As filed with the Securities and Exchange Commission on August 29, 1997.
File Nos.
33-69048
811-8034
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. 7 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 9 (X)
FRANKLIN REAL ESTATE SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public offering:
It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on September 1,1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Declaration Pursuant to Rule 24f-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24(f)(2) under the Investment Company Act of 1940. The Rule 24f-2 Notice for the
issuer's most recent fiscal year was filed on June 26, 1997.
FRANKLIN REAL ESTATE SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Real Estate Securities Fund - Class I & II
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How does
the Fund Measure Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage Your
Account"; "What Distributions
Might I Receive from the Fund?";
"How Taxation Affects the Fund
and its Shareholders"; "What If I
Have Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"; "Who
Manages the Fund?"; "Useful Terms
and Definitions"
8. Redemption or Repurchase "May I Exchange Shares for Shares
of Another Fund?"; "How Do I Sell
Shares?"; "Transaction Procedures
and Special Requirements";
"Services to Help You Manage Your
Account"
9. Legal Proceedings Not Applicable
FRANKLIN REAL ESTATE SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
Franklin Real Estate Securities Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
1. Cover Page Cover Page
2. Synopsis "Expense Summary"
3. Condensed Financial Information "Financial Highlights"; "How
does the Fund Measure
Performance?"
4. General Description of the "How is the Trust Organized?";
Registrant "How does the Fund Invest its
Assets?" "What are the Fund's
Potential Risks?"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Fund Contained in Registrant's Annual
Performance Report to Shareholders
6. Capital Stock and Other "How is the Trust Organized?";
Securities "Services to Help You Manage
Your Account"; "What
Distributions Might I Receive
from the Fund?"; "How Taxation
Affects the Fund and its
Shareholders"; "What If I Have
Questions About My Account?"
7. Purchase of Securities Being "How Do I Buy Shares?"; "May I
Offered Exchange Shares for Shares of
Another Fund?";
"Transaction Procedures and
Special Requirements"; "Services
to Help You Manage Your
Account"; "Who Manages the
Fund?"; "Useful Terms and
Definitions"
8. Redemption or Repurchase "May I Exchange Shares for
Shares of Another Fund?"; "How
Do I Sell Shares?"; "Transaction
Procedures and Special
Requirements"; "Services to Help
You Manage Your Account"
9. Pending Legal Proceedings Not Applicable
FRANKLIN REAL ESTATE SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Real Estate Securities Fund - Class I & II
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees";
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the Trust
Securities Organized?"
19. Purchase, Redemption and "How Do I Buy, Sell and Exchange
Pricing of Securities Being Shares?"; "How are Fund Shares
Offered Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
FRANKLIN REAL ESTATE SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART B: INFORMATION REQUIRED IN
STATEMENT OF ADDITIONAL INFORMATION
Franklin Real Estate Securities Fund - Advisor Class
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and "How does the Fund Invest its
Policies Assets?"; "Investment
Restrictions"
14. Management of the Trust "Officers and Trustees"
15. Control Persons and Principal "Officers and Trustees";
Holders of Securities "Investment Management and Other
Services"; "Miscellaneous
Information"
16. Investment Advisory and Other "Investment Management and Other
Services Services"; "The Fund's
Underwriter"
17. Brokerage Allocation "How does the Fund Buy
Securities for its Portfolio?"
18. Capital Stock and Other See Prospectus "How is the Trust
Securities Organized?"
19. Purchase, Redemption and Pricing "How Do I Buy, Sell and Exchange
of Securities Being Offered Shares?"; "How are Fund Shares
Valued?"; "Financial Statements"
20. Tax Status "Additional Information on
Distributions and Taxes"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance Data "How does the Fund Measure
Performance?"
23. Financial Statements "Financial Statements"
PROSPECTUS & APPLICATION
FRANKLIN REAL ESTATE SECURITIES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
SEPTEMBER 1, 1997
Franklin Real Estate Securities Trust
This prospectus describes Class I and Class II shares of the Franklin Real
Estate Securities Fund (the "Fund"). It contains information you should know
before investing in the Fund. Please keep it for future reference.
The Fund currently offers another class of shares with a different sales charge
and expense structure, which affects performance. This class is described in a
separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Class I and
Class II shares, dated September 1, 1997, which may be amended from time to
time. It includes more information about the Fund's procedures and policies. It
has been filed with the SEC and is incorporated by reference into this
prospectus. For a free copy or a larger print version of this prospectus, call
1-800/DIAL BEN or write the Fund at its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN REAL ESTATE SECURITIES FUND
September 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary .................................................... 2
Financial Highlights ............................................... 3
How does the Fund Invest its Assets? ............................... 4
What are the Fund's Potential Risks? ............................... 10
Who Manages the Fund? .............................................. 13
How does the Fund Measure Performance? ............................. 15
How Taxation Affects the Fund and its Shareholders ................. 16
How is the Trust Organized? ........................................ 17
ABOUT YOUR ACCOUNT
How Do I Buy Shares? ............................................... 18
May I Exchange Shares for Shares of Another Fund?................... 24
How Do I Sell Shares? .............................................. 27
What Distributions Might I Receive from the Fund?................... 30
Transaction Procedures and Special Requirements..................... 31
Services to Help You Manage Your Account............................ 35
What If I Have Questions About My Account? ......................... 38
GLOSSARY
Useful Terms and Definitions ....................................... 38
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of each class for the fiscal year
ended April 30, 1997. The Fund's actual expenses may vary.
<TABLE>
<CAPTION>
CLASS I CLASS II
A. SHAREHOLDER TRANSACTION EXPENSES+
<S> <C> <C>
Maximum Sales Charge (as a percentage
of Offering Price) 4.50% 1.99%
Paid at time of purchase 4.50%++ 1.00%+++
Paid at redemption++++ None 0.99%
Exchange Fee (per transaction) $5.00* $5.00*
B. ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.59%** 0.59%**
Rule 12b-1 Fees 0.23%*** 1.00%***
Other Expenses 0.27% 0.27%
----- -----
Total Fund Operating Expenses 1.09%** 1.86%**
======= =======
</TABLE>
C. EXAMPLE
Assume the annual return for each class is 5%, operating expenses are as
described above, and you sell your shares after the number of years
shown. These are the projected expenses for each $1,000 that you invest
in the Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
Class I $56**** $78 $102 $172
Class II $39 $68 $110 $226
For the same Class II investment, you would pay projected expenses of $29 if
you did not sell your shares at the end of the first year. Your projected
expenses for the remaining periods would be the same.
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
The Fund pays its operating expenses. The effects of these expenses are
reflected in the Net Asset Value or dividends of each class and are not
directly charged to your account.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service. ++There is no
front-end sales charge if you invest $1 million or more in Class I shares.
+++Although Class II has a lower front-end sales charge than Class I, its Rule
12b-1 fees are higher. Over time you may pay more for Class II shares. Please
see "How Do I Buy Shares? - Deciding Which Class to Buy." ++++A Contingent
Deferred Sales Charge may apply to any Class II purchase if you sell the shares
within 18 months and to Class I purchases of $1 million or more if you sell the
shares within one year. A Contingent Deferred Sales Charge may also apply to
purchases by certain retirement plans that qualify to buy Class I shares without
a front-end sales charge. The charge is 1% of the value of the shares sold or
the Net Asset Value at the time of purchase, whichever is less. The number in
the table shows the charge as a percentage of Offering Price. While the
percentage is different depending on whether the charge is shown based on the
Net Asset Value or the Offering Price, the dollar amount paid by you would be
the same. See "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
*$5.00 fee is only for Market Timers. We process all other exchanges without a
fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.48% and total operating
expenses were 0.98% for Class I and 1.75% for Class II. ***These fees may not
exceed 0.25% for Class I. The combination of front-end sales charges and Rule
12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charge permitted under the NASD's
rules. ****Assumes a Contingent Deferred Sales Charge will not apply.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the periods shown below appears in the financial
statements in the Trust's Annual Report to Shareholders for the fiscal year
ended April 30, 1997. The Annual Report to Shareholders also includes more
information about the Fund's performance. For a free copy, please call Fund
Information.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, JANUARY 3, 1994**
1997 1996 1995 TO APRIL 30, 1994
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES:
<S> <C> <C> <C> <C>
Per Share Operating Performance****
Net asset value at beginning of period $12.64 $10.58 $10.92 $10.00
-----------------------------------------------
Net investment income 0.49 0.43 0.39 0.06
Net realized & unrealized gain (loss) on securities 2.770 2.100 (0.450) 0.860
----------------------------------------------
Total from investment operations 3.260 2.530 (0.060) 0.920
----------------------------------------------
Distributions from net investment income (0.360) (0.470) (0.280) -
Distributions from realized capital gains (0.100) - - -
-------------------------------------------
Total distributions (0.460) (0.470) (0.280) -
-------------------------------------------
Net asset value at end of period $15.44 $12.64 $10.58 $10.92
===============================================
TOTAL RETURN+ 25.97% 24.25% (0.48%) 9.20%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in 000's) $153,520 $33,634 $16,694 $5,634
Ratio of expenses to average net assets++ 0.98% 0.67% 0.25% 0.25%*
Ratio of expenses to average net assets
(excluding waiver and payments by Advisers) 1.09% 1.24% 1.40% 2.91%*
Ratio of net investment income to average net assets 3.88% 4.38% 4.86% 3.19%*
Portfolio turnover rate 6.80% 14.40% 3.74% -
Average commission rate+++ 0.0576 0.0575 - -
. YEAR ENDED APRIL 30,
1997 1996
- -----------------------------------------------------------------------------------------------------
CLASS II SHARES:***
<S> <C> <C>
Per Share Operating Performance****
Net asset value at beginning of period $12.56 $10.58
-------------------
Net investment income 0.43 0.44
Net realized & unrealized gain on securities 2.683 1.995
-------------------
Total from investment operations 3.113 2.435
-------------------
Distributions from net investment income (0.313) (0.455)
Distributions from realized capital gains (0.100) -
-------------------
Total distributions (0.413) (0.455)
---------------------
Net asset value at end of period $15.26 $12.56
====================
Total Return+ 24.94% 23.21%
Ratios/Supplemental Data
Net assets at end of period (in 000's) $58,540 $6,282
Ratio of expenses to average net assets++ 1.75% 1.41%
Ratio of expenses to average net assets
(excluding waiver and payments by Advisers) 1.86% 1.98%
Ratio of net investment income to average net assets 2.92% 3.65%
Portfolio turnover rate 6.80% 14.40%
Average commission rate+++ 0.0576 0.0575
</TABLE>
+Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge and assumes reinvestment of dividends and capital gains, if any, at Net
Asset Value. ++During the period, Advisers agreed in advance to waive a portion
of its management fees and made payments of other expenses. +++Represents the
average broker commission rate per share paid by the Fund in connection with the
execution of the Fund's portfolio transactions in equity securities.
*Annualized. **Effective date of registration. ***Effective date of Class II
shares was May 1, 1995. ****Per share amounts have been calculated using the
daily average shares outstanding during the period.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to maximize total return. The objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund will seek to accomplish its investment objective by investing primarily
in the equity securities of companies operating in the real estate industry.
Under normal circumstances at least 65% of the Fund's total assets will be
invested in real estate securities, primarily equity real estate investment
trusts ("REITs"). The Fund may also invest in equity securities issued by home
builders and developers and in debt and convertible securities issued by REITs,
home builders and developers.
"Real estate securities" include equity, convertible and debt securities of
companies having the following characteristics and will be subject to the
following limitations:
1. Companies qualifying as a REIT for federal income tax purposes. In order
to qualify as a REIT, a company must derive at least 75% of its gross
income from real estate sources (rents, mortgage interest, gains from the
sale of real estate assets), and at least 95% from real estate sources,
plus dividends, interest and gains from the sale of securities. Real
property, mortgage loans, cash and certain securities must comprise 75% of
a company's assets. In order to qualify as a REIT, a company must also
make distributions to shareholders aggregating annually at least 95% of
its REIT taxable income.
