greater than the exercise price of the put written.
The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and volatility of the
underlying security, the remaining term of the option, supply and demand, and
interest rates.
The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same series
as the option previously written. The effect of the purchase is that the
clearing corporation will cancel the writer's position. However, a writer may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, the holder of an option may liquidate its position by
effecting a "closing sale transaction" by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction may be made at the time desired by the
fund.
Effecting a closing transaction in the case of a written call option allows the
fund to write another call option on the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other fund investments.
If the fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.
The fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, the fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to buy
the option. Increases in the market price of a call option will generally
reflect increases in the market price of the underlying security. As a result,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the fund may elect to close the
position or take delivery of the security at the exercise price. The fund's
return will be the premium received from the put option minus the amount by
which the market price of the security is below the exercise price.
The fund may buy call options on securities it intends to buy in order to limit
the risk of a substantial increase in the market price of the security before
the purchase is effected. The fund may also buy call options on securities held
in its portfolio and on which it has written call options. Prior to its
expiration, a call option may be sold in a closing sale transaction. Profit or
loss from the sale will depend on whether the amount received is more or less
than the premium paid for the call option plus any related transaction costs.
The fund may buy put options on securities in an attempt to protect against a
decline in the market value of the underlying security below the exercise price
less the premium paid for the option. The ability to buy put options allows the
fund to protect the unrealized gain in an appreciated security in its portfolio
without actually selling the security. In addition, the fund continues to
receive interest or dividend income on the security. The fund may sell a put
option it has previously purchased prior to the sale of the security underlying
the option. The sale of the option will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option. Any gain or loss may be wholly
or partially offset by a change in the value of the underlying security that the
fund owns or has the right to acquire.
The fund may write covered put and call options and buy put and call options
that trade in the OTC market to the same extent that it may engage in exchange
traded options. Like exchange traded options, OTC options give the holder the
right to buy, in the case of OTC call options, or sell, in the case of OTC put
options, an underlying security from or to the writer at a stated exercise
price. However, OTC options differ from exchange traded options in certain
material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options, and the writer of an OTC option is paid the premium in advance
by the dealer.
Call and put options on stock indices are similar to options on securities
except, rather than the right to buy or sell stock at a specified price, options
on a stock index give the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the underlying stock index is
greater than (or less than, in the case of a put) the exercise price of the
option, expressed in dollars multiplied by a specified number. Thus, unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the fund writes an option on a stock index, the fund will establish a
segregated account with its custodian bank containing cash or high quality
fixed-income securities in an amount at least equal to the market value of the
underlying stock index. The fund will maintain the account while the option is
open or will otherwise cover the transaction.
FINANCIAL FUTURES. The fund may enter into contracts for the purchase or sale of
futures contracts based upon financial indices (financial futures). Financial
futures contracts are commodity contracts that obligate the long or short holder
to take or make delivery of the cash value of a securities index during a
specified future period at a specified price. A "sale" of a futures contract
means the acquisition of a contractual obligation to deliver such cash value
called for by the contract on a specified date. A "purchase" of a futures
contract means the acquisition of a contractual obligation to take delivery of
the cash value called for by the contract at a specified date. The purpose of
the acquisition or sale of a futures contract is to attempt to protect the fund
from fluctuations in price of portfolio securities without actually buying or
selling the underlying security. Futures contracts have been designed by
exchanges designated "contracts markets" by the Commodity Futures Trading
Commission (CFTC) and must be executed through a futures commission merchant, or
brokerage firm, which is a member of the relevant contract market.
The fund will not engage in transactions in futures contracts or related options
for speculation, but only as a hedge against changes resulting from market
conditions in the values of its securities or securities that they intend to buy
and, to the extent consistent therewith, to accommodate cash flows. The fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one third of total assets would be
represented by futures contracts or related options. In addition, the fund may
not buy or sell futures contracts or buy or sell related options if, immediately
thereafter, the sum of the amount of initial deposits on existing financial
futures and premiums paid on options on financial futures contracts would exceed
5% of total assets (taken at current value). To the extent the fund enters into
a futures contract or related call option, it will maintain with its custodian
bank, to the extent required by the rules of the Securities and Exchange
Commission (SEC), assets in a segregated account to cover its obligations with
respect to such contract which will consist of cash, cash equivalents or high
quality debt securities from its portfolio in an amount equal to the market
value of such futures contract or related option.
STOCK INDEX FUTURES. The fund may buy and sell stock index futures contracts. A
stock index futures contract obligates the seller to deliver (and the buyer to
take) an amount of cash equal to a specific dollar amount times the difference
between the value of a specific stock index at the close of the last trading day
of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made.
The fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of their equity
securities that might otherwise result. When the fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The fund may buy and sell call and put options
on stock index futures to hedge against risks of market price movements. The
need to hedge against these risks will depend on the extent of diversification
of the fund's common stock portfolio and the sensitivity of such investments to
factors influencing the stock market as a whole.
Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the futures contract, at exercise, exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. If an option is exercised on the last
trading day before the expiration date of the option, the settlement will be
made entirely in cash equal to the difference between the exercise price of the
option and the closing price of the futures contract on the expiration date.
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.
FUTURE DEVELOPMENTS. The fund may take advantage of opportunities in the area of
options, futures, and options on futures and any other derivative investments
that are not presently contemplated for use by the fund or that are not
currently available but which may be developed, to the extent such opportunities
are consistent with the fund's investment goals and legally permissible for the
fund.
ILLIQUID SECURITIES The fund's policy is not to invest more than 15% of its net
assets in illiquid securities. Generally, an illiquid security is any security
that cannot be disposed of within seven days in the ordinary course of business
at approximately the amount at which the fund has valued it.
The fund does not consider securities that it acquires outside of the U.S. and
that are publicly traded in the U.S. or on a foreign securities market to be
illiquid assets if: (a) the fund reasonably believes it can readily dispose of
the securities for cash in the U.S. or foreign market, or (b) current market
quotations are readily available. The fund will not acquire the securities of
foreign issuers outside of the U.S. if, at the time of acquisition, the fund has
reason to believe that it could not resell the securities in a public trading
market.
The fund's board of trustees has authorized the fund to invest in restricted
securities. To the extent the manager determines there is a liquid institutional
or other market for these securities, the fund considers them to be liquid
securities. An example of these securities are restricted securities that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The fund's board of trustees will review any
determination by the manager to treat a restricted security as a liquid security
on an ongoing basis, including the manager's assessment of current trading
activity and the availability of reliable price information. In determining
whether a restricted security is properly considered a liquid security, the
manager and the fund's board of trustees will take into account the following
factors: (i) the frequency of trades and quotes for the security; (ii) the
number of dealers willing to buy or sell the security and the number of other
potential buyers; (iii) dealer undertakings to make a market in the security;
and (iv) the nature of the security and the nature of the marketplace trades
(e.g., the time needed to dispose of the security, the method of soliciting
offers, and the mechanics of transfer). To the extent the fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the fund may increase if qualified institutional buyers become uninterested
in buying these securities or the market for these securities contracts.
TEMPORARY INVESTMENTS When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolios in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of assets in short-term debt instruments. The fund may
also invest cash, including cash resulting from purchases and sales of fund
shares, temporarily in short-term debt instruments. Short-term debt instruments
include high-grade commercial paper, repurchase agreements, and other money
market equivalents. To the extent permitted by exemptions granted under the 1940
Act and the fund's other investment policies and restrictions, the fund may also
invest in shares of one or more money market funds managed by Franklin Advisers,
Inc. or its affiliates.
INVESTMENT RESTRICTIONS
The fund has adopted the following restrictions as fundamental policies. This
means they may only be changed if the change is approved by (i) more than 50% of
the fund's outstanding shares or (ii) 67% or more of the fund's shares present
at a shareholder meeting if more than 50% of the fund's outstanding shares are
represented at the meeting in person or by proxy, whichever is less.
The fund may not:
1. borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted by the 1940 Act, or any
exemptions therefrom which may be granted by the U.S. Securities and
Exchange Commission, or for temporary or emergency purposes and then in an
amount not exceeding 33-1/3% of the value of the fund's total assets
(including the amount borrowed);
2. act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own
shares;
3. make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
objectives and policies, and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan. The fund may also make loans to affiliated
investment companies to the extent permitted by the 1940 Act or any
exemptions therefrom which may be granted by the U.S.