2. Companies, such as home builders and developers, having at least 50% of
their assets related to, or deriving at least 50% of their revenues from,
the ownership, construction, management, or sale of residential,
commercial or industrial real estate.
The Fund will invest primarily in equity real estate securities of companies
listed on a securities exchange or traded in the over-the-counter ("OTC")
market. The Fund will invest more than 25% of its total assets in the real
estate industry as described above.
Many issuers in the real estate industry are small or medium capitalization
companies. Accordingly, the Fund anticipates that a substantial portion of its
assets will be invested in securities issued by small or mid-cap companies.
These companies are subject to specific risks because of their smaller market
capitalization. Please see "What are the Fund's Potential Risks?"
To maximize the return on uninvested cash, as well as for other specified
purposes, the Fund may invest up to 35% of its assets in a combination of the
following types of investments subject to the limitations regarding ratings
discussed below.
REAL ESTATE RELATED INVESTMENTS. In addition to the Fund's investments in real
estate securities, the Fund may also invest in debt or equity securities of
issuers engaged in businesses closely related to the real estate industry and
publicly traded on an exchange or in the OTC market. These companies include
those whose products and services are closely related to the real estate
industry, such as manufacturers and distributors of building supplies; financial
institutions that issue or service mortgages, such as savings and loan
associations or mortgage bankers; and companies whose principal business is
unrelated to the real estate industry but who have significant real estate
holdings (at least 50% of their respective assets) believed to be undervalued
relative to the price of those companies' securities.
OPTIONS AND FINANCIAL FUTURES. The Fund may write (sell) covered put and call
options and buy put and call options that trade on securities exchanges and in
the OTC market in order to hedge against the risk of market or industry-wide
stock price fluctuations or to increase income to the Fund. The Fund may buy and
sell futures and options on futures with respect to securities and securities
indices and buy futures and options to "close-out" futures and options it may
have written. Additionally, the Fund may sell futures and options to "close out"
futures and options it may have purchased. The Fund will not enter into any
futures contract or related options (except for closing transactions) if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of its total assets
(taken at current value). The Fund will not engage in any stock options or stock
index options if the option premiums paid regarding its open option positions
exceed 5% of the value of its total assets. Options, futures and options on
futures are generally considered "derivative securities."
The Fund understands the current position of the SEC staff to be that purchased
OTC options are illiquid securities and that the assets used to cover the sale
of an OTC option are considered illiquid. The Fund disagrees with this position.
Nevertheless, pending a change in the staff's position, the Fund will treat OTC
options and "cover assets" as subject to the Fund's limitation on illiquid
securities.
CONVERTIBLE AND DEBT SECURITIES. The Fund may invest in convertible and debt
securities of issuers in any industry. 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. Both convertible and conventional debt securities provide a fixed income
stream. A convertible security also provides the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
Convertible and debt securities rated within the top three rating categories by
S&P (AAA, AA and A) or by Moody's (Aaa, Aa and A) comprise what are known as
high-grade securities and are regarded as having a strong capacity to pay
interest or dividends. Medium-grade convertible and debt securities (e.g., BBB
by S&P or Baa by Moody's) are regarded as having an adequate capacity to pay
interest or dividends but with greater vulnerability to adverse economic
conditions and some speculative characteristics. Lower rated securities, those
rated BB or lower by S&P or Ba or lower by Moody's, are considered by S&P and
Moody's, on balance, to be predominantly speculative with respect to capacity to
pay preferred stock dividends or principal or interest, as the case may be, in
accordance with the terms of the obligation and will generally involve more
credit risk than securities in the higher rating categories. Please see the SAI
for a more detailed description of these ratings. The Fund may invest in
convertible and debt securities rated below investment grade, or that are
unrated. The Fund, however, will not invest in securities rated lower than B by
Moody's or S&P or that are unrated but determined by Advisers to be of
comparable credit quality to securities rated by Moody's or S&P. The Fund does
not intend to invest more than 10% of its net assets in high risk, high yield
convertible and debt securities.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years, PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell debt
securities on a "when-issued" or "delayed delivery" basis. These are trading
practices where payment and delivery of the securities take place at a future
date. These transactions are subject to market fluctuations and the risk that
the value of a security at delivery may be more or less than its purchase price.
Although the Fund will generally buy debt securities on a when-issued basis with
the intention of acquiring the securities, it may sell the securities before the
settlement date if it is deemed advisable. When the Fund is the buyer, it will
maintain cash or high-grade marketable securities with an aggregate value equal
to the amount of its purchase commitments, in a segregated account with its
custodian bank until payment is made. The Fund will not engage in when-issued
and delayed delivery transactions for investment leverage purposes.
FOREIGN SECURITIES. The Fund may invest in foreign securities that are not
publicly traded in the U.S. It is the Fund's current investment strategy,
however, to limit these investments to less than 5% of the Fund's net assets.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents. Subject to the terms of an SEC
exemption order, the Fund may also invest in the shares of affiliated money
market funds that invest primarily in short-term debt securities. These
temporary investments may be made either for liquidity purposes, to meet
shareholder redemption requirements or as a temporary defensive measure.
OTHER INVESTMENT POLICIES OF THE FUND
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions, in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may borrow up to 10% of its
total asset value to meet redemption requests and for other temporary or
emergency purposes. The Fund will not make any additional investments while any
borrowings exceed 5% of its total assets.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. The Board has
authorized the Fund to invest in restricted securities (which might otherwise be
considered illiquid) where the investment is consistent with the Fund's
investment objective and has authorized the securities to be considered liquid
(and thus not subject to the foregoing 10% limitation), to the extent Advisers
determines on a daily basis that there is a liquid institutional or other market
for the securities. The Board will review Advisers' determinations of liquidity,
retain ultimate responsibility for the determinations and will consider
appropriate action, consistent with the Fund's objective and policies, if a
security becomes illiquid after its purchase. To the extent the Fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the Fund may be increased if qualified institutional buyers are no longer
interested in buying these securities or the market for these securities
contracts.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
INVESTING IN REAL ESTATE SECURITIES
Generally. Because the Fund primarily invests in the securities of companies in
the real estate industry, an investment in the Fund will generally be subject to
the risks associated with real estate. These risks include declines in the value
of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants and increases in interest rates. The value of securities
of companies that service the real estate industry will also be affected by
these risks.
Because the Fund invests primarily in the real estate industry, it could own
real estate directly as a result of a default on debt securities it may own.
Receipt of rental income or income from the disposition of real property by the
Fund may adversely affect its ability to retain its tax status as a regulated
investment company. The possibility exists that a REIT may fail to qualify for
tax-free pass-through of income under the Code or maintain its exemption under
federal securities law.
EQUITY AND MORTGAGE REITS. Equity REITs are affected by changes in the value of
the underlying property in which they invest, while mortgage REITs are affected
by the quality of the properties to which they have extended credit. Equity and
mortgage REITs are dependent upon the REITs' management skill. REITs may not be
diversified and are subject to the risks of financing projects. REITS are also
subject to heavy cash flow dependency, defaults by borrowers and
self-liquidation.
EXPENSES. By investing in REITs indirectly through the Fund, you will bear not
only your proportionate share of the expenses of the Fund, but also, indirectly,
similar expenses of the REITs.
OTHER RISK CONSIDERATIONS
NON-DIVERSIFICATION RISK. As a non-diversified investment company, the Fund is
not subject to any statutory restriction under federal securities law with
respect to the percentage of its assets that may be invested in the securities
of any one issuer. To the extent the Fund is not fully diversified, it may be
more susceptible to adverse economic, political or regulatory developments
affecting a single issuer than would be the case if the Fund were more broadly
diversified. The Fund, however, intends to comply with the asset
diversification, income, distribution and other requirements of the Code
applicable to regulated investment companies so that it will not be subject to
federal income tax and distributions to shareholders will be free from regular
federal income tax. Accordingly, the Fund will not buy a security if, as a
result, more than 25% of its total assets would be invested in the securities of
a single issuer, or with respect to 50% of its total assets, more than 5% of
such assets would be invested in the securities of a single issuer.
MEDIUM AND SMALL CAPITALIZATION RISK. Historically, small and medium market
capitalization stocks have been more volatile in price than larger
capitalization stocks. Among the reasons for greater price volatility of these
securities are the less certain growth prospects of smaller firms, the lower
degree of liquidity in the market for such stocks, and the greater sensitivity
of small and medium size companies to changing economic conditions. Besides
exhibiting greater volatility, medium and small company stocks may fluctuate
independently of larger company stocks. Medium and small company stocks may
decline in price as large company stocks rise or vice versa. You should
therefore expect that the value of the Fund's shares may be more volatile than
the shares of a fund that invests in larger capitalization stocks. In addition,
small and medium size companies may have products and management that have not
been thoroughly tested by time or by the marketplace. These companies may also
be more dependent on a limited number of key personnel and their financial
resources may not be as substantial as those of more established companies.
Adversity that leads to a decline in the value of such a security will have a
negative impact on the Fund's share price as well.
OPTIONS AND FINANCIAL FUTURES. The Fund's options and futures investments
involve certain risks. These risks include the risks that the effectiveness of
an options and futures strategy depends on the degree to which price movements
in the underlying index or securities correlate with price movements in the
relevant portion of the Fund's portfolio. The Fund bears the risk that the
prices of its portfolio securities will not move in the same amount as the
option or future it has purchased, or that there may be a negative correlation
that would result in a loss on both the securities and the option or future.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. There can be no assurance that a liquid secondary
market will exist for any particular option or futures contract at any specific
time.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
The Fund's investment in options and futures contracts may be limited by the
requirements of the Code for qualification as a regulated investment company and
are subject to special tax rules that may affect the amount, timing and
character of distributions to you. These securities also require the application
of complex and special tax rules and elections.
For more information please see the SAI.
CONVERTIBLE AND DEBT SECURITIES. An investment in an enhanced convertible
security or any other security may involve additional risks to the Fund. The
Fund may have difficulty disposing of such securities because there may be a
thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as the deterioration in
the credit worthiness of an issuer. Reduced liquidity in the secondary market
for certain securities may also make it more difficult for the Fund to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio. The Fund, however, intends to acquire liquid securities, though there
can be no assurances that this will be achieved.
HIGH YIELD, FIXED-INCOME SECURITIES. The Fund's investments in convertible and
debt securities rated below investment grade and in unrated securities of
comparable quality have credit characteristics similar to high risk, high yield
bonds.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities. Please see the SAI for more information on the
risk of high yield, lower-quality securities.
INTEREST RATE AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates will affect the value of the Fund's
portfolio and its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to have a negative effect on
the value of the Fund's shares. To the extent the Fund invests in common stocks,
a general market decline, shown for example by a drop in the Dow Jones
Industrials or other equity based index, may cause the value of what the Fund
owns, and thus the Fund's share price, to decline. The value of stock markets
and interest rates throughout the world has increased and decreased in the past.
These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM. The team responsible for the day-to-day management of the
Fund's portfolio since its inception is Matt Avery and Tom Branch.
Matt Avery
Vice President of Advisers
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles and a Bachelor of Science degree in Industrial
Engineering from Stanford University. He has been in the securities industry
since 1982 and with the Franklin Templeton Group since 1987.
Tom Branch
Portfolio Manager of Advisers
Mr. Branch received a Bachelor of Science degree in Business Administration with
a concentration in Finance from California Polytechnic State University, San
Luis Obispo. Mr. Branch joined the Franklin Templeton Group in 1993.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees,
before any advance waiver, totaled 0.59% of the average daily net assets of the
Fund. Total operating expenses were 1.09% for Class I and 1.86% for Class II.
Under an agreement by Advisers to limit its fees, the Fund paid management fees
totaling 0.48% and operating expenses totaling 0.98% for Class I and 1.75% for
Class II. Advisers may end this arrangement at any time upon notice to the
Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 Plans"
under which they may pay or reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
Fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the Fund under the Class I plan may not exceed 0.25% per year of
Class I's average daily net assets. All distribution expenses over this amount
will be borne by those who have incurred them. During the first year after
certain Class I purchases made without a sales charge, Distributors may keep the
Rule 12b-1 fees associated with the purchase.