Securities and Exchange Commission;
4. purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase
or sell currencies, may enter into futures contracts on securities,
currencies, and other indices or any other financial instruments, and may
purchase and sell options on such futures contracts; and
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 owned by the fund, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. In this case, the fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
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
NON-DIVERSIFICATION RISK Because the fund is not diversified, there is no
restriction under the Investment Company Act of 1940 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 focusing
on technology companies the fund carries much greater risks of adverse
developments among such companies than a 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 market 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 a
fund that invests a substantial portion of its net assets in smaller company
stocks may be more volatile than the shares of a 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 a foreign company or
government than about a U.S. company or public entity. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs on
foreign securities markets are generally higher than in the U.S. The settlement
practices may be cumbersome and result in delays that may affect portfolio
liquidity. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to foreign investments in foreign courts than with respect to domestic
issuers in U.S. courts.
The fund's management endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies that would prevent the fund from
transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of cessation of trading on
national exchanges, expropriation, nationalization, or confiscatory taxation,
withholding, and other foreign taxes on income or other amounts, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability, or diplomatic developments that could affect
investments in securities of issuers in foreign nations.
The fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations, and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
EMERGING MARKETS. Investments in companies domiciled 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 each 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 funds may invest have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain countries. Moreover,
the economies of some 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 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, each
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 a funds' 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 funds.
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 Although they may offer higher yields than do higher
rated securities, low rated and unrated debt securities generally involve
greater volatility of price and risk to principal and income, including the
possibility of default by, or bankruptcy of the issuers of the securities. In
addition, the markets in which low rated and unrated debt securities are traded
are more limited than those in which higher rated securities are traded. The
existence of limited markets for particular securities may diminish the fund's
ability to sell the securities at fair value either to meet redemption requests
or to respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for the
fund to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of low rated debt securities may be more complex than for issuers of
higher rated securities. The ability of the fund to achieve its investment goal
may, to the extent of investment in low rated debt securities, be more dependent
upon such creditworthiness analysis than would be the case if the fund were
invested in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of rising interest rates, for example, could
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery.
DERIVATIVE SECURITIES The fund's transactions in options, futures, and options
on futures involve certain risks. These risks include, among others, the risk
that the effectiveness of a transaction depends on the degree that price
movements in the underlying securities, index, or currency correlate with price
movements in the relevant portion of the fund's portfolio. The fund bears the
risk that the prices of its portfolio securities will not move in the same
amount as the option or future it has purchased, or that there may be a negative
correlation that would result in a loss on both the underlying securities and
the derivative security.
In addition, adverse market movements could cause the fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the fund of margin deposits in the event of bankruptcy of a broker with whom the
fund has an open position.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus, it may not be possible to close an option or futures
position. The inability to close options or futures positions may have an
adverse impact on the fund's ability to effectively hedge its securities.
Furthermore, if the fund is unable to close out a position and if prices move
adversely, the fund will have to continue to make daily cash payments to
maintain its required margin. If the fund does not have sufficient cash to do
this, it may have to sell portfolio securities at a disadvantageous time. The
fund will enter into an option or futures position only if there appears to be a
liquid secondary market for the options or futures.
Similarly, there can be no assurance that a continuous liquid secondary market
will exist for any particular OTC option at any specific time. Consequently, the
fund may be able to realize the value of an OTC option it has purchased only by
exercising it or by entering into a closing sale transaction with the dealer
that issued it. When the fund writes an OTC option, it generally can close out
that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote it.
WHEN-ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to delivery and generally
do not earn interest until their scheduled delivery date. There is the risk that
the value or yield of the security at the time of delivery may be more or less
than the price paid for the security or the yield available when the transaction
was entered into.
STANDBY COMMITMENT AGREEMENTS There can be no assurance that the securities
underlying a standby commitment agreement will be issued. If issued, the value
of the security may be more or less than its purchase price. Since the issuance
of the security is at the option of the issuer, the fund may bear the risk of a
decline in value of the security and may not benefit if the security appreciates
in value during the commitment period.
EURO RISK On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
OFFICERS AND TRUSTEES
The trust has a board of trustees. The board is responsible for the overall
management of the trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the trust who
are responsible for administering the trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes. While none is expected, the board will act appropriately to resolve any
material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (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 27 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 47 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).
Edward J. Bonach (46)
Allianz Life Insurance Company, 1750 Hennepin Avenue
Minneapolis, MN 55403-2195
TRUSTEE
Senior Vice President and Chief Financial Officer, Allianz Life Insurance
Company of North America; President and Chief Executive Officer, Canadian
American Financial Corporation; and Director, Preferred Life Insurance Company
of New York and Life USA Holding, Inc.
Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE
Member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS); director or trustee, as the case may be, of nine
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.
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 49 of the investment companies in the Franklin Templeton
Group of Funds.
*Charles B. Johnson (66)
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 Advisers, Inc. and Franklin Investment Advisory Services, 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 48 of the investment companies in the Franklin
Templeton Group of Funds.
*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Chairman and Director, Templeton
Investment Counsel, Inc.; President, Franklin Advisers, Inc. and 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 32 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (59)
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.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory
Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 51 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 Reclamation (redevelopment); director or trustee, as
the case may be, of 27 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 47 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) and Hambrecht & Quist
Group (investment banking), and President, National Association of Securities
Dealers, Inc.
*Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
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 51 of the investment companies in the Franklin Templeton
Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, 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.; President and Director, Franklin Templeton Services,
Inc.; officer and/or director of some of the other subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as the case may be, of
51 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 33 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).
Edward V. McVey (63)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
*This board member is considered an "interested person" under federal securities
laws.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The trust pays noninterested board members $675 per month plus $550 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 $2,000 per
committee meeting attended, a portion of which is allocated to the trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members may also serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to
noninterested board members by the trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the trust and by
the Franklin Templeton Group of Funds.
NUMBER OF
BOARDS IN
TOTAL FEES THE FRANKLIN
RECEIVED FROM TEMPLETON
TOTAL FEES THE FRANKLIN GROUP
RECEIVED TEMPLETON OF FUNDS
FROM THE GROUP OF ON WHICH
NAME TRUST1 ($) FUNDS2 ($) EACH SERVES3
- ----------------------------------------------------------------------------
Frank H. Abbott 156,060 27
Harris Ashton 363,165 47
Robert F. Carlson 89.690 9
S. Joseph Fortunato 363.238 49
Frank W.T. LaHaye 138,700 27
Gordon Macklin 363,165 47
1. For the fiscal year ended December 31, 1999.
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
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 $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][1177 Avenue of the Americas, New York, NY 10036, is the fund's
independent auditor. The auditor gives an opinion on the financial statements
included in the trust's Annual Report to Shareholders and reviews the trust's
registration statement filed with the U.S. Securities and Exchange Commission
(SEC).
PORTFOLIO TRANSACTIONS
The manager selects brokers and dealers to execute the fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the board may give.
When placing a portfolio transaction, the manager seeks to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The manager will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
manager, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The manager may pay certain brokers commissions that are higher than those
another broker may charge, if the manager determines in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular
transaction or the manager's overall responsibilities to client accounts over
which it exercises investment discretion. The services that brokers may provide
to the manager include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the manager in carrying out its investment advisory
responsibilities. These services may not always directly benefit the fund. They
must, however, be of value to the manager in carrying out its overall
responsibilities to its clients.
To the extent the fund invests in bonds or participates in other principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker.
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 prices. The fund seeks to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the manager receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services allows the manager to supplement its own research
and analysis activities and to receive the views and information of individuals
and research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. If the fund's
officers are satisfied that the best execution is obtained, the sale of fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, also may be considered a factor in the selection of broker-dealers to
execute the fund's portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when the fund tenders portfolio securities pursuant to a
tender-offer solicitation. To recapture brokerage for the benefit of the fund,
any portfolio securities tendered by the fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to the manager will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions may improve execution and reduce transaction costs to the
fund.
DISTRIBUTIONS AND TAXES
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 by the fund on the sale of
debt securities are generally treated as ordinary losses by the fund. These
gains when distributed will be taxable to you as ordinary dividends, and any
losses will reduce the fund's ordinary income otherwise available for
distribution to you. This treatment could increase or 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 has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code, has qualified as such for its most recent fiscal year, and intends
to so qualify during the current fiscal year. As a regulated investment company,
the fund generally pays no federal income tax on the income and gains it
distributes to you. The board reserves the right not to maintain the
qualification of the fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains, and distributions to you will be taxed as ordinary dividend
income to the extent of the fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires the fund to distribute to you by December 31 of each year,
at a minimum, the following amounts: 98% of its taxable ordinary income earned
during the calendar year; 98% of its capital gain net income earned during the
twelve month period ending October 31; and 100% of any undistributed amounts
from the prior year. The fund intends to declare and pay these 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 OBLIGATIONS States grant tax-free status to dividends paid to
you from interest earned on direct obligations of the U.S. government, subject
in some states to minimum investment 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.
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. In turn, these rules may affect the amount,
timing or character of the income distributed to you by the fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity
bonds, while still exempt from regular federal income tax, is a preference item
for taxpayers when determining their alternative minimum tax under the Internal
Revenue Code and under the income tax provisions of several states. Private
activity bond interest could subject you to or increase your liability under
federal and state alternative minimum taxes, depending on your individual or
corporate tax position. Persons who are defined in the Internal Revenue Code as
substantial users (or persons related to such users) of facilities financed by
private activity bonds should consult with their tax advisors before buying fund
shares.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
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 as a Delaware business trust on January 25, 1991, and is
registered with the SEC.
Certain Franklin Templeton Funds offer multiple classes of shares. The different
classes have proportionate interests in the same portfolio of investment
securities. They differ, however, primarily in their sales charge structures and
Rule 12b-1 plans.
The 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:
Franklin Technology Fund - Class A
Franklin Technology Fund - Class B
Franklin Technology Fund - Class C
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.
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 February 1, 2000, the officers and board members, as a group, owned of
record and beneficially less than 1% of the outstanding shares of each fund and
class. The board members may own shares in other funds in the Franklin Templeton
Group of Funds.
BUYING AND SELLING SHARES
- ---------------------------------------
The fund continuously offers its shares through securities dealers who have an
agreement with Franklin Templeton Distributors, Inc. (Distributors). A
securities dealer includes any financial institution that, either directly or
through affiliates, has an agreement with Distributors to handle customer orders
and accounts with the fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity. Banks and financial institutions that
sell shares of the fund may be required by state law to register as securities
dealers.
For investors outside the U.S., the offering of fund shares may be limited in
many jurisdictions. An investor who wishes to buy shares of the fund should
determine, or have a broker-dealer determine, the applicable laws and
regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to obtain
information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the 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[s] exist
immediately. This money will then be withdrawn from the short-term,
interest-bearing money market instruments and invested in portfolio securities
in as orderly a manner as is possible when attractive investment opportunities
arise.
The proceeds from the sale of shares of an investment company 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.
Payments under the plan will be made from the redemption of an equivalent amount
of shares in your account, generally on the 25th day of the month in which a
payment is scheduled. If the 25th falls on a weekend or holiday, we will process
the redemption on the next business day. When you sell your shares under a
systematic withdrawal plan, it is a taxable transaction.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us by mail or by
phone at least seven business days before the end of the month preceding a
scheduled payment. The fund may discontinue a systematic withdrawal plan by
notifying you in writing and will automatically discontinue a systematic
withdrawal plan if all shares in your account are withdrawn or if the fund
receives notification of the shareholder's death or incapacity.
REDEMPTIONS IN KIND The fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the U.S. Securities and Exchange
Commission (SEC). In the case of redemption requests in excess of these amounts,
the board reserves the right to make payments in whole or in part in securities
or other assets of the fund, in case of an emergency, or if the payment of such
a redemption in cash would be detrimental to the existing shareholders of the
fund. In these circumstances, the securities distributed would be valued at the
price used to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. 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
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 determines the value of a foreign security as of the close of trading
on the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the board. With the approval of the board, the
fund may use a pricing service, bank or securities dealer to perform any of the
above described functions.
THE UNDERWRITER
- --------------------------------------
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal
underwriter in the continuous public offering of the fund's shares. Distributors
is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the fund for acting as
underwriter of the fund's Advisor Class shares.
PERFORMANCE
- --------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total 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 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 companies, Salomon Brothers, Merrill Lynch,
Lehman Brothers and Bloomberg L.P.
o Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect
Morningstar's assessment of the historical risk-adjusted performance of a
fund over specified time periods relative to other funds within its
category.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. For example, as the general level of interest rates rise, the value
of the fund's fixed-income investments, if any, as well as the value of its
shares that are based upon the value of such portfolio investments, can be
expected to fall. Conversely, when interest rates decrease, the value of the
fund's shares can be expected to increase. CDs are frequently insured by an
agency of the U.S. government. An investment in the fund is not insured by any
federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------
The fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis 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 $224 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
- ----------------------------------------------
PREFERRED STOCKS RATINGS
STANDARD & POOR'S CORPORATION (S&P)
AAA: This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated AA also qualifies as a high quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the A category.
BB, B and CCC: Preferred stock rated BB, B, and CCC are regarded, on balance, as
predominately speculative with respect to the issuer's capacity to pay preferred
stock obligations. BB indicates the lowest degree of speculation and CCC the
highest degree of speculation. While these issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a non-paying issue.
D: A preferred stock rated D is a non-paying issue with the issuer in default on
debt instruments.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of preferred stock
quality, the ratings from "AA" to "CCC" may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's commercial paper
ratings are opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designations for both short-term debt and
commercial paper, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN STRATEGIC SERIES
FILE NOS. 33-39088 &
811-6243
FORM N-1A
PART C
OTHER INFORMATION
PART C: OTHER INFORMATION
ITEM 23 EXHIBITS. The following exhibits are incorporated by reference to the
previously filed document indicated below, except as noted:
(a) Agreement and Declaration of Trust
(i) Agreement and Declaration of Trust of Franklin California
250 Growth Index Fund dated January 22, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Certificate of Trust dated January 22, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Certificate of Amendment to the Certificate of Trust
dated November 19, 1991 Filing: Post-Effective Amendment
No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Certificate of Amendment to the Certificate of Trust of
Franklin Strategic Series dated May 14, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Certificate of Amendment of Agreement and Declaration of
Trust of Franklin Strategic Series dated April 18, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(b) By-Laws
(i) Amended and Restated By-Laws as of April 25, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amendment to By-Laws dated October 27, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Management Agreement between the Registrant, on behalf of
Franklin Global Health Care Fund, Franklin Small Cap Growth
Fund, Franklin Global Utilities Fund, and Franklin Natural
Resources Fund, and Franklin Advisers, Inc., dated February
24, 1992
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Management Agreement between the Registrant, on behalf of
Franklin Strategic Income Fund, and Franklin Advisers, Inc.,
dated May 24, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Subadvisory Agreement between Franklin Advisers, Inc., on
behalf of the Franklin Strategic Income Fund, and Templeton
Investment Counsel, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(iv) Amended and Restated Management Agreement between the
Registrant, on behalf of Franklin California Growth Fund,
and Franklin Advisers, Inc., dated July 12, 1993
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Management Agreement between the Registrant, on behalf of
Franklin Blue Chip Fund, and Franklin Advisers, Inc., dated
February 13, 1996
Filing: Post-Effective Amendment No. 18 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(vi) Management Agreement between the Registrant, on behalf of
Franklin Institutional MidCap Growth Fund (now known as
Franklin MidCap Growth Fund), and Franklin Advisers, Inc.,
dated January 1, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 27, 1996
(vii) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin California
Growth Fund, and Franklin Advisers, Inc., dated July 12,
1993
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(viii) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin Global Health
Care Fund, Franklin Small Cap Growth Fund, Franklin Global
Utilities Fund, and Franklin Natural Resources Fund, and
Franklin Advisers, Inc., dated February 24, 1992
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(ix) Amendment dated August 1, 1995 to the Management Agreement
between the Registrant, on behalf of Franklin Strategic
Income Fund, and Franklin Advisers, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 6, 1996
(x) Management Agreement between the Registrant, on behalf of
Franklin Biotechnology Discovery Fund, and Franklin Advisers,
Inc., dated July 15, 1997
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 22, 1997
(xi) Investment Advisory Agreement between the Registrant, on
behalf of Franklin U.S. Long-Short Fund, and Franklin
Advisers, Inc. dated February 18, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(xii) Investment Advisory Agreement between the Registrant, on
behalf of Franklin Large Cap Growth Fund, and Franklin
Advisers, Inc. dated May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xiii) Investment Advisory Agreement between the Registrant, on
behalf of Franklin Aggressive Growth Fund, and Franklin
Advisers, Inc. dated May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xiv) Form of Investment Advisory Agreement between the
Registrant, on behalf of Franklin Technology Fund, and
Franklin Advisers, Inc.