Under the Class II plan, the Fund may pay Distributors up to 0.75% per year of
Class II's average daily net assets to pay Distributors or others for providing
distribution and related services and bearing certain Class II expenses. All
distribution expenses over this amount will be borne by those who have incurred
them. During the first year after a purchase of Class II shares, Distributors
may keep this portion of the Rule 12b-1 fees associated with the purchase.
The Fund may also pay a servicing fee of up to 0.25% per year of Class II's
average daily net assets under the Class II plan. This fee may be used to pay
Securities Dealers or others for, among other things, helping to establish and
maintain customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend payments
from the Fund on behalf of customers, and similar servicing and account
maintenance activities.
The Rule 12b-1 fees charged to each class are based only on the fees
attributable to that particular class. For more information, please see "The
Fund's Underwriter" in the SAI.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, each class of the Fund advertises its performance. Commonly
used measures of performance include total return, current yield and current
distribution rate. Performance figures are usually calculated using the maximum
sales charges, but certain figures may not include sales charges.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield for each
class shows the income per share earned by that class. The current distribution
rate shows the dividends or distributions paid to shareholders of a class. This
rate is usually computed by annualizing the dividends paid per share during a
certain period and dividing that amount by the current Offering Price of the
class. Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of each class will vary. Performance figures are always
based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will generally not be liable
for federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether these
distributions are received in cash or in additional shares.
Under the Code, certain distributions which are declared in October, November or
December but which, for operational reasons, may not be paid to you until the
following January, will be treated for tax purposes as if paid by the Fund and
received by you on December 31 of the calendar year in which they are declared.
For corporate shareholders, only 13.00% of the ordinary income dividends
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997, qualified for the corporate dividends-received
deduction due to the Fund's primary investment in equity securities of REITs and
debt obligations.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to these shares.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of these dividends
and distributions. The Fund will generally retain the return of capital
distributions received from its investments; however, if these distributions are
in turn paid to you, then you will receive nontaxable return of capital
distributions, which reduce the cost basis of Fund shares for purposes of
computing gain or loss on the redemption or other disposition of Fund shares.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Real Estate Securities Trust
(the "Trust"), an open-end management investment company, commonly called a
mutual fund. It was organized as a Delaware business trust on September 14,
1993, and is registered with the SEC. As of January 1, 1997, the Fund began
offering a new class of shares designated Franklin Real Estate Securities Fund -
Advisor Class. All shares outstanding before the offering of Advisor Class
shares have been designated Franklin Real Estate Securities Fund - Class I and
Franklin Real Estate Securities Fund - Class II. Additional series and classes
of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a Board
member.-
As of August 5, 1997, the Franklin Templeton Moderate Target Fund and the
Franklin Templeton Growth Target Fund each owned of record and beneficially more
than 25% of the outstanding shares of the Advisor Class of the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, contact your investment representative or complete and
sign the enclosed shareholder application and return it to the Fund with your
check. PLEASE INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, YOUR PURCHASE WILL BE AUTOMATICALLY INVESTED IN CLASS I SHARES.
MINIMUM
INVESTMENTS*
To Open Your Account $100
To Add to Your Account $ 25
*We may waive these minimums for retirement plans. We may also refuse any order
to buy shares.
DECIDING WHICH CLASS TO BUY
You should consider a number of factors when deciding which class of shares to
buy. IF YOU PLAN TO BUY $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO
BUY CLASS I SHARES WITHOUT A SALES CHARGE, YOU MAY NOT BUY CLASS II SHARES.
Generally, you should consider buying Class I shares if:
o you expect to invest in the Fund over the long term;
o you qualify to buy Class I shares at a reduced sales charge; or
o you plan to buy $1 million or more over time.
You should consider Class II shares if:
o you expect to invest less than $100,000 in the Franklin Templeton Funds; and
o you plan to sell a substantial number of your shares within approximately six
years or less of your investment.
Class I shares are generally more attractive for long-term investors because of
Class II's higher Rule 12b-1 fees. These may accumulate over time to outweigh
the lower Class II front-end sales charge and result in lower income dividends
for Class II shareholders. If you qualify to buy Class I shares at a reduced
sales charge based upon the size of your purchase or through our Letter of
Intent or cumulative quantity discount programs, but plan to hold your shares
less than approximately six years, you should evaluate whether it is more
economical for you to buy Class I or Class II shares.
For purchases of $1 million or more, it is considered more beneficial for you to
buy Class I shares since there is no front-end sales charge, even though these
purchases may be subject to a Contingent Deferred Sales Charge. Any purchase of
$1 million or more is therefore automatically invested in Class I shares. You
may accumulate more than $1 million in Class II shares through purchases over
time, but if you plan to do this you should determine whether it would be more
beneficial for you to buy Class I shares through a Letter of Intent.
Please consider all of these factors before deciding which class of shares to
buy. There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
For Class I shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class II shares is 1%
and, unlike Class I, does not vary based on the size of your purchase.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
TOTAL SALES CHARGE AMOUNT PAID
AS A PERCENTAGE OF TO DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS I
Under $100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more* None None None
CLASS II
Under $1,000,000* 1.00% 1.01% 1.00%
</TABLE>
*A Contingent Deferred Sales Charge of 1% may apply to Class I purchases of
$1 million or more and any Class II purchase. Please see "How Do I Sell Shares?
- - Contingent Deferred Sales Charge." Please also see "Other Payments to
Securities Dealers" below for a discussion of payments Distributors may make out
of its own resources to Securities Dealers for certain purchases. Purchases of
Class II shares are limited to purchases below $1 million. Please see "Deciding
Which Class to Buy."
SALES CHARGE REDUCTIONS AND WAIVERS
IF YOU QUALIFY TO BUY SHARES UNDER ONE OF THE SALES CHARGE REDUCTION OR
WAIVER CATEGORIES DESCRIBED BELOW, PLEASE INCLUDE A WRITTEN STATEMENT
WITH EACH PURCHASE ORDER EXPLAINING WHICH PRIVILEGE APPLIES. If you don't
include this statement, we cannot guarantee that you will receive the
sales charge reduction or waiver.
CUMULATIVE QUANTITY DISCOUNTS - Class I Only. To determine if you may pay a
reduced sales charge, the amount of your current Class I purchase is added to
the cost or current value, whichever is higher, of your existing shares in the
Franklin Templeton Funds, as well as those of your spouse, children under the
age of 21 and grandchildren under the age of 21. If you are the sole owner of a
company, you may also add any company accounts, including retirement plan
accounts. Companies with one or more retirement plans may add together the total
plan assets invested in the Franklin Templeton Funds to determine the sales
charge that applies.
LETTER OF INTENT - CLASS I ONLY. You may buy Class I shares at a reduced sales
charge by completing the Letter of Intent section of the shareholder
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class I shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase in
Class I shares registered in your name until you fulfill your Letter.
o You give Distributors a security interest in the reserved shares and appoint
Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any
additional sales charge if you do not fulfill the terms of the Letter.
o Although you may exchange your shares, you may not sell reserved shares
until you complete the Letter or pay the higher sales charge.
Your periodic statements will include the reserved shares in the total shares
you own. We will pay or reinvest dividend and capital gain distributions on the
reserved shares as you direct. Our policy of reserving shares does not apply to
certain retirement plans.
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy, Sell and Exchange Shares? - Letter of Intent" in the SAI or
call Shareholder Services.
GROUP PURCHASES - Class I Only. If you are a member of a qualified group, you
may buy Class I shares at a reduced sales charge that applies to the group as a
whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost savings
in distributing shares.
SALES CHARGE WAIVERS. The Fund's front-end sales charge and Contingent Deferred
Sales Charge do not apply to certain purchases. For waiver categories 1, 2 or 3
below: (i) the distributions or payments must be reinvested within 365 days of
their payment date, and (ii) Class II distributions may be reinvested in either
Class I or Class II shares. Class I distributions may only be reinvested in
Class I shares.
The Fund's sales charges do not apply if you are buying Class I shares with
money from the following sources or Class II shares with money from the sources
in waiver categories 1 or 4:
1. Dividend and capital gain distributions from any Franklin Templeton Fund or
a real estate investment trust (REIT) sponsored or advised by Franklin
Properties, Inc.
2. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
3. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds, the Templeton Variable Annuity
Fund, the Templeton Variable Products Series Fund, or the Franklin
Government Securities Trust. You should contact your tax advisor for
information on any tax consequences that may apply.
4. Redemptions from any Franklin Templeton Fund if you:
o Originally paid a sales charge on the shares,
o Reinvest the money within 365 days of the redemption date, and
o Reinvest the money in the same class of shares.
An exchange is not considered a redemption for this privilege. The Contingent
Deferred Sales Charge will not be waived if the shares were subject to a
Contingent Deferred Sales Charge when sold. We will credit your account in
shares, at the current value, in proportion to the amount reinvested for any
Contingent Deferred Sales Charge paid in connection with the earlier redemption,
but a new Contingency Period will begin.
If you immediately placed your redemption proceeds in a Franklin Bank CD, you
may reinvest them as described above. The proceeds must be reinvested within 365
days from the date the CD matures, including any rollover.
The Fund's sales charges also do not apply to Class I purchases by:
5. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets held
in a fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans, have
full or shared investment discretion. We will accept orders for these
accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with
payment by federal funds received by the close of business on the next
business day following the order.
6. Group annuity separate accounts offered to retirement plans
7. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
8. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the Fund is
permissible and suitable for you and the effect, if any, of payments by the
Fund on arbitrage rebate calculations.
9. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
10. Registered Securities Dealers and their affiliates, for their investment
accounts only
11. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
12. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group, and their family members,
consistent with our then-current policies
13. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
14. Accounts managed by the Franklin Templeton Group
15. Certain unit investment trusts and their holders reinvesting distributions
from the trusts
RETIREMENT PLANS. Retirement plans that (i) are sponsored by an employer with at
least 100 employees, or (ii) have plan assets of $1 million or more, or (iii)
agree to invest at least $500,000 in the Franklin Templeton Funds over a 13
month period may buy Class I shares without a front-end sales charge. Retirement
plans that are not Qualified Retirement Plans or SEPs, such as 403(b) or 457
plans, must also meet the requirements described under "Group Purchases - Class
I Only" above. For retirement plan accounts opened on or after May 1, 1997, a
Contingent Deferred Sales Charge may apply if the account is closed within 365
days of the retirement plan account's initial purchase in the Franklin Templeton
Funds. Please see "How Do I Sell Shares? - Contingent Deferred Sales Charge" for
details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
OTHER PAYMENTS TO SECURITIES DEALERS
The payments described below may be made to Securities Dealers who initiate and
are responsible for Class II purchases and certain Class I purchases made
without a sales charge. The payments are subject to the sole discretion of
Distributors, and are paid by Distributors or one of its affiliates and not by
the Fund or its shareholders.
1. Class II purchases - up to 1% of the purchase price.
2. Class I purchases of $1 million or more - up to 1% of the amount invested.
3. Class I purchases made without a front-end sales charge by certain
retirement plans described under "Sales Charge Reductions and Waivers -
Retirement Plans" above - up to 1% of the amount invested. For retirement
plan accounts opened on or after May 1, 1997, a Contingent Deferred Sales
Charge will not apply to the account if the Securities Dealer chooses to
receive a payment of 0.25% or less or if no payment is made.
4. Class I purchases by trust companies and bank trust departments, Eligible
Governmental Authorities, and broker-dealers or others on behalf of clients
participating in comprehensive fee programs - up to 0.25% of the amount
invested.
5. Class I purchases by Chilean retirement plans - up to 1% of the amount
invested.
A Securities Dealer may receive only one of these payments for each qualifying
purchase. Securities Dealers who receive payments in connection with investments
described in paragraphs 1, 2 or 5 above or a payment of up to 1% for investments
described in paragraph 3 will be eligible to receive the Rule 12b-1 fee
associated with the purchase starting in the thirteenth calendar month after the
purchase.