(xv) Form of Investment Advisory Agreement between the
Registrant, on behalf of Franklin Small Cap Growth Fund
II, and Franklin Advisers, Inc.
(e) Underwriting Contracts
(i) Amended and Restated Distribution Agreement between the
Registrant, on behalf of all Series except Franklin Strategic
Income Fund, and Franklin/Templeton Distributors, Inc.,
dated April 23, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Amended and Restated Distribution Agreement between the
Registrant, on behalf of Franklin Strategic Income Fund,
and Franklin/Templeton Distributors, Inc., dated March
29, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers dated March 1, 1998
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(iv) Amendment of Amended and Restated Distribution Agreement
between the Registrant on behalf of Franklin Strategic
Income Fund, and Franklin/Templeton Distributors, Inc. dated
January 12, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on
Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(v) Amendment of Amended and Restated Distribution Agreement
between the Registrant on behalf of all series except
Franklin Strategic Income Fund dated January 12, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between the Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(ii) Terminal Link Agreement between the Registrant and Bank of
New York dated February 16, 1996
Filing: Post-Effective Amendment No. 19 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 14, 1996
(iii) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(iv) Amendment dated February 27, 1998 to Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(v) Foreign Custody Manager Agreement between the Registrant and
The Bank of New York dated February 27, 1998
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(vi) Amendment dated September 16, 1999 to Exhibit A of the
Master Custody Agreement
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: January 28, 2000
(h) Other Material Contracts
(i) Subcontract for Fund Administrative Services dated October
1, 1996 and Amendment thereto dated April 30, 1998 between
Franklin Advisers, Inc. and Franklin Templeton Services, Inc.
Filing: Post-Effective Amendment No. 30 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 23, 1998
(ii) Administration Agreement between the Registrant, on behalf of
Franklin Biotechnology Discovery Fund, and Franklin Templeton
Services, Inc., dated July 15, 1997
Filing: Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 22, 1997
(iii) Fund Administration Agreement between the Registrant, on
behalf of Franklin U.S. Long-Short Fund, and Franklin
Templeton Services, Inc. dated February 18, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(iv) Fund Administration Agreement between the Registrant, on
behalf of Franklin Large Cap Growth Fund, and Franklin
Templeton Services, Inc. dated May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(v) Fund Administration Agreement between the Registrant, on
behalf of Franklin Aggressive Growth Fund, and Franklin
Templeton Services, Inc. dated May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(vi) Form of Fund Administration Agreement between the
Registrant, on behalf of Franklin Technology Fund, and
Franklin Advisers, Inc.
(vi) Form of Fund Administration Agreement between the
Registrant, on behalf of Franklin Small Cap Growth Fund
II, and Franklin Advisers, Inc.
(i) Legal Opinion
(i) Opinion and consent of counsel dated March 8, 1999
Filing: Post-Effective Amendment No. 31 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 11, 1999
(j) Other Opinions
Not Applicable
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding for Franklin California Growth Fund
dated August 20, 1991
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Letter of Understanding for Franklin Global Utilities Fund -
Class II dated April 12, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Letter of Understanding for Franklin Natural Resources Fund
dated June 5, 1995
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 5, 1995
(iv) Letter of Understanding for Franklin California Growth
Fund-Class II dated August 30, 1996
Filing: Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(v) Letter of Understanding for Franklin Global Health Care Fund
dated August 30, 1996
Filing: Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(vi) Letter of Understanding for Franklin Blue Chip Fund dated
May 24, 1996
Filing: Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(vii) Letter of Understanding for Franklin Biotechnology Discovery
Fund dated September 5, 1997
Filing: Post-Effective Amendment No. 27 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(viii) Letter of Understanding for Franklin U.S. Long-Short
Fund dated March 11, 1999 Filing: Post-Effective
Amendment No. 37 to Registration Statement on
Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(ix) Letter of Understanding for Franklin Large Cap Growth Fund
dated June 4, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(x) Letter of Understanding for Franklin Aggressive Growth Fund
dated June 22, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(m) Rule 12b-1 Plan
(i) Amended and Restated Distribution Plan between the
Registrant, on behalf of Franklin California Growth Fund,
Franklin Small Cap Growth Fund, Franklin Global Health Care
Fund and Franklin Global Utilities Fund, and
Franklin/Templeton Distributors, Inc., dated July 1, 1993
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(ii) Distribution Plan between the Registrant, on behalf of
Franklin Global Utilities Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated March 30,
1995 Filing: Post-Effective Amendment No. 14 to
Registration Statement on
Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Strategic Income Fund,
and Franklin/Templeton Distributors, Inc., dated May 24, 1994
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Natural Resources Fund,
and Franklin/Templeton Distributors, Inc., dated June 1, 1995
Filing: Post-Effective Amendment No. 14 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 1, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin MidCap Growth Fund,
and Franklin/Templeton Distributors, Inc., dated June 1, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of the Franklin Blue Chip Fund, and
Franklin/Templeton Distributors, Inc., dated May 28, 1996
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(vii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Small Cap Growth Fund -
Class II, and Franklin/Templeton Distributors, Inc., dated
September 29, 1995
Filing: Post-Effective Amendment No. 21 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 7, 1996
(viii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Biotechnology Discovery
Fund and Franklin/Templeton Distributors, Inc., dated
September 15, 1997 Filing: Post-Effective
Amendment No. 27 to Registration Statement on
Form N-1A
File No. 33-39088
Filing Date: March 13, 1998
(ix) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin California Growth Fund
- Class II and Franklin Global Health Care Fund - Class
II, and Franklin/Templeton Distributors, Inc., dated
September 3, 1996
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: August 29, 1997
(x) Distribution Plan pursuant to Rule 12b-1 between Registrant,
on behalf of Franklin Strategic Income Fund - Class II, and
Franklin/Templeton Distributors, Inc. dated February 26, 1998
Filing: Post-Effective Amendment No. 28 to Registration
Statement on Form N-1A
File No. 33-39088
Filing date: April 21, 1998
(xi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin California Growth Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Global Health Care Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xiii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Global Utilities Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xiv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Strategic Income Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
October 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(xv) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin U.S. Long-Short Fund, and
Franklin Templeton Distributors, Inc. dated April 15, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xvi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Large Cap Growth Fund
- Class A, and Franklin Templeton Distributors, Inc.
dated May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xvii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Aggressive Growth Fund -
Class A, and Franklin Templeton Distributors, Inc. dated
May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xviii) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Large Cap Growth Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xix) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Aggressive Growth Fund -
Class B, and Franklin/Templeton Distributors, Inc. dated
May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xx) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Large Cap Growth Fund -
Class C, and Franklin/Templeton Distributors, Inc. dated
May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xxi) Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Aggressive Growth Fund -
Class C, and Franklin/Templeton Distributors, Inc. dated
May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(xxii) Form of Distribution Plan pursuant to Rule 12b-1 between
the Registrant, on behalf of Franklin Blue Chip Fund -
Class B, and Franklin/Templeton
Distributors, Inc.
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: January 28, 2000
(xxiii) Form of Distribution Plan pursuant to Rule 12b-1 between the
Registrant, on behalf of Franklin Blue Chip Fund - Class C,
and Franklin/Templeton Distributors, Inc.
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: January 28, 2000
(o) Rule 18f-3 Plan
(i) Multiple Class Plan for Franklin Global Utilities Fund dated
April 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(ii) Multiple Class Plan for Franklin California Growth Fund
dated April 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(iii) Multiple Class Plan for Franklin Global Health Care Fund
dated April 16, 1998
Filing: Post-Effective Amendment No. 33 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(iv) Multiple Class Plan for Franklin Small Cap Growth Fund
dated June 18, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 11, 1996
(v) Multiple Class Plan for Franklin Natural Resources Fund dated
June 18, 1996
Filing: Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: December 11, 1996
(vi) Multiple Class Plan for Franklin Strategic Income Fund dated
February 18, 1999
Filing: Post-Effective Amendment No. 32 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: March 24, 1999
(vii) Multiple Class Plan for Franklin Large Cap Growth Fund
dated May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(viii) Multiple Class Plan for Franklin Aggressive Growth Fund
dated May 18, 1999
Filing: Post-Effective Amendment No. 37 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: June 25, 1999
(ix) Form of Multiple Class Plan for Franklin Blue Chip Fund
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: January 28, 2000
(p) Power of Attorney
(i) Power of Attorney for Franklin Strategic Series dated
January 20, 2000
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: January 28, 2000
(ii) Certificate of Secretary dated January 27, 2000
Filing: Post-Effective Amendment No. 38 to Registration
Statement on Form N-1A
File No. 33-39088
Filing Date: January 28, 2000
ITEM 24 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
ITEM 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a Court of appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 26 BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
a) Franklin Advisers, Inc.
The officers and directors of the Registrant's manager Franklin Advisers, Inc.
("Advisers") also serve as officers and/or directors for (1) Advisers' corporate
parent, Franklin Resources, Inc., and/or (2) other investment companies in the
Franklin Templeton Group of Funds. In addition, Mr. Charles B. Johnson was
formerly a director of General Host Corporation. For additional information
please see Part B and Schedules A and D of Form ADV of Advisers (SEC File
801-26292) incorporated herein by reference, which sets forth the officers and
directors of Advisers and information as to any business, profession, vocation
or employment of a substantial nature engaged in by those officers and directors
during the past two years.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Franklin Resources, Inc., serves as the Franklin Strategic Income
Fund's Sub-adviser, furnishing to Franklin Advisers, Inc. in that capacity,
portfolio management services and investment research. For additional
information please see Part B and Schedules A and D of Form ADV of the Franklin
Strategic Income Fund's Sub-adviser (SEC File 801-15125), incorporated herein by
reference, which sets forth the officers and directors of the Sub-adviser and
information as to any business, profession, vocation or employment of a
substantial nature engaged in by those officers and directors during the past
two years.
ITEM 27 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Templeton Variable Insurance Products Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Products Series Fund
b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889)
c) Not Applicable. Registrant's principal underwriter is an affiliated person of
an affiliated person of the Registrant.
ITEM 28 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act of 1940 are kept by the Registrant or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30 UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Mateo and the State of California, on the
16th day of February, 2000.
FRANKLIN STRATEGIC SERIES
(Registrant)
By: RUPERT H. JOHNSON, JR.
Rupert H. Johnson, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
RUPERT H. JOHNSON, JR.* Principal Executive Officer
Rupert H. Johnson, Jr. and Trustee
Dated: February 16, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: February 16, 2000
KIMBERLEY H. MONASTERIO* Principal Accounting Officer
Kimberley H. Monasterio Dated: February 16, 2000
FRANK H. ABBOTT, III* Trustee
Frank H. Abbott, III Dated: February 16, 2000
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: February 16, 2000
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: February 16, 2000
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: February 16, 2000
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: February 16, 2000
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: February 16, 2000
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: February 16, 2000
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: February 16, 2000
By: /s/ Karen L. Skidmore
Attorney-in-Fact
(Pursuant to Power of Attorney previously filed)
FRANKLIN STRATEGIC SERIES
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust dated *
January 22, 1991
EX-99.(a)(ii) Certificate of Trust dated January 22, 1991 *
EX-99.(a)(iii) Certificate of Amendment to the Certificate of *
Trust dated November 19, 1991
EX-99.(a)(iv) Certificate of Amendment to the Certificate of *
Trust of Franklin Strategic Series dated May
14, 1992
EX-99.(a)(v) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin Strategic
Series dated April 18, 1995
EX-99.(b)(i) Amended and Restated By-Laws as of April 25, *
1991
EX-99.(b)(ii) Amendment to By-Laws dated October 27, 1994 *
EX-99.(d)(i) Management Agreement between the Registrant, on *
behalf of Franklin Global Health Care Fund,
Franklin Small Cap Growth Fund, Franklin Global
Utilities Fund, and Franklin Natural Resources
Fund, and Franklin Advisers, Inc., dated
February 24, 1992
EX-99.(d)(ii) Management Agreement between the Registrant, on *
behalf of Franklin Strategic Income Fund, and
Franklin Advisers, Inc., dated May 24, 1994
EX-99.(d)(iii) Subadvisory Agreement between Franklin *
Advisers, Inc., on behalf of the Franklin
Strategic Income Fund, and Templeton Investment
Counsel, Inc., dated May 24, 1994
EX-99.(d)(iv) Amended and Restated Management Agreement *
between the Registrant, on behalf of Franklin
California Growth Fund, and Franklin Advisers,
Inc., dated July 12, 1993
EX-99.(d)(v) Management Agreement between the Registrant, on *
behalf of Franklin Blue Chip Fund, and Franklin
Advisers, Inc., dated February 13, 1996
EX-99.(d)(vi) Management Agreement between the Registrant, on *
behalf of Franklin Institutional MidCap Growth Fund
(now known as Franklin MidCap Growth Fund), and
Franklin Advisers, Inc., dated
January 1, 1996
EX-99.(d)(vii) Amendment dated August 1, 1995 to the Management *
Agreement between the Registrant, on behalf of
Franklin California Growth Fund, and Franklin
Advisers, Inc., dated July 12, 1993
EX-99.(d)(viii) Amendment dated August 1, 1995 to the *
Management Agreement between the Registrant, on
behalf of Franklin Global Health Care Fund, and
Franklin Small Cap Growth Fund, Franklin Global
Utilities Fund, and Franklin Natural Resources
Fund, and Franklin Advisers, Inc., dated
February 24, 1992
EX-99.(d)(ix) Amendment dated August 1, 1995 to the Management *
Agreement between the Registrant on behalf of
Franklin Strategic Income Fund, and Franklin
Advisers, Inc., dated May 24, 1994
EX-99.(d)(x) Management Agreement between the Registrant, on *
behalf of Franklin Biotechnology Discovery
Fund, and Franklin Advisers, Inc., dated July
15, 1997
EX-99.(d)(xi) Investment Advisory Agreement between the *
Registrant, on behalf of Franklin U.S.
Long-Short Fund, and Franklin Advisers, Inc.
dated February 18, 1999
EX-99.(d)(xii) Investment Advisory Agreement between the *
Registrant, on behalf of Franklin Large Cap
Growth Fund, and Franklin Advisers, Inc. dated
May 18, 1999
EX-99.(d)(xiii) Investment Advisory Agreement between the *
Registrant, on behalf of Franklin Aggressive
Growth Fund, and Franklin Advisers, Inc. dated
May 18, 1999
EX-99.(d)(xiv) Form of Investment Advisory Agreement between Attached
the Registrant, on behalf of Franklin Technology
Fund, and Franklin Advisers, Inc.
EX-99.(d)(xv) Form of Investment Advisory Agreement between Attached
the Registrant, on behalf of Franklin Small
Cap Growth Fund II, and Franklin Advisers, Inc.
EX-99.(e)(i) Amended and Restated Distribution Agreement *
between the Registrant, on behalf of all Series
except Franklin Strategic Income Fund, and
Franklin/Templeton Distributors, Inc., dated
April 23, 1995
EX-99.(e)(ii) Amended and Restated Distribution Agreement between *
the Registrant, on behalf of Franklin Strategic
Income Fund, and Franklin/Templeton Distributors,
Inc., dated March 29, 1995
EX-99.(e)(iii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc., and
Securities Dealers dated March 1, 1998
EX-99.(e)(iv) Amendment of Amended and Restated Distribution *
Agreement between the Registrant on behalf of
Franklin Strategic Income Fund, and
Franklin/Templeton Distributors, Inc. dated
January 12, 1999
EX-99.(e)(v) Amendment of Amended and Restated Distribution *
Agreement between the Registrant on behalf of
all series except Franklin Strategic Income
Fund dated January 12, 1999
EX-99.(g)(i) Master Custody Agreement between the Registrant *
and Bank of New York dated February 16, 1996
EX-99.(g)(ii) Terminal Link Agreement between the Registrant *
and Bank of New York dated February 16, 1996
EX-99.(g)(iii) Amendment dated May 7, 1997 to Master Custody *
Agreement between Registrant and Bank of New York
dated February 16, 1996
EX-99.(g)(iv) Amendment dated February 27, 1998 to Master *
Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
EX-99.(g)(v) Foreign Custody Manager Agreement between the *
Registrant and The Bank of New York dated
February 27, 1998
EX-99.(g)(vi) Amendment dated September 16, 1999 to Exhibit A *
of the Master Custody Agreement
EX-99.(h)(i) Subcontract for Fund Administrative Services *
dated October 1, 1996 and Amendment thereto
dated April 30, 1998 between Franklin Advisers,
Inc. and Franklin Templeton Services, Inc.