FOR BREAKPOINTS THAT MAY APPLY AND INFORMATION ON ADDITIONAL COMPENSATION
PAYABLE TO SECURITIES DEALERS IN CONNECTION WITH THE SALE OF FUND SHARES, PLEASE
SEE "HOW DO I BUY, SELL AND EXCHANGE SHARES? - OTHER PAYMENTS TO SECURITIES
DEALERS" IN THE SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
If you own Class I shares, you may exchange into any of our money funds except
Franklin Templeton Money Fund II ("Money Fund II"). Money Fund II is the only
money fund exchange option available to Class II shareholders. Unlike our other
money funds, shares of Money Fund II may not be purchased directly and no drafts
(checks) may be written on Money Fund II accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have different
investment minimums. Some Franklin Templeton Funds do not offer Class II shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account
owners
2. Include any outstanding share certificates for the
shares you want to exchange
BY PHONE Call Shareholder Services or TeleFACTS(R)
If you do not want the ability to
exchange by phone to apply to your
account, please let us know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
WILL SALES CHARGES APPLY TO MY EXCHANGE?
You generally will not pay a front-end sales charge on exchanges.
If you have held your shares less than six months, however, you will pay the
percentage difference between the sales charge you previously paid and the
applicable sales charge of the new fund. If you have never paid a sales charge
on your shares because, for example, they have always been held in a money fund,
you will pay the Fund's applicable sales charge no matter how long you have held
your shares. These charges may not apply if you qualify to buy shares without a
sales charge.
We will not impose a Contingent Deferred Sales Charge when you exchange shares.
Any shares subject to a Contingent Deferred Sales Charge at the time of
exchange, however, will remain so in the new fund. See the discussion on
Contingent Deferred Sales Charges below and under "How Do I Sell Shares?"
CONTINGENT DEFERRED SALES CHARGE - CLASS I. For accounts with Class I shares
subject to a Contingent Deferred Sales Charge, we will first exchange any shares
in your account that are not subject to the charge. If there are not enough of
these to meet your exchange request, we will exchange shares subject to the
charge in the order they were purchased. If you exchange Class I shares into one
of our money funds, the time your shares are held in that fund will not count
towards the completion of any Contingency Period.
CONTINGENT DEFERRED SALES CHARGE - CLASS II. For accounts with Class II shares
subject to a Contingent Deferred Sales Charge, shares are exchanged into the new
fund proportionately based on the amount of shares subject to a Contingent
Deferred Sales Charge and the length of time the shares have been held. For
example, suppose you own $1,000 in shares that have never been subject to a
Contingent Deferred Sales Charge, such as shares from the reinvestment of
dividends and capital gains ("free shares"), $2,000 in shares that are no longer
subject to a Contingent Deferred Sales Charge because you have held them for
longer than 18 months ("matured shares"), and $3,000 in shares that are still
subject to a Contingent Deferred Sales Charge ("CDSC liable shares"). If you
exchange $3,000 into a new fund, $500 will be exchanged from free shares, $1,000
from matured shares, and $1,500 from CDSC liable shares.
Likewise, CDSC liable shares purchased at different times will be exchanged into
a new fund proportionately. For example, assume you purchased $1,000 in shares 3
months ago, 6 months ago, and 9 months ago. If you exchange $1,500 into a new
fund, $500 will be exchanged from shares purchased at each of these three
different times.
While Class II shares are exchanged proportionately, they are redeemed in the
order purchased. In some cases, this means exchanged shares may be CDSC liable
even though they would not be subject to a Contingent Deferred Sales Charge if
they were sold. The tax consequences of a sale or exchange are determined by the
Code and not by the method used by the Fund to transfer shares.
If you exchange your Class II shares for shares of Money Fund II, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the SAME CLASS, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar quarter,
or (iii) exchanged shares equal to at least $5 million, or more than 1% of
the Fund's net assets. Shares under common ownership or control are combined
for these limits. If you have exchanged shares as described in this
paragraph, you will be considered a Market Timer. Each exchange by a Market
Timer, if accepted, will be charged $5.00. Some of our funds do not allow
investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
Certain funds in the Franklin Templeton Funds offer classes of shares not
offered by the Fund, such as "Class Z" shares. Certain shareholders of Class Z
shares of Franklin Mutual Series Fund Inc. may exchange their Class Z shares for
Class I shares of the Fund at Net Asset Value.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
By Mail 1. Send us written instructions signed by all
account owners. If you would like your redemption
proceeds wired to a bank account, your
instructions should include:
o The name, address and telephone number of
the bank where you want the proceeds sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and the
account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may
need to send additional documents. Accounts under
court jurisdiction may have other requirements.
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wire to a bank account, other
than an escrow account, you must first sign up for
the wire feature. To sign up, send us written
instructions, with a signature guarantee. To avoid
any delay in processing, the instructions should
include the item listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutiona
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services
to receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 15 days
If you do not want the ability to redeem by
phone to apply to your account, please let
us know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
CONTINGENT DEFERRED SALES CHARGE
For Class I purchases, if you did not pay a front-end sales charge because you
invested $1 million or more or agreed to invest $1 million or more under a
Letter of Intent, a Contingent Deferred Sales Charge may apply if you sell all
or a part of your investment within the Contingency Period. Once you have
invested $1 million or more, any additional Class I investments you make without
a sales charge may also be subject to a Contingent Deferred Sales Charge if they
are sold within the Contingency Period. For any Class II purchase, a Contingent
Deferred Sales Charge may apply if you sell the shares within the Contingency
Period. The charge is 1% of the value of the shares sold or the Net Asset Value
at the time of purchase, whichever is less.
Certain retirement plan accounts opened on or after May 1, 1997, and that
qualify to buy Class I shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan account is
closed within 365 days of the account's initial purchase in the Franklin
Templeton Funds.
We will first redeem any shares in your account that are not subject to the
charge. If there are not enough of these to meet your request, we will redeem
shares subject to the charge in the order they were purchased.
Unless otherwise specified, when you request to sell a stated DOLLAR AMOUNT, we
will redeem additional shares to cover any Contingent Deferred Sales Charge. For
requests to sell a stated NUMBER OF SHARES, we will deduct the amount of the
Contingent Deferred Sales Charge, if any, from the sale proceeds.
WAIVERS. We waive the Contingent Deferred Sales Charge for:
o Exchanges
o Account fees
o Sales of shares purchased pursuant to a sales charge waiver
o Sales of shares purchased without a front-end sales charge by certain
retirement plan accounts if (i) the account was opened before May 1, 1997,
or (ii) the Securities Dealer of record received a payment from Distributors
of 0.25% or less, or (iii) Distributors did not make any payment in
connection with the purchase, as described under "How Do I Buy Shares? -
Other Payments to Securities Dealers"
o Redemptions by the Fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1,
1995
o Redemptions through a systematic withdrawal plan set up on or after February
1, 1995, at a rate of up to 1% a month of an account's Net Asset Value. For
example, if you maintain an annual balance of $1 million in Class I shares,
you can redeem up to $120,000 annually through a systematic withdrawal plan
free of charge. Likewise, if you maintain an annual balance of $10,000 in
Class II shares, $1,200 may be redeemed annually free of charge.
o Distributions from individual retirement plan accounts due to death or
disability or upon periodic distributions based on life expectancy
o Tax-free returns of excess contributions from employee benefit plans
o Redemptions by Trust Company employee benefit plans or employee benefit plans
serviced by ValuSelect(R)
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income annually in December
to shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividends and capital gains are calculated and distributed the same way for each
class. The amount of any income dividends per share will differ, however,
generally due to the difference in the Rule 12b-1 fees of Class I and Class II.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund (without a sales charge or imposition of a Contingent Deferred
Sales Charge) by reinvesting capital gain distributions, or both dividend and
capital gain distributions. If you own Class II shares, you may also reinvest
your distributions in Class I shares of the Fund. This is a convenient way to
accumulate additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton Fund
(without a sales charge or imposition of a Contingent Deferred Sales Charge). If
you own Class II shares, you may also direct your distributions to buy Class I
shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee. If you send
the money to a checking account, please see "Electronic Fund Transfers - Class I
Only" under "Services to Help You Manage Your Account."
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
When you buy shares, you pay the Offering Price. This is the Net Asset Value per
share of the class you wish to purchase, plus any applicable sales charges. When
you sell shares, you receive the Net Asset Value per share minus any applicable
Contingent Deferred Sales Charges.
The Net Asset Value we use when you buy or sell shares is the one next
calculated after we receive your transaction request in proper form. If you buy
or sell shares through your Securities Dealer, however, we will use the Net
Asset Value next calculated after your Securities Dealer receives your request,
which is promptly transmitted to the Fund. Your redemption proceeds will not
earn interest between the time we receive the order from your dealer and the
time we receive any required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share of each class as of the scheduled close of the NYSE,
generally 1:00 p.m. Pacific time. You can find the prior day's closing Net Asset
Value and Offering Price for each class in many newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. Each class, however,
bears the Rule 12b-1 fees payable under its Rule 12b-1 plan. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION Corporate Resolution
PARTNERSHIP 1. The pages from the partnership agreement
that identify the general partners, or
2. A certification for a partnership
agreement
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A CERTIFICATION FOR TRUST
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the automatic investment plan application
included with this prospectus or contact your investment representative. The
market value of the Fund's shares may fluctuate and a systematic investment plan
such as this will not assure a profit or protect against a loss. You may
discontinue the program at any time by notifying Investor Services by mail or
phone.
AUTOMATIC PAYROLL DEDUCTION - CLASS I ONLY
You may have money transferred from your paycheck to the Fund to buy additional
Class I shares. Your investments will continue automatically until you instruct
the Fund and your employer to discontinue the plan. To process your investment,
we must receive both the check and payroll deduction information in required
form. Due to different procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time we receive the money.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. If you choose to have the money sent to a
checking account, please see "Electronic Fund Transfers - Class I Only" below.
Once your plan is established, any distributions paid by the Fund will be
automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if you
plan to buy shares on a regular basis. Shares sold under the plan may also be
subject to a Contingent Deferred Sales Charge. Please see "Contingent Deferred
Sales Charge" under "How Do I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS - CLASS I ONLY
You may choose to have dividend and capital gain distributions from Class I
shares of the Fund or payments under a systematic withdrawal plan sent directly
to a checking account. If the checking account is with a bank that is a member
of the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If you choose this option, please allow at least
fifteen days for initial processing. We will send any payments made during that
time to the address of record on your account.
TELEFACTS(R)
From a touch-tone phone, you may call our TeleFACTS(R) system (day or night) at
1-800/247-1753 to:
o obtain information about your account;
o obtain price and performance information about any Franklin Templeton Fund;
o exchange shares between identically registered Franklin accounts; and
o request duplicate statements and deposit slips for Franklin accounts.
You will need the code number for each class to use TeleFACTS(R). The code
number is 192 for Class I and 292 for Class II.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your account,
including additional purchases and dividend reinvestments. PLEASE VERIFY THE
ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce Fund
expenses, we attempt to identify related shareholders within a household and
send only one copy of a report. Call Fund Information if you would like an
additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m.
(Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded.
<PAGE>
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
CONTINGENCY PERIOD - For Class I shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. For Class II shares, the contingency
period is 18 months. Regardless of when during the month you purchased shares,
they will age one month on the last day of that month and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply if
you sell your shares within the Contingency Period.
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are
affiliated with Distributors. See "Officers and Trustees."
ELIGIBLE GOVERNMENTAL AUTHORITY - Any state or local government or any
instrumentality, department, authority or agency thereof that has determined the
Fund is a legally permissible investment and that can only buy shares of the
Fund without paying sales charges.
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin
Valuemark Funds, Franklin Government Securities Trust, Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies i
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
QUALIFIED RETIREMENT PLANS - An employer sponsored pension or profit-sharing
plan that qualifies under section 401 of the Code. Examples include 401(k),
money purchase pension, profit sharing and defined benefit plans.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
SEP - An employer sponsored simplified employee pension plan established under
section 408(k) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
PROSPECTUS & APPLICATION
FRANKLIN REAL ESTATE
SECURITIES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
ADVISOR CLASS
SEPTEMBER 1, 1997
Franklin Real Estate Securities Trust
This prospectus describes the Advisor Class shares of the Franklin Real Estate
Securities Fund (the "Fund"). It contains information you should know before
investing in the Fund. Please keep it for future reference.
The Fund currently offers other classes of shares with different sales charge
and expense structures, which affect performance. These classes are described in
a separate prospectus. For more information, contact your investment
representative or call 1-800/DIAL BEN.
The Fund has a Statement of Additional Information ("SAI") for its Advisor
Class, dated September 1, 1997, which may be amended from time to time. It
includes more information about the Fund's procedures and policies. It has been
filed with the SEC and is incorporated by reference into this prospectus. For a
free copy or a larger print version of this prospectus, call 1-800/DIAL BEN or
write the Fund at its address.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S.
GOVERNMENT. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SEC OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
FRANKLIN REAL ESTATE
SECURITIES FUND
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE, JURISDICTION OR COUNTRY IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES
REPRESENTATIVE, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM DISTRIBUTORS.
FRANKLIN
REAL ESTATE SECURITIES FUND -
ADVISOR CLASS
September 1, 1997
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section.
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary........................................... 2
Financial Highlights...................................... 3
How does the Fund Invest its Assets?...................... 4
What are the Fund's Potential Risks?...................... 10
Who Manages the Fund?..................................... 13
How does the Fund Measure Performance?.................... 14
How Taxation Affects the Fund and its Shareholders........ 15
How is the Trust Organized?............................... 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares?...................................... 17
May I Exchange Shares for Shares of Another Fund?......... 19
How Do I Sell Shares? .................................... 21
What Distributions Might I Receive from the Fund?......... 23
Transaction Procedures and Special Requirements........... 24
Services to Help You Manage Your Account.................. 28
What If I Have Questions About My Account?................ 30
GLOSSARY
Useful Terms and Definitions.............................. 30
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN
ABOUT THE FUND
EXPENSE SUMMARY
This table is designed to help you understand the costs of investing in the
Fund. It is based on the historical expenses of the Advisor Class for the fiscal
year ended April 30, 1997. The Fund's actual expenses may vary. The expenses are
annualized.
A. SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Charge Imposed on Purchases............... None
Exchange Fee (per transaction).........................$5.00*
B. ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees ..................................... 0.59%**
Rule 12b-1 Fees ........................................ None
Other Expenses ........................................ 0.27%
Total Fund Operating Expenses ....................... 0.86%**
C. EXAMPLE
Assume the annual return for the class is 5%, operating expenses are as
described above, and you sell your shares after the number of years shown.
These are the projected expenses for each $1,000 that you invest in the
Fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$9 $27 $48 $106
THIS IS JUST AN EXAMPLE. IT DOES NOT REPRESENT PAST OR FUTURE EXPENSES OR
RETURNS. ACTUAL EXPENSES AND RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN.
THE FUND PAYS ITS OPERATING EXPENSES. THE EFFECTS OF THESE EXPENSES ARE
REFLECTED IN THE NET ASSET VALUE OR DIVIDENDS OF THE CLASS AND ARE NOT
DIRECTLY CHARGED TO YOUR ACCOUNT.
+If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
*$5.00 fee is only for Market Timers. We process all other exchanges
without a fee.
**For the period shown, Advisers had agreed in advance to limit its management
fees. With this reduction, management fees were 0.48% and total operating
expenses were 0.75%.
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's financial history. The information has been
audited by Coopers & Lybrand L.L.P., the Fund's independent auditors. Their
audit report covering the period shown below appears in the financial statements
in the Trust's Annual Report to Shareholders for the fiscal year ended April 30,
1997. The Annual Report to Shareholders also includes more information about the
Fund's performance. For a free copy, please call Fund Information.
JANUARY 1, 1997,**
TO APRIL 30, 1997
PER SHARE OPENING PERFORMANCE***
Net asset value at beginning of period....................... $15.30
Net investment income...........................................0.18
Net realized & unrealized gain on securities.................(0.030)
Total from investment operations...............................0.150
Net asset value at end of period..............................$15.45
TOTAL RETURN+..................................................0.98%
RATIOS/SUPPLEMENTAL DATA
Net assets at end of period (in 000's)........................ $625
Ratio of expenses to average net assets++.....................0.75%*
Ratio of expenses to average net assets
(excluding waiver by Advisers)................................0.86%*
Ratio of net investment income to average net assets..........3.44%*
Portfolio turnover rate........................................6.80%
Average commission rate+++....................................0.0576
+Total return measures the change in value of an investment over the
periods indicated. It is not annualized.
++During the period, Advisers agreed in advance to waive a portion of its
management fees.
+++Represents the average broker commission rate per share paid by the Fund in
connection with the execution of the Fund's portfolio transactions in equity
securities.
*Annualized.
**Effective date of registration.
***Per share amounts have been calculated using the daily average shares
outstanding during the period.
HOW DOES THE FUND INVEST ITS ASSETS?
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to maximize total return. The objective is a
fundamental policy of the Fund and may not be changed without shareholder
approval. Of course, there is no assurance that the Fund's objective will be
achieved.
TYPES OF SECURITIES IN WHICH THE FUND MAY INVEST
The Fund will seek to accomplish its investment objective by investing primarily
in the equity securities of companies operating in the real estate industry.
Under normal circumstances at least 65% of the Fund's total assets will be
invested in real estate securities, primarily equity real estate investment
trusts ("REITs"). The Fund may also invest in equity securities issued by home
builders and developers and in debt and convertible securities issued by REITs,
home builders and developers.
"Real estate securities" include equity, convertible and debt securities of
companies having the following characteristics and will be subject to the
following limitations:
1. Companies qualifying as a REIT for federal income tax purposes. In order to
qualify as a REIT, a company must derive at least 75% of its gross income from
real estate sources (rents, mortgage interest, gains from the sale of real
estate assets), and at least 95% from real estate sources, plus dividends,
interest and gains from the sale of securities. Real property, mortgage loans,
cash and certain securities must comprise 75% of a company's assets. In order to
qualify as a REIT, a company must also make distributions to shareholders
aggregating annually at least 95% of its REIT taxable income.
2. Companies, such as home builders and developers, having at least 50% of their
assets related to, or deriving at least 50% of their revenues from, the
ownership, construction, management, or sale of residential, commercial or
industrial real estate.
The Fund will invest primarily in equity real estate securities of companies
listed on a securities exchange or traded in the over-the-counter ("OTC")
market. The Fund will invest more than 25% of its total assets in the real
estate industry as described above.
Many issuers in the real estate industry are small or medium capitalization
companies. Accordingly, the Fund anticipates that a substantial portion of its
assets will be invested in securities issued by small or mid-cap companies.
These companies are subject to specific risks because of their smaller market
capitalization. Please see "What are the Fund's Potential Risks?"
To maximize the return on uninvested cash, as well as for other specified
purposes, the Fund may invest up to 35% of its assets in a combination of the
following types of investments subject to the limitations regarding ratings
discussed below.
REAL ESTATE RELATED INVESTMENTS. In addition to the Fund's investments in real
estate securities, the Fund may also invest in debt or equity securities of
issuers engaged in businesses closely related to the real estate industry and
publicly traded on an exchange or in the OTC market. These companies include
those whose products and services are closely related to the real estate
industry, such as manufacturers and distributors of building supplies; financial
institutions that issue or service mortgages, such as savings and loan
associations or mortgage bankers; and companies whose principal business is
unrelated to the real estate industry but who have significant real estate
holdings (at least 50% of their respective assets) believed to be undervalued
relative to the price of those companies' securities.
OPTIONS AND FINANCIAL FUTURES. The Fund may write (sell) covered put and call
options and buy put and call options that trade on securities exchanges and in
the OTC market in order to hedge against the risk of market or industry-wide
stock price fluctuations or to increase income to the Fund. The Fund may buy and
sell futures and options on futures with respect to securities and securities
indices and buy futures and options to "close-out" futures and options it may
have written. Additionally, the Fund may sell futures and options to "close out"
futures and options it may have purchased. The Fund will not enter into any
futures contract or related options (except for closing transactions) if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of its total assets
(taken at current value). The Fund will not engage in any stock options or stock
index options if the option premiums paid regarding its open option positions
exceed 5% of the value of its total assets. Options, futures and options on
futures are generally considered "derivative securities."
The Fund understands the current position of the SEC staff to be that purchased
OTC options are illiquid securities and that the assets used to cover the sale
of an OTC option are considered illiquid. The Fund disagrees with this position.
Nevertheless, pending a change in the staff's position, the Fund will treat OTC
options and "cover assets" as subject to the Fund's limitation on illiquid
securities.
CONVERTIBLE AND DEBT SECURITIES. The Fund may invest in convertible and debt
securities of issuers in any industry. 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. Both convertible and conventional debt securities provide a fixed income
stream. A convertible security also provides the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock. As with a straight
fixed-income security, a convertible security tends to increase in market value
when interest rates decline and decrease in value when interest rates rise. Like
a common stock, the value of a convertible security also tends to increase as
the market value of the underlying stock rises, and it tends to decrease as the
market value of the underlying stock declines. Because its value can be
influenced by both interest rate and market movements, a convertible security is
not as sensitive to interest rates as a similar fixed-income security, nor is it
as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When a convertible security
issued by an operating company is "converted," the operating company often
issues new stock to the holder of the convertible security but, if the parity
price of the convertible security is less than the call price, the operating
company may pay out cash instead of common stock. If the convertible security is
issued by an investment bank, the security is an obligation of and is
convertible through the issuing investment bank.
The issuer of a convertible security may be important in determining the
security's true value. This is because the holder of a convertible security will
have recourse only to the issuer. In addition, a convertible security may be
subject to redemption by the issuer, but only after a specified date and under
circumstances established at the time the security is issued.
While the Fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the Fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations in the event of insolvency, and an issuer's failure to make
a dividend payment is generally not an event of default entitling the preferred
shareholder to take action. A preferred stock generally has no maturity date, so
that its market value is dependent on the issuer's business prospects for an
indefinite period of time. In addition, distributions from preferred stock are
dividends, rather than interest payments, and are usually treated as such for
corporate tax purposes.
Convertible and debt securities rated within the top three rating categories by
S&P (AAA, AA and A) or by Moody's (Aaa, Aa and A) comprise what are known as
high-grade securities and are regarded as having a strong capacity to pay
interest or dividends. Medium-grade convertible and debt securities (e.g., BBB
by S&P or Baa by Moody's) are regarded as having an adequate capacity to pay
interest or dividends but with greater vulnerability to adverse economic
conditions and some speculative characteristics. Lower rated securities, those
rated BB or lower by S&P or Ba or lower by Moody's, are considered by S&P and
Moody's, on balance, to be predominantly speculative with respect to capacity to
pay preferred stock dividends or principal or interest, as the case may be, in
accordance with the terms of the obligation and will generally involve more
credit risk than securities in the higher rating categories. Please see the SAI
for a more detailed description of these ratings. The Fund may invest in
convertible and debt securities rated below investment grade, or that are
unrated. The Fund, however, will not invest in securities rated lower than B by
Moody's or S&P or that are unrated but determined by Advisers to be of
comparable credit quality to securities rated by Moody's or S&P. The Fund does
not intend to invest more than 10% of its net assets in high risk, high yield
convertible and debt securities.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. PERCS are
preferred stocks that generally feature a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer. PERCS are generally not
convertible into cash at maturity. Under a typical arrangement, after three
years, PERCS convert into one share of the issuer's common stock if the issuer's
common stock is trading at a price below that set by the capital appreciation
limit, and into less than one full share if the issuer's common stock is trading
at a price above that set by the capital appreciation limit. The amount of that
fractional share of common stock is determined by dividing the price set by the
capital appreciation limit by the market price of the issuer's common stock.
PERCS can be called at any time prior to maturity, and hence do not provide call
protection. If called early, however, the issuer must pay a call premium over
the market price to the investor. This call premium declines at a preset rate
daily, up to the maturity date.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company, whose common stock is to be acquired in the event the
security is converted, or by a different issuer, such as an investment bank.
These securities may be identified by names such as ELKS (Equity Linked
Securities) or similar names. Typically they share most of the salient
characteristics of an enhanced convertible preferred stock but will be ranked as
senior or subordinated debt in the issuer's corporate structure according to the
terms of the debt indenture. There may be additional types of convertible
securities not specifically referred to herein which may be similar to those
described above in which a Fund may invest, consistent with its objectives and
policies.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may buy and sell debt
securities on a "when-issued" or "delayed delivery" basis. These are trading
practices where payment and delivery of the securities take place at a future
date. These transactions are subject to market fluctuations and the risk that
the value of a security at delivery may be more or less than its purchase price.
Although the Fund will generally buy debt securities on a when-issued basis with
the intention of acquiring the securities, it may sell the securities before the
settlement date if it is deemed advisable. When the Fund is the buyer, it will
maintain cash or high-grade marketable securities with an aggregate value equal
to the amount of its purchase commitments, in a segregated account with its
custodian bank until payment is made. The Fund will not engage in when-issued
and delayed delivery transactions for investment leverage purposes.
FOREIGN SECURITIES. The Fund may invest in foreign securities that are not
publicly traded in the U.S. It is the Fund's current investment strategy,
however, to limit these investments to less than 5% of the Fund's net assets.
SHORT-TERM INVESTMENTS. The Fund may invest its cash, including cash resulting
from purchases and sales of Fund shares, in short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents. Subject to the terms of an SEC
exemption order, the Fund may also invest in the shares of affiliated money
market funds that invest primarily in short-term debt securities. These
temporary investments may be made either for liquidity purposes, to meet
shareholder redemption requirements or as a temporary defensive measure.
OTHER INVESTMENT POLICIES OF THE FUND
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions, in which
the Fund buys a U.S. government security subject to resale to a bank or dealer
at an agreed-upon price and date. The transaction requires the collateralization
of the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the underlying
security marked-to-market daily to maintain coverage of at least 100%. A default
by the seller may cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Fund may
also incur disposition costs in liquidating the collateral. The Fund, however,
intends to enter into repurchase agreements only with financial institutions
such as broker-dealers and banks that are deemed creditworthy by Advisers. A
repurchase agreement is deemed to be a loan by the Fund under federal securities
laws. The U.S. government security subject to resale (the collateral) is held on
behalf of the Fund by a custodian bank approved by the Board and is held
pursuant to a written agreement.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors, if
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank collateral with an initial market value of at least 102% of the initial
market value of the securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. This collateral shall consist of cash,
securities issued by the U.S. government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Fund may engage in security loan arrangements with
the primary objective of increasing the Fund's income either through investing
cash collateral in short-term interest bearing obligations or by receiving a
loan premium from the borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any loaned securities.
As with any extension of credit, there are risks of delay in recovery and loss
of rights in the collateral should the borrower of the security fail
financially.
BORROWING. As a fundamental policy, the Fund does not borrow money or mortgage
or pledge any of its assets, except that the Fund may borrow up to 10% of its
total asset value to meet redemption requests and for other temporary or
emergency purposes. The Fund will not make any additional investments while any
borrowings exceed 5% of its total assets.
ILLIQUID INVESTMENTS. The Fund's policy is not to invest more than 10% of its
net assets in illiquid securities. Illiquid securities are generally securities
that cannot be sold within seven days in the normal course of business at
approximately the amount at which the Fund has valued them. The Board has
authorized the Fund to invest in restricted securities (which might otherwise be
considered illiquid) where the investment is consistent with the Fund's
investment objective and has authorized the securities to be considered liquid
(and thus not subject to the foregoing 10% limitation), to the extent Advisers
determines on a daily basis that there is a liquid institutional or other market
for the securities. The Board will review Advisers' determinations of liquidity,
retain ultimate responsibility for the determinations and will consider
appropriate action, consistent with the Fund's objective and policies, if a
security becomes illiquid after its purchase. To the extent the Fund invests in
restricted securities that are deemed liquid, the general level of illiquidity
in the Fund may be increased if qualified institutional buyers are no longer
interested in buying these securities or the market for these securities
contracts.
OTHER POLICIES AND RESTRICTIONS. The Fund has a number of additional investment
restrictions that limit its activities to some extent. Some of these
restrictions may only be changed with shareholder approval. For a list of these
restrictions and more information about the Fund's investment policies, please
see "How does the Fund Invest its Assets?" and "Investment Restrictions" in the
SAI.
Each of the Fund's policies and restrictions discussed in this prospectus and in
the SAI is considered at the time the Fund makes an investment. The Fund is
generally not required to sell a security because of a change in circumstances.
WHAT ARE THE FUND'S POTENTIAL RISKS?
The value of your shares will increase as the value of the securities owned by
the Fund increases and will decrease as the value of the Fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the Fund. In addition to the factors that affect the value
of any particular security that the Fund owns, the value of Fund shares may also
change with movements in the stock and bond markets as a whole.
INVESTING IN REAL ESTATE SECURITIES
GENERALLY. Because the Fund primarily invests in the securities of companies in
the real estate industry, an investment in the Fund will generally be subject to
the risks associated with real estate. These risks include declines in the value
of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in zoning laws, casualty or condemnation losses,
variations in rental income, changes in neighborhood values, the appeal of
properties to tenants and increases in interest rates. The value of securities
of companies that service the real estate industry will also be affected by
these risks.
Because the Fund invests primarily in the real estate industry, it could own
real estate directly as a result of a default on debt securities it may own.
Receipt of rental income or income from the disposition of real property by the
Fund may adversely affect its ability to retain its tax status as a regulated
investment company. The possibility exists that a REIT may fail to qualify for
tax-free pass-through of income under the Code or maintain its exemption under
federal securities law.
EQUITY AND MORTGAGE REITS. Equity REITs are affected by changes in the value of
the underlying property in which they invest, while mortgage REITs are affected
by the quality of the properties to which they have extended credit. Equity and
mortgage REITs are dependent upon the REITs' management skill. REITs may not be
diversified and are subject to the risks of financing projects. REITS are also
subject to heavy cash flow dependency, defaults by borrowers and
self-liquidation.
EXPENSES. By investing in REITs indirectly through the Fund, you will bear not
only your proportionate share of the expenses of the Fund, but also, indirectly,
similar expenses of the REITs.
OTHER RISK CONSIDERATIONS
NON-DIVERSIFICATION RISK. As a non-diversified investment company, the Fund is
not subject to any statutory restriction under federal securities law with
respect to the percentage of its assets that may be invested in the securities
of any one issuer. To the extent the Fund is not fully diversified, it may be
more susceptible to adverse economic, political or regulatory developments
affecting a single issuer than would be the case if the Fund were more broadly
diversified. The Fund, however, intends to comply with the asset
diversification, income, distribution and other requirements of the Code
applicable to regulated investment companies so that it will not be subject to
federal income tax and distributions to shareholders will be free from regular
federal income tax. Accordingly, the Fund will not buy a security if, as a
result, more than 25% of its total assets would be invested in the securities of
a single issuer, or with respect to 50% of its total assets, more than 5% of
such assets would be invested in the securities of a single issuer.
MEDIUM AND SMALL CAPITALIZATION RISK. Historically, small and medium market
capitalization stocks have been more volatile in price than larger
capitalization stocks. Among the reasons for greater price volatility of these
securities are the less certain growth prospects of smaller firms, the lower
degree of liquidity in the market for such stocks, and the greater sensitivity
of small and medium size companies to changing economic conditions. Besides
exhibiting greater volatility, medium and small company stocks may fluctuate
independently of larger company stocks. Medium and small company stocks may
decline in price as large company stocks rise or vice versa. You should
therefore expect that the value of the Fund's shares may be more volatile than
the shares of a fund that invests in larger capitalization stocks. In addition,
small and medium size companies may have products and management that have not
been thoroughly tested by time or by the marketplace. These companies may also
be more dependent on a limited number of key personnel and their financial
resources may not be as substantial as those of more established companies.
Adversity that leads to a decline in the value of such a security will have a
negative impact on the Fund's share price as well.
OPTIONS AND FINANCIAL FUTURES. The Fund's options and futures investments
involve certain risks. These risks include the risks that the effectiveness of
an options and futures strategy depends on the degree to which price movements
in the underlying index or securities correlate with price movements in the
relevant portion of the Fund's portfolio. The Fund bears the risk that the
prices of its portfolio securities will not move in the same amount as the
option or future it has purchased, or that there may be a negative correlation
that would result in a loss on both the securities and the option or future.
Positions in exchange traded options and futures may be closed out only on an
exchange that provides a secondary market. There may not always be a liquid
secondary market for a futures or option contract at a time when the Fund seeks
to "close out" its position. There can be no assurance that a liquid secondary
market will exist for any particular option or futures contract at any specific
time.
In addition, adverse market movements could cause the Fund to lose up to its
full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option.
The Fund's investment in options and futures contracts may be limited by the
requirements of the Code for qualification as a regulated investment company and
are subject to special tax rules that may affect the amount, timing and
character of distributions to you. These securities also require the application
of complex and special tax rules and elections.
For more information please see the SAI.
CONVERTIBLE AND DEBT SECURITIES. An investment in an enhanced convertible
security or any other security may involve additional risks to the Fund. The
Fund may have difficulty disposing of such securities because there may be a
thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and the Fund's ability to
dispose of particular securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as the deterioration in
the credit worthiness of an issuer. Reduced liquidity in the secondary market
for certain securities may also make it more difficult for the Fund to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio. The Fund, however, intends to acquire liquid securities, though there
can be no assurances that this will be achieved.
HIGH YIELD, FIXED-INCOME SECURITIES. The Fund's investments in convertible and
debt securities rated below investment grade and in unrated securities of
comparable quality have credit characteristics similar to high risk, high yield
bonds.
The market value of high yield, lower-quality fixed-income securities, commonly
known as junk bonds, tends to reflect individual developments affecting the
issuer to a greater degree than the market value of higher-quality securities,
which react primarily to fluctuations in the general level of interest rates.
Lower-quality securities also tend to be more sensitive to economic conditions
than higher-quality securities. Please see the SAI for more information on the
risk of high yield, lower-quality securities.
INTEREST RATE AND MARKET RISK. To the extent the Fund invests in debt
securities, changes in interest rates will affect the value of the Fund's
portfolio and its share price. Rising interest rates, which often occur during
times of inflation or a growing economy, are likely to have a negative effect on
the value of the Fund's shares. To the extent the Fund invests in common stocks,
a general market decline, shown for example by a drop in the Dow Jones
Industrials or other equity based index, may cause the value of what the Fund
owns, and thus the Fund's share price, to decline. The value of stock markets
and interest rates throughout the world has increased and decreased in the past.
These changes are unpredictable.
WHO MANAGES THE FUND?
THE BOARD. The Board oversees the management of the Fund and elects its
officers. The officers are responsible for the Fund's day-to-day operations. The
Board also monitors the Fund to ensure no material conflicts exist between the
Fund's classes of shares. While none is expected, the Board will act
appropriately to resolve any material conflict that may arise.
INVESTMENT MANAGER. Advisers manages the Fund's assets and makes its investment
decisions. Advisers also performs similar services for other funds. It is wholly
owned by Resources, a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Advisers and its
affiliates manage over $207 billion in assets. Please see "Investment Management
and Other Services" and "Miscellaneous Information" in the SAI for information
on securities transactions and a summary of the Fund's Code of Ethics.
MANAGEMENT TEAM The team responsible for the day-to-day management of the Fund's
portfolio since its inception is Matt Avery and Tom Branch.