EX-99.(h)(ii) Administration Agreement between the *
Registrant, on behalf of Franklin Biotechnology
Discovery Fund, and Franklin Templeton
Services, Inc., dated July 15, 1997
EX-99.(h)(iii) Fund Administration Agreement between the *
Registrant, on behalf of Franklin U.S.
Long-Short Fund, and Franklin Templeton
Services, Inc. dated February 18, 1999
EX-99.(h)(iv) Fund Administration Agreement between the *
Registrant, on behalf of Franklin Large Cap
Growth Fund, and Franklin Templeton Services,
Inc. dated May 18, 1999
EX-99.(h)(v) Fund Administration Agreement between the *
Registrant, on behalf of Franklin Aggressive
Growth Fund, and Franklin Templeton Services,
Inc. dated May 18, 1999
EX-99.(h)(vi) Form of Fund Administration Agreement between Attached
the Registrant, on behalf of Franklin
Technology Fund, and Franklin Templeton
Services, Inc.
EX-99.(h)(vii) Form of Fund Administration Agreement between Attached
the Registrant, on behalf of Franklin Small Cap
Growth Fund II, and Franklin Templeton
Services, Inc.
EX-99.(i)(i) Opinion and consent of counsel dated March 8, *
1999
EX-99.(l)(i) Letter of Understanding for Franklin California *
Growth Fund dated August 20, 1991
EX-99.(l)(ii) Letter of Understanding for Franklin Global *
Utilities Fund - Class II dated April 12, 1995
EX-99.(l)(iii) Letter of Understanding for Franklin Natural *
Resources Fund dated June 5, 1995
EX-99.(l)(iv) Letter of Understanding for Franklin California *
Growth Fund - Class II dated August 30, 1996
EX-99.(l)(v) Letter of Understanding for Franklin Global *
Health Care Fund dated August 30, 1996
EX-99.(l)(vi) Letter of Understanding for Franklin Blue Chip *
Fund dated May 24, 1996
EX-99.(l)(vii) Letter of Understanding for Franklin *
Biotechnology Discovery Fund dated September 5,
1997
EX-99.(l)(viii) Letter of Understanding for Franklin U.S. *
Long-Short Fund dated March 11, 1999
EX-99.(l)(ix) Letter of Understanding for Franklin Large Cap *
Growth Fund dated June 4, 1999
EX-99.(l)(x) Letter of Understanding for Franklin Aggressive *
Growth Fund dated June 22, 1999
EX-99.(m)(i) Amended and Restated Distribution Plan between *
the Registrant, on behalf of Franklin
California Growth Fund, Franklin Small Cap
Growth Fund, Franklin Global Health Care Fund
and Franklin Global Utilities Fund, and
Franklin/Templeton Distributors, Inc., dated
July 1, 1993
EX-99.(m)(ii) Distribution Plan between the Registrant, on *
behalf of Franklin Global Utilities Fund -
Class II, and Franklin/Templeton Distributors,
Inc., dated March 30, 1995
EX-99.(m)(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Strategic Income Fund, and Franklin/Templeton
Distributors, Inc., dated May 24, 1994
EX-99.(m)(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the Franklin
Natural Resources Fund, and Franklin/Templeton
Distributors, Inc., dated June 1, 1995
EX-99.(m)(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the Franklin
MidCap Growth Fund, and Franklin/Templeton
Distributors, Inc., dated June 1, 1996
EX-99.(m)(vi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of the Franklin
Blue Chip Fund, and Franklin/Templeton Distributors,
Inc., dated May 28, 1996
EX-99.(m)(vii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin Small
Cap Growth Fund - Class II, and Franklin/Templeton
Distributors, Inc., dated September 29, 1995
EX-99.(m)(viii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Biotechnology Discovery Fund, and Franklin/Templeton
Distributors, Inc., dated September 15, 1997
EX-99.(m)(ix) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
California Growth Fund - Class II, and Franklin
Global Health Care Fund - Class II, and
Franklin/Templeton Distributors, Inc., dated
September 3, 1996
EX-99.(m)(x) Distribution Plan pursuant to Rule 12b-1 *
between Registrant on behalf of Franklin
Strategic Income Fund - Class II, and
Franklin/Templeton Distributors, Inc. dated
February 26, 1998
EX-99.(m)(xi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of California
Growth Fund - Class B, and Franklin/Templeton
Distributors, Inc. dated October 16, 1998
EX-99.(m)(xii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Global Health Care Fund - Class B, and
Franklin/Templeton Distributors, Inc. dated
October 16, 1998
EX-99.(m)(xiii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Global Utilities Fund - Class B, and
Franklin/Templeton Distributors, Inc. dated
October 16, 1998
EX-99.(m)(xiv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Strategic Income Fund - Class B, and
Franklin/Templeton Distributors, Inc. dated
October 16, 1998
EX-99.(m)(xv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
U.S. Long-Short Fund and Franklin/Templeton
Distributors, Inc. dated April 15, 1999
EX-99.(m)(xvi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Large Cap Growth Fund - Class A and
Franklin/Templeton Distributors, Inc. dated May
18, 1999
EX-99.(m)(xvii) Distribution Plan pursuant to the Rule 12b-1 *
between the Registrant, on behalf of Franklin
Aggressive Growth Fund - Class A and
Franklin/Templeton Distributors, Inc. dated May
18, 1999
EX-99.(m)(xviii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Large Cap Growth Fund - Class B, and
Franklin/Templeton Distributors, Inc. dated May
18, 1999
EX-99.(m)(xix) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Aggressive Growth Fund - Class B, and
Franklin/Templeton Distributors, Inc. dated May
18, 1999
EX-99.(m)(xx) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Large Cap Growth Fund - Class C, and
Franklin/Templeton Distributors, Inc. dated May
18, 1999
EX-99.(m)(xxi) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin
Aggressive Growth Fund - Class C, and
Franklin/Templeton Distributors, Inc. dated May
18, 1999
EX-99.(m)(xxii) Form of Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin Blue
Chip Fund - Class B, and Franklin/Templeton
Distributors, Inc.
EX-99.(m)(xxiii) Form of Distribution Plan pursuant to Rule 12b-1 *
between the Registrant, on behalf of Franklin Blue
Chip Fund - Class C, and Franklin/Templeton
Distributors, Inc.
EX-99.(o)(i) Multiple Class Plan for Franklin Global *
Utilities Fund dated April 16, 1998
EX-99.(o)(ii) Multiple Class Plan for Franklin California *
Growth Fund dated April 16, 1998
EX-99.(o)(iii) Multiple Class Plan for Franklin Global Health *
Care Fund dated April 16, 1998
EX-99.(o)(iv) Multiple Class Plan for Franklin Small Cap *
Growth Fund dated June 18, 1996
EX-99.(o)(v) Multiple Class Plan for Franklin Natural *
Resources Fund dated June 18, 1996
EX-99.(o)(vi) Multiple Class Plan for Franklin Strategic *
Income Fund dated February 18, 1999
EX-99.(o)(vii) Multiple Class Plan for Franklin Large Cap *
Growth Fund dated May 18, 1999
EX-99.(o)(viii) Multiple Class Plan for Franklin Aggressive *
Growth Fund dated May 18, 1999
EX-99.(o)(ix) Form of Multiple Class Plan for Franklin Blue *
Chip Fund
EX-99.(p)(i) Power of Attorney for Franklin Strategic Series *
dated January 20, 2000
EX-99.(p)(ii) Certificate of Secretary dated January 27, 2000 *
* Incorporated by reference
FRANKLIN STRATEGIC SERIES
on behalf of
FRANKLIN TECHNOLOGY FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN STRATEGIC
SERIES, a Delaware business trust (the "Trust") on behalf of FRANKLIN TECHNOLOGY
FUND (the "Fund"), a series of the Trust, and FRANKLIN ADVISERS, INC., a
California corporation (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statement under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment adviser and to have an investment adviser perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment companies
and other investment counseling clients, and desires to provide these services
to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Adviser
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets subject to and in
accordance with the investment objectives and policies of the Fund and any
directions which the Trust's Board of Trustees may issue from time to time. In
pursuance of the foregoing, the Adviser shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of its
investment securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall include determining
the manner in which any voting rights, rights to consent to corporate action and
any other rights pertaining to the Fund's investment securities shall be
exercised. The Adviser shall render or cause to be rendered regular reports to
the Trust, at regular meetings of its Board of Trustees and at such other times
as may be reasonably requested by the Trust's Board of Trustees, of (i) the
decisions made with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, (ii) the reasons for such
decisions, and (iii) the extent to which those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Adviser to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Adviser in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Adviser may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Adviser agree that the Adviser shall
select brokers for the execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets,
in such amount of total brokerage as may reasonably be
required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or which
place the Adviser in a better position to make decisions
in connection with the management of the Fund's assets
and securities, whether or not such data may also be
useful to the Adviser and its affiliates in managing
other portfolios or advising other clients, in such
amount of total brokerage as may reasonably be required.
Provided that the Trust's officers are satisfied that
the best execution is obtained, the sale of shares of
the Fund may also be considered as a factor in the
selection of broker-dealers to execute the Fund's
portfolio transactions.
(c) When the Adviser has determined that the Fund should tender
securities pursuant to a "tender offer solicitation," Franklin/Templeton
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Adviser nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Adviser or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Adviser and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the Trust, not
more frequently than quarterly, of how much total brokerage business has been
placed by the Adviser, on behalf of the Fund, with brokers falling into each of
the categories referred to above and the manner in which the allocation has been
accomplished.
(e) The Adviser agrees that no investment decision will be made
or influenced by a desire to provide brokerage for allocation in accordance with
the foregoing, and that the right to make such allocation of brokerage shall not
interfere with the Adviser's paramount duty to obtain the best net price and
execution for the Fund.
(f) Decisions on proxy voting shall be made by the Adviser
unless the Board of Trustees determines otherwise. Pursuant to its authority,
Adviser shall have the power to vote, either in person or by proxy, all
securities in which the Fund may be invested from time to time, and shall not be
required to seek or take instructions from the Fund with respect thereto.
Adviser shall not be expected or required to take any action other than the
rendering of investment-related advice with respect to lawsuits involving
securities presently or formerly held in the Fund, or the issuers thereof,
including actions involving bankruptcy. Should Adviser undertake litigation
against an issuer on behalf of the Fund, the Fund agrees to pay its portion of
any applicable legal fees associated with the action or to forfeit any claim to
any assets Adviser may recover and, in such case, agrees to hold Adviser
harmless for excluding the Fund from such action. In the case of class action
suits involving issuers held in the Fund, Adviser may include information about
the Fund for purposes of participating in any settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser,
its officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
D. DELEGATION OF SERVICES. The Adviser may, at its expense,
select and contract with one or more investment advisers registered under the
Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the
services for the Fund for which it is responsible under this Agreement. The
Adviser will compensate any Sub-Adviser for its services to the Fund. The
Adviser may terminate the services of any Sub-Adviser at any time in its sole
discretion, and shall at such time assume the responsibilities of such
Sub-Adviser unless and until a successor Sub-Adviser is selected and the
requisite approval of the Fund's shareholders is obtained. The Adviser will
continue to have responsibility for all advisory services furnished by any
Sub-Adviser.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian,
dividend disbursing agent and shareholder record-keeping services, including the
expenses of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the
value of the Fund's net assets;
E. Salaries and other compensations of executive officers
of the Trust who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing
money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable state
laws; including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting
service used on its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in
cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
0.550% of the value of its net assets up to and including
$500,000,000; and
0.450% of the value of its net assets over $500,000,000 up to and
including $1,000,000,000; and
0.400% of the value of its net assets over $1,000,000,000 up to
and including $1,500,000,000; and
0.350% of the value of its net assets over $1,500,000,000 up to
and including $6,500,000,000; and
0.325% of the value of its net assets over $6,500,000,000 up to
and including $11,500,000,000; and
0.300% of the value of its net assets over $11,500,000,000 up to
and including $16,500,000,000; and
0.290% of the value of its net assets over $16,500,000,000 up to
and including $19,000,000,000; and
0.280% of the value of its net assets over $19,000,000,000 up to
and including $21,500,000,000; and
0.270% of the value of its net assets over $21,500,000,000.
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Adviser shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any month,
the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Adviser or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Adviser or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Adviser or any of its affiliates
or any of their officers, directors, employees or stockholders. The Adviser
shall not be obligated pursuant to the provisions of this Subparagraph 6.B., to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Adviser or any of its affiliates from the sale of his shares of the
Adviser, or similar matters. So long as this Agreement is in effect, the Adviser
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6.B. within thirty (30) days after a bill or statement has been received by the
Adviser therefor. This provision shall not be deemed to be a waiver of any claim
the Trust may have or may assert against the Adviser or others for costs,
expenses or damages heretofore incurred by the Trust or for costs, expenses or
damages the Trust may hereafter incur which are not reimbursable to it
hereunder.
C. No provision of this Agreement shall be construed to protect
any trustee or officer of the Trust, or director or officer of the Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the
payment of any penalty either by vote of the Board of Trustees of the Trust
or by vote of a majority of the outstanding voting securities of the Fund on
sixty (60) days' written notice to the Adviser;
(ii) shall immediately terminate with respect to the
Fund in the event of its assignment; and
(iii) may be terminated by the Adviser on sixty (60)
days' written notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the ____ day of ____________.
FRANKLIN STRATEGIC SERIES
ON BEHALF OF FRANKLIN TECHNOLOGY FUND
By:
Title:
FRANKLIN ADVISERS, INC.
By:
Title:
FRANKLIN STRATEGIC SERIES
on behalf of
FRANKLIN SMALL CAP GROWTH FUND II
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN STRATEGIC
SERIES, a Delaware business trust (the "Trust") on behalf of FRANKLIN SMALL CAP
GROWTH FUND II (the "Fund"), a series of the Trust, and FRANKLIN ADVISERS, INC.,
a California corporation (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statement under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment adviser and to have an investment adviser perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment companies
and other investment counseling clients, and desires to provide these services
to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Adviser
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets subject to and in
accordance with the investment objectives and policies of the Fund and any
directions which the Trust's Board of Trustees may issue from time to time. In
pursuance of the foregoing, the Adviser shall make all determinations with
respect to the investment of the Fund's assets and the purchase and sale of its
investment securities, and shall take such steps as may be necessary to
implement the same. Such determinations and services shall include determining
the manner in which any voting rights, rights to consent to corporate action and
any other rights pertaining to the Fund's investment securities shall be
exercised. The Adviser shall render or cause to be rendered regular reports to
the Trust, at regular meetings of its Board of Trustees and at such other times
as may be reasonably requested by the Trust's Board of Trustees, of (i) the
decisions made with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, (ii) the reasons for such
decisions, and (iii) the extent to which those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any
directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Adviser to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Adviser in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Adviser may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Adviser agree that the Adviser shall
select brokers for the execution of the Fund's transactions from among:
(i) Those brokers and dealers who provide quotations and
other services to the Fund, specifically including the
quotations necessary to determine the Fund's net assets,
in such amount of total brokerage as may reasonably be
required in light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or which
place the Adviser in a better position to make decisions
in connection with the management of the Fund's assets
and securities, whether or not such data may also be
useful to the Adviser and its affiliates in managing
other portfolios or advising other clients, in such
amount of total brokerage as may reasonably be required.
Provided that the Trust's officers are satisfied that
the best execution is obtained, the sale of shares of
the Fund may also be considered as a factor in the
selection of broker-dealers to execute the Fund's
portfolio transactions.