Matt Avery
Vice President of Advisers
Mr. Avery holds a Master of Business Administration degree from the University
of California at Los Angeles and a Bachelor of Science degree in Industrial
Engineering from Stanford University. He has been in the securities industry
since 1982 and with the Franklin Templeton Group since 1987.
Tom Branch
Portfolio Manager of Advisers
Mr. Branch received a Bachelor of Science degree in Business Administration with
a concentration in Finance from California Polytechnic State University, San
Luis Obispo. Mr. Branch joined the Franklin Templeton Group in 1993.
MANAGEMENT FEES. During the fiscal year ended April 30, 1997, management fees,
before any advance waiver, totaled 0.59% of the average daily net assets of the
Fund. Total operating expenses of the class were 0.86%. Under an agreement by
Advisers to limit its fees, the Fund paid management fees totaling 0.48% and
operating expenses totaling 0.75%. Advisers may end this arrangement at any time
upon notice to the Board.
PORTFOLIO TRANSACTIONS. Advisers tries to obtain the best execution on all
transactions. If Advisers believes more than one broker or dealer can provide
the best execution, it may consider research and related services and the sale
of Fund shares, as well as shares of other funds in the Franklin Templeton Group
of Funds, when selecting a broker or dealer. Please see "How does the Fund Buy
Securities for its Portfolio?" in the SAI for more information.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. Please see
"Investment Management and Other Services" in the SAI for more information.
HOW DOES THE FUND MEASURE PERFORMANCE?
From time to time, the Advisor Class of the Fund advertises its performance.
Commonly used measures of performance include total return, current yield and
current distribution rate.
Total return is the change in value of an investment over a given period. It
assumes any dividends and capital gains are reinvested. Current yield shows the
income per share earned by Advisor Class. The current distribution rate shows
the dividends or distributions paid to shareholders of Advisor Class. This rate
is usually computed by annualizing the dividends paid per share during a certain
period and dividing that amount by the current Net Asset Value of the class.
Unlike current yield, the current distribution rate may include income
distributions from sources other than dividends and interest received by the
Fund.
The investment results of the Advisor Class will vary. Performance figures are
always based on past performance and do not guarantee future results. For a more
detailed description of how the Fund calculates its performance figures, please
see "How does the Fund Measure Performance?" in the SAI.
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For more information on tax matters
relating to the Fund and its shareholders, see "Additional Information on
Distributions and Taxes" in the SAI.
The Fund has elected and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will generally not be liable
for federal income or excise taxes.
For federal income tax purposes, any income dividends that you receive from the
Fund, as well as any distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as ordinary income
whether you have elected to receive them in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time you have owned Fund shares and regardless of whether these
distributions are received in cash or in additional shares.
Under the Code, certain distributions which are declared in October, November or
December but which, for operational reasons, may not be paid to you until the
following January, will be treated for tax purposes as if paid by the Fund and
received by you on December 31 of the calendar year in which they are declared.
For corporate shareholders, only 13.00% of the ordinary income dividends
(including short-term capital gain distributions) paid by the Fund for the
fiscal year ended April 30, 1997, qualified for the corporate dividends-received
deduction due to the Fund's primary investment in equity securities of REITs and
debt obligations.
Redemptions and exchanges of Fund shares are taxable events on which you may
realize a gain or loss. Any loss incurred on the sale or exchange of Fund
shares, held for six months or less, will be treated as a long-term capital loss
to the extent of capital gain dividends received with respect to these shares.
The Fund will inform you of the source of its dividends and distributions at the
time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of these dividends
and distributions. The Fund will generally retain the return of capital
distributions received from its investments; however, if these distributions are
in turn paid to you, then you will receive nontaxable return of capital
distributions, which reduce the cost basis of Fund shares for purposes of
computing gain or loss on the redemption or other disposition of Fund shares.
If you are not considered a U.S. person for federal income tax purposes, you
should consult with your financial or tax advisor regarding the applicability of
U.S. withholding or other taxes to distributions received by you from the Fund
and the application of foreign tax laws to these distributions. You should also
consult your tax advisor with respect to the applicability of any state and
local intangible property or income taxes to your shares of the Fund and
distributions and redemption proceeds received from the Fund.
HOW IS THE TRUST ORGANIZED?
The Fund is a non-diversified series of Franklin Real Estate Securities Trust
(the "Trust"), an open-end management investment company, commonly called a
mutual fund. It was organized as a Delaware business trust on September 14,
1993, and is registered with the SEC. As of January 1, 1997, the Fund began
offering a new class of shares designated Franklin Real Estate Securities Fund -
Advisor Class. All shares outstanding before the offering of Advisor Class
shares have been designated Franklin Real Estate Securities Fund - Class I and
Franklin Real Estate Securities Fund - Class II. Additional series and classes
of shares may be offered in the future.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as any other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect one class, however, only shareholders of that class may vote. Each class
will vote separately on matters affecting only that class, or expressly required
to be voted on separately by state or federal law. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
The Trust has noncumulative voting rights. This gives holders of more than 50%
of the shares voting the ability to elect all of the members of the Board. If
this happens, holders of the remaining shares voting will not be able to elect
anyone to the Board.
The Trust does not intend to hold annual shareholder meetings. It may hold
special meetings, however, for matters requiring shareholder approval. A meeting
may also be called by the Board in its discretion or by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a Board
member.
As of August 5, 1997, the Franklin Templeton Moderate Target Fund and the
Franklin Templeton Growth Target Fund each owned of record and beneficially more
than 25% of the outstanding shares of the Advisor Class of the Fund.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
Shares of the Fund may be purchased without a sales charge. To open your
account, contact your investment representative or complete and sign the
enclosed shareholder application and return it to the Fund with your check.
MINIMUM
INVESTMENTS*
To Open Your Account.................. $5,000,000
To Add to Your Account ............... $25
*We waive or lower these minimums for certain investors listed below. We may
also refuse any order to buy shares.
To determine if you meet the minimum investment requirement, the amount of your
current purchase is added to the cost or current value, whichever is higher, of
your existing shares in the Franklin Templeton Funds. At least $1 million of
this amount, however, must be invested in Advisor Class or Class Z shares of any
of the Franklin Templeton Funds.
The Fund's minimum initial investment requirement will not apply to purchases
by:
1. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for clients
participating in comprehensive fee programs
2. Qualified registered investment advisors or certified financial planners who
have clients invested in the Franklin Mutual Series Fund Inc. on October 31,
1996, or who buy through a broker-dealer or service agent who has entered
into an agreement with Distributors
3. Officers, trustees, directors and full-time employees of the Franklin
Templeton Funds or the Franklin Templeton Group and their immediate family
members, subject to a $100 minimum investment requirement
4. Accounts managed by the Franklin Templeton Group
5. The Franklin Templeton Profit Sharing 401(k) Plan
6. Each series of the Franklin Templeton Fund Allocator Series, subject to a
$1,000 minimum initial and subsequent investment requirement
7. Employer stock, bonus, pension or profit sharing plans that meet the
requirements for qualification under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, and
that (i) are sponsored by an employer with at least 5,000 employees, or
(ii) have plan assets of $50 million or more
8. Trust companies and bank trust departments initially investing in the
Franklin Templeton Funds at least $1 million of assets held in a
fiduciary, agency, advisory, custodial or similar capacity and over
which the trust companies and bank trust departments or other plan
fiduciaries or participants, in the case of certain retirement plans,
have full or shared investment discretion
9. Defined benefit plans or governments, municipalities, and tax-exempt
entities that meet the requirements for Qualification under Section 501 of
the Code, subject to a $1 million initial investment in Advisor Class shares
10. Any other investor, including a private investment vehicle such as a
family trust or foundation, who is a member of a qualified group, if
the group as a whole meets the $5 million minimum investment
requirement. A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying Fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials
in publications and mailings to its members at reduced or no cost
to Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the Fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the Fund.
Plan documents are required for all retirement plans. Trust Company can provide
the plan documents for you and serve as custodian or trustee.
Trust Company can provide you with brochures containing important information
about its plans. To establish a Trust Company retirement plan, you will need an
application other than the one included in this prospectus. For a retirement
plan brochure or application, call Retirement Plan Services.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan. Your investment representative or advisor can help you make
investment decisions within your plan.
PAYMENTS TO SECURITIES DEALERS
Securities Dealers who initiate and are responsible for purchases of Advisor
Class shares may receive up to 0.25% of the amount invested. The payment is
subject to the sole discretion of Distributors, and is paid by Distributors or
one of its affiliates and not by the Fund or its shareholders.
For information on additional compensation payable to Securities Dealers in
connection with the sale of Fund shares, please see "How Do I Buy, Sell and
Exchange Shares? - Other Payments to Securities Dealers" in the SAI.
MAY I EXCHANGE SHARES FOR SHARES OF ANOTHER FUND?
We offer a wide variety of funds. If you would like, you can move your
investment from your Fund account to an existing or new account in another
Franklin Templeton Fund (an "exchange"). Because it is technically a sale and a
purchase of shares, an exchange is a taxable transaction.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment objective
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and some do not offer Advisor
Class shares.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all
account owners
2. Include any outstanding share certificates for
the shares you want to exchange
BY PHONE Call Shareholder Services
If you do not want the ability to exchange by
phone to apply to your account, please let us
know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to exchange shares.
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You may only exchange shares within the same class, except as noted below.
o The accounts must be identically registered. You may, however, exchange
shares from a Fund account requiring two or more signatures into an
identically registered money fund account requiring only one signature for
all transactions. Please notify us in writing if you do not want this
option to be available on your account. Additional procedures may apply.
Please see "Transaction Procedures and Special Requirements."
o Trust Company IRA or 403(b) retirement plan accounts may exchange shares as
described above. Restrictions may apply to other types of retirement plans.
Please contact Retirement Plan Services for information on exchanges within
these plans.
o The fund you are exchanging into must be eligible for sale in your state.
o We may modify or discontinue our exchange policy if we give you 60 days'
written notice.
o Your exchange may be restricted or refused if you have: (i) requested an
exchange out of the Fund within two weeks of an earlier exchange request,
(ii) exchanged shares out of the Fund more than twice in a calendar
quarter, or (iii) exchanged shares equal to at least $5 million, or more
than 1% of the Fund's net assets. Shares under common ownership or control
are combined for these limits. If you have exchanged shares as described in
this paragraph, you will be considered a Market Timer. Each exchange by a
Market Timer, if accepted, will be charged $5.00. Some of our funds do not
allow investments by Market Timers.
Because excessive trading can hurt Fund performance, operations and
shareholders, we may refuse any exchange purchase if (i) we believe the Fund
would be harmed or unable to invest effectively, or (ii) the Fund receives or
anticipates simultaneous orders that may significantly affect the Fund.
LIMITED EXCHANGES BETWEEN DIFFERENT CLASSES OF SHARES
If you want to exchange into a fund that does not currently offer an Advisor
Class, you may exchange your Advisor Class shares for Class I shares of that
fund at Net Asset Value. If you do not qualify to buy Advisor Class shares of
Templeton Developing Markets Trust, Templeton Foreign Fund or Templeton Growth
Fund, you may exchange the Advisor Class shares you own for Class I shares of
those funds or of Templeton Institutional Funds, Inc. at Net Asset Value. If you
do so and you later decide you would like to exchange into a fund that offers an
Advisor Class, you may exchange your Class I shares for Advisor Class shares of
that fund. You may also exchange your Advisor Class shares for Class Z shares of
Franklin Mutual Series Fund Inc.
HOW DO I SELL SHARES?
You may sell (redeem) your shares at any time.
METHOD STEPS TO FOLLOW
BY MAIL 1. Send us written instructions signed by all account
owners. If you would like your redemption proceeds
wired to a bank account, your instructions should
include:
o The name, address and telephone number of th
bank where you want the proceed sent
o Your bank account number
o The Federal Reserve ABA routing number
o If you are using a savings and loan or credit
union, the name of the corresponding bank and
the account number
2. Include any outstanding share certificates for
the shares you are selling
3. Provide a signature guarantee if required
4. Corporate, partnership and trust accounts may need
to send additional documents. Accounts under court
jurisdiction may have other requirements.
BY PHONE Call Shareholder Services. If you would like your
redemption proceeds wired to a bank account, other than
an escrow account, you must first sign up for the wire
feature. To sign up, send us written instructions, with
a signature guarantee. To avoid any delay in
processing, the instructions should include the items
listed in "By Mail" above.
Telephone requests will be accepted:
o If the request is $50,000 or less. Institutional
accounts may exceed $50,000 by completing a
separate agreement. Call Institutional Services to
receive a copy.
o If there are no share certificates issued for the
shares you want to sell or you have already
returned them to the Fund
o Unless you are selling shares in a Trust Company
retirement plan account
o Unless the address on your account was changed by
phone within the last 15 days
If you do not want the ability to
redeem by phone to apply to your account,
please let us know.
THROUGH YOUR DEALER CALL YOUR INVESTMENT REPRESENTATIVE
We will send your redemption check within seven days after we receive your
request in proper form. If you would like the check sent to an address other
than the address of record or made payable to someone other than the registered
owners on the account, send us written instructions signed by all account
owners, with a signature guarantee. We are not able to receive or pay out cash
in the form of currency.
The wiring of redemption proceeds is a special service that we make available
whenever possible for redemption requests of $1,000 or more. If we receive your
request in proper form before 1:00 p.m. Pacific time, your wire payment will be
sent the next business day. For requests received in proper form after 1:00 p.m.
Pacific time, the payment will be sent the second business day. By offering this
service to you, the Fund is not bound to meet any redemption request in less
than the seven day period prescribed by law. Neither the Fund nor its agents
shall be liable to you or any other person if, for any reason, a redemption
request by wire is not processed as described in this section.
If you sell shares you recently purchased with a check or draft, we may delay
sending you the proceeds for up to 15 days or more to allow the check or draft
to clear. A certified or cashier's check may clear in less time.
Under unusual circumstances, we may suspend redemptions or postpone payment for
more than seven days as permitted by federal securities law.
Please refer to "Transaction Procedures and Special Requirements" for other
important information on how to sell shares.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS
To comply with IRS regulations, you need to complete additional forms before
selling shares in a Trust Company retirement plan account. Tax penalties
generally apply to any distribution from these plans to a participant under age
59 1/2, unless the distribution meets an exception stated in the Code. To obtain
the necessary forms, please call Retirement Plan Services.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The Fund declares dividends from its net investment income annually in December
to shareholders of record on the first business day before the 15th of the month
and pays them on or about the last day of that month.
Capital gains, if any, may be distributed annually, usually in December.
Dividend payments are not guaranteed, are subject to the Board's discretion and
may vary with each payment. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
If you buy shares shortly before the record date, please keep in mind that any
distribution will lower the value of the Fund's shares by the amount of the
distribution and you will then receive a portion of the price you paid back in
the form of a taxable distribution.
DISTRIBUTION OPTIONS
You may receive your distributions from the Fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may buy additional shares of the same
class of the Fund by reinvesting capital gain distributions, or both dividend
and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2. BUY SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to buy the same class of shares of another Franklin Templeton
Fund. You may also direct your distributions to buy Class I shares of another
Franklin Templeton Fund. Many shareholders find this a convenient way to
diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive dividends, or both dividend
and capital gain distributions in cash. If you have the money sent to another
person or to a checking account, you may need a signature guarantee.
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF YOU DO NOT SELECT AN OPTION, WE WILL
AUTOMATICALLY REINVEST DIVIDEND AND CAPITAL GAIN DISTRIBUTIONS IN THE SAME CLASS
OF THE FUND. You may change your distribution option at any time by notifying us
by mail or phone. Please allow at least seven days before the record date for us
to process the new option. For Trust Company retirement plans, special forms are
required to receive distributions in cash.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
SHARE PRICE
You buy and sell Advisor Class shares at the Net Asset Value per share. The Net
Asset Value we use when you buy or sell shares is the one next calculated after
we receive your transaction request in proper form. If you buy or sell shares
through your Securities Dealer, however, we will use the Net Asset Value next
calculated after your Securities Dealer receives your request, which is promptly
transmitted to the Fund. Your redemption proceeds will not earn interest between
the time we receive the order from your dealer and the time we receive any
required documents.
HOW AND WHEN SHARES ARE PRICED
The Fund is open for business each day the NYSE is open. We determine the Net
Asset Value per share as of the scheduled close of the NYSE, generally 1:00 p.m.
Pacific time. You can find the prior day's closing Net Asset Value in many
newspapers.
The Net Asset Value of all outstanding shares of each class is calculated on a
pro rata basis. It is based on each class' proportionate participation in the
Fund, determined by the value of the shares of each class. To calculate Net
Asset Value per share of each class, the assets of each class are valued and
totaled, liabilities are subtracted, and the balance, called net assets, is
divided by the number of shares of the class outstanding. The Fund's assets are
valued as described under "How are Fund Shares Valued?" in the SAI.
PROPER FORM
An order to buy shares is in proper form when we receive your signed shareholder
application and check. Written requests to sell or exchange shares are in proper
form when we receive written instructions signed by all registered owners, with
a signature guarantee if necessary. We must also receive any outstanding share
certificates for those shares.
WRITTEN INSTRUCTIONS
Written instructions must be signed by all registered owners. To avoid any delay
in processing your transaction, they should include:
o Your name,
o The Fund's name,
o The class of shares,
o A description of the request,
o For exchanges, the name of the fund you are exchanging into,
o Your account number,
o The dollar amount or number of shares, and
o A telephone number where we may reach you during the day, or in the evening
if preferred.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $50,000 worth of shares,
2) You want the proceeds to be paid to someone other than the registered owners,
3) The proceeds are not being sent to the address of record, preauthorized bank
account, or preauthorized brokerage firm account,
4) We receive instructions from an agent, not the registered owners,
5) We believe a signature guarantee would protect us against potential claims
based on the instructions received.
A signature guarantee verifies the authenticity of your signature. You should be
able to obtain a signature guarantee from a bank, broker, credit union, savings
association, clearing agency, or securities exchange or association. A NOTARIZED
SIGNATURE IS NOT SUFFICIENT.
SHARE CERTIFICATES
We will credit your shares to your Fund account. We do not issue share
certificates unless you specifically request them. This eliminates the costly
problem of replacing lost, stolen or destroyed certificates. If a certificate is
lost, stolen or destroyed, you may have to pay an insurance premium of up to 2%
of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to
sell or exchange those shares or if you would like to start a systematic
withdrawal plan. The certificates should be properly endorsed. You can do this
either by signing the back of the certificate or by completing a share
assignment form. For your protection, you may prefer to complete a share
assignment form and to send the certificate and assignment form in separate
envelopes.
TELEPHONE TRANSACTIONS
You may initiate many transactions by phone. Please refer to the sections of
this prospectus that discuss the transaction you would like to make or call
Shareholder Services.
When you call, we will request personal or other identifying information to
confirm that instructions are genuine. We may also record calls. We will not be
liable for following instructions communicated by telephone if we reasonably
believe they are genuine. For your protection, we may delay a transaction or not
implement one if we are not reasonably satisfied that the instructions are
genuine. If this occurs, we will not be liable for any loss.
If our lines are busy or you are otherwise unable to reach us by phone, you may
wish to ask your investment representative for assistance or send us written
instructions, as described elsewhere in this prospectus. If you are unable to
execute a transaction by phone, we will not be liable for any loss.
TRUST COMPANY RETIREMENT PLAN ACCOUNTS. We cannot accept instructions to sell
shares or change distribution options on Trust Company retirement plans by
phone. While you may exchange shares of Trust Company IRA and 403(b) retirement
accounts by phone, certain restrictions may be imposed on other retirement
plans.
To obtain any required forms or more information about distribution or transfer
procedures, please call Retirement Plan Services.
ACCOUNT REGISTRATIONS AND REQUIRED DOCUMENTS
When you open an account, we need you to tell us how you want your shares
registered. How you register your account will affect your ownership rights and
ability to make certain transactions. If you have questions about how to
register your account, you should consult your investment representative or
legal advisor. Please keep the following information in mind when registering
your account.
JOINT OWNERSHIP. If you open an account with two or more owners, we register the
account as "joint tenants with rights of survivorship" unless you tell us
otherwise. An account registered as "joint tenants with rights of survivorship"
is shown as "Jt Ten" on your account statement. For any account with two or more
owners, ALL owners must sign instructions to process transactions and changes to
the account. Even if the law in your state says otherwise, we cannot accept
instructions to change owners on the account unless all owners agree in writing.
If you would like another person or owner to sign for you, please send us a
current power of attorney.
GIFTS AND TRANSFERS TO MINORS. You may set up a custodial account for a minor
under your state's Uniform Gifts/Transfers to Minors Act. Other than this form
of registration, a minor may not be named as an account owner.
TRUSTS. You should register your account as a trust only if you have a valid
written trust document. This avoids future disputes or possible court action
over who owns the account.
REQUIRED DOCUMENTS. For corporate, partnership and trust accounts, please send
us the following documents when you open your account. This will help avoid
delays in processing your transactions while we verify who may sign on the
account.
TYPE OF ACCOUNT DOCUMENTS REQUIRED
CORPORATION CORPORATE RESOLUTION
PARTNERSHIP 1. The pages from the partnership agreement that
identify the general partners, or
2. A certification for a partnership agreement
TRUST 1. The pages from the trust document that
identify the trustees, or
2. A certificqtion for trust
STREET OR NOMINEE ACCOUNTS. If you have Fund shares held in a "street" or
"nominee" name account with your Securities Dealer, you may transfer the shares
to the street or nominee name account of another Securities Dealer. Both dealers
must have an agreement with Distributors or we cannot process the transfer.
Contact your Securities Dealer to initiate the transfer. We will process the
transfer after we receive authorization in proper form from your delivering
Securities Dealer. Accounts may be transferred electronically through the NSCC.
For accounts registered in street or nominee name, we may take instructions
directly from the Securities Dealer or your nominee.
IMPORTANT INFORMATION IF YOU HAVE AN INVESTMENT REPRESENTATIVE
If there is a Securities Dealer or other representative of record on your
account, we are authorized: (1) to provide confirmations, account statements and
other information about your account directly to your dealer and/or
representative; and (2) to accept telephone and electronic instructions directly
from your dealer or representative, including instructions to exchange or redeem
your shares. Electronic instructions may be processed through established
electronic trading systems and programs used by the Fund. Telephone instructions
directly from your representative will be accepted unless you have let us know
that you do not want telephone privileges to apply to your account.
TAX IDENTIFICATION NUMBER
The IRS requires us to have your correct Social Security or tax identification
number on a signed shareholder application or applicable tax form. Federal law
requires us to withhold 31% of your taxable distributions and sale proceeds if
(i) you have not furnished a certified correct taxpayer identification number,
(ii) you have not certified that withholding does not apply, (iii) the IRS or a
Securities Dealer notifies the Fund that the number you gave us is incorrect, or
(iv) you are subject to backup withholding.
We may refuse to open an account if you fail to provide the required tax
identification number and certifications. We may also close your account if the
IRS notifies us that your tax identification number is incorrect. If you
complete an "awaiting TIN" certification, we must receive a correct tax
identification number within 60 days of your initial purchase to keep your
account open.
KEEPING YOUR ACCOUNT OPEN
Due to the relatively high cost of maintaining a small account, we may close
your account if the value of your shares is less than $50. We will only do this
if the value of your account fell below this amount because you voluntarily sold
your shares and your account has been inactive (except for the reinvestment of
distributions) for at least six months. Before we close your account, we will
notify you and give you 30 days to increase the value of your account to $100.
These minimums do not apply if you fall within categories 4, 5, 6 or 7 under
"How Do I Buy Shares? - Opening Your Account."
SERVICES TO HELP YOU MANAGE YOUR ACCOUNT