(c) When the Adviser has determined that the Fund should tender
securities pursuant to a "tender offer solicitation," Franklin/Templeton
Distributors, Inc. ("Distributors") shall be designated as the "tendering
dealer" so long as it is legally permitted to act in such capacity under the
federal securities laws and rules thereunder and the rules of any securities
exchange or association of which Distributors may be a member. Neither the
Adviser nor Distributors shall be obligated to make any additional commitments
of capital, expense or personnel beyond that already committed (other than
normal periodic fees or payments necessary to maintain its corporate existence
and membership in the National Association of Securities Dealers, Inc.) as of
the date of this Agreement. This Agreement shall not obligate the Adviser or
Distributors (i) to act pursuant to the foregoing requirement under any
circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Adviser and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the Trust, not
more frequently than quarterly, of how much total brokerage business has been
placed by the Adviser, on behalf of the Fund, with brokers falling into each of
the categories referred to above and the manner in which the allocation has been
accomplished.
(e) The Adviser agrees that no investment decision will be made
or influenced by a desire to provide brokerage for allocation in accordance with
the foregoing, and that the right to make such allocation of brokerage shall not
interfere with the Adviser's paramount duty to obtain the best net price and
execution for the Fund.
(f) Decisions on proxy voting shall be made by the Adviser
unless the Board of Trustees determines otherwise. Pursuant to its authority,
Adviser shall have the power to vote, either in person or by proxy, all
securities in which the Fund may be invested from time to time, and shall not be
required to seek or take instructions from the Fund with respect thereto.
Adviser shall not be expected or required to take any action other than the
rendering of investment-related advice with respect to lawsuits involving
securities presently or formerly held in the Fund, or the issuers thereof,
including actions involving bankruptcy. Should Adviser undertake litigation
against an issuer on behalf of the Fund, the Fund agrees to pay its portion of
any applicable legal fees associated with the action or to forfeit any claim to
any assets Adviser may recover and, in such case, agrees to hold Adviser
harmless for excluding the Fund from such action. In the case of class action
suits involving issuers held in the Fund, Adviser may include information about
the Fund for purposes of participating in any settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser,
its officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
D. DELEGATION OF SERVICES. The Adviser may, at its expense,
select and contract with one or more investment advisers registered under the
Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the
services for the Fund for which it is responsible under this Agreement. The
Adviser will compensate any Sub-Adviser for its services to the Fund. The
Adviser may terminate the services of any Sub-Adviser at any time in its sole
discretion, and shall at such time assume the responsibilities of such
Sub-Adviser unless and until a successor Sub-Adviser is selected and the
requisite approval of the Fund's shareholders is obtained. The Adviser will
continue to have responsibility for all advisory services furnished by any
Sub-Adviser.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of
the Fund's net assets;
E. Salaries and other compensations of executive officers of the
Trust who are not officers, directors, stockholders or employees of the Adviser
or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the purchase
and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors,
officers, employees or stockholders of the Adviser or any of its affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable state
laws; including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting service
used on its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in
cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
0.550% of the value of its net assets up to and including
$500,000,000; and
0.450% of the value of its net assets over $500,000,000 up to and
including $1,000,000,000; and
0.400% of the value of its net assets over $1,000,000,000 up to
and including $1,500,000,000; and
0.350% of the value of its net assets over $1,500,000,000 up to
and including $6,500,000,000; and
0.325% of the value of its net assets over $6,500,000,000 up to
and including $11,500,000,000; and
0.300% of the value of its net assets over $11,500,000,000 up to
and including $16,500,000,000; and
0.290% of the value of its net assets over $16,500,000,000 up to
and including $19,000,000,000; and
0.280% of the value of its net assets over $19,000,000,000 up to
and including $21,500,000,000; and
0.270% of the value of its net assets over $21,500,000,000.
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Adviser shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any month,
the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to reimburse
the Trust for any and all costs, expenses, and counsel and trustees' fees
reasonably incurred by the Trust in the preparation, printing and distribution
of proxy statements, amendments to its Registration Statement, holdings of
meetings of its shareholders or trustees, the conduct of factual investigations,
any legal or administrative proceedings (including any applications for
exemptions or determinations by the Securities and Exchange Commission) which
the Trust incurs as the result of action or inaction of the Adviser or any of
its affiliates or any of their officers, directors, employees or stockholders
where the action or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the stock or
control of the Adviser or its affiliates (or litigation related to any pending
or proposed or future transaction in such shares or control) which shall have
been undertaken without the prior, express approval of the Trust's Board of
Trustees; or, (ii) is within the control of the Adviser or any of its affiliates
or any of their officers, directors, employees or stockholders. The Adviser
shall not be obligated pursuant to the provisions of this Subparagraph 6.B., to
reimburse the Trust for any expenditures related to the institution of an
administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Adviser or any of its affiliates from the sale of his shares of the
Adviser, or similar matters. So long as this Agreement is in effect, the Adviser
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6.B. within thirty (30) days after a bill or statement has been received by the
Adviser therefor. This provision shall not be deemed to be a waiver of any claim
the Trust may have or may assert against the Adviser or others for costs,
expenses or damages heretofore incurred by the Trust or for costs, expenses or
damages the Trust may hereafter incur which are not reimbursable to it
hereunder.
C. No provision of this Agreement shall be construed to protect
any trustee or officer of the Trust, or director or officer of the Adviser, from
liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any
penalty either by vote of the Board of Trustees of the Trust or by vote of a
majority of the outstanding voting securities of the Fund on sixty (60) days'
written notice to the Adviser;
(ii) shall immediately terminate with respect to the Fund in the
event of its assignment; and
(iii) may be terminated by the Adviser on sixty (60) days' written
notice to the Fund.
C. As used in this Paragraph the terms "assignment," "interested
person" and "vote of a majority of the outstanding voting securities" shall have
the meanings set forth for any such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the ____ day of ____________.
FRANKLIN STRATEGIC SERIES
ON BEHALF OF FRANKLIN SMALL CAP GROWTH FUND II
By:
Title:
FRANKLIN ADVISERS, INC.
By:
Title:
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of _____________ between FRANKLIN STRATEGIC
SERIES (the "Investment Company"), an investment company registered under the
Investment Company Act of 1940 ("1940 Act"), on behalf of FRANKLIN TECHNOLOGY
FUND (the "Fund"), and Franklin Templeton Services, Inc. ("Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to Fund
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Fund shareholders when asked to do so by the Fund's shareholder servicing agent
or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and the
rules and regulations thereunder, supervising compliance with recordkeeping
requirements imposed by state laws or regulations, and maintaining books and
records for the Fund (other than those maintained by the custodian and transfer
agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Investment Company's Board of Trustees
("Board") or by the Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation,
NSARs, proxy statements, and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for such
services a monthly fee equal on an annual basis to 0.20% of the average daily
net assets of the Fund.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one
year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN TECHNOLOGY FUND
By:
Title:
FRANKLIN TEMPLETON SERVICES, INC.
By:
Title:
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of _____________ between FRANKLIN STRATEGIC
SERIES (the "Investment Company"), an investment company registered under the
Investment Company Act of 1940 ("1940 Act"), on behalf of FRANKLIN SMALL CAP
GROWTH FUND II (the "Fund"), and Franklin Templeton Services, Inc.
("Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to Fund
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Fund shareholders when asked to do so by the Fund's shareholder servicing agent
or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the Fund,
including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the 1940 Act, and the
rules and regulations thereunder, supervising compliance with recordkeeping
requirements imposed by state laws or regulations, and maintaining books and
records for the Fund (other than those maintained by the custodian and transfer
agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies; the
Fund's investment objectives, policies and restrictions; and the Code of Ethics
and other policies adopted by the Investment Company's Board of Trustees
("Board") or by the Adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation,
NSARs, proxy statements, and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for such
services a monthly fee equal on an annual basis to 0.20% of the average daily
net assets of the Fund.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for one
year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross negligence
on the part of the Administrator, or of reckless disregard of its duties and
obligations hereunder, the Administrator shall not be subject to liability for
any act or omission in the course of, or connected with, rendering services
hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed by their duly authorized officers.
FRANKLIN STRATEGIC SERIES on behalf of
FRANKLIN SMALL CAP GROWTH FUND II
By:
Title:
FRANKLIN TEMPLETON SERVICES, INC.
By:
Title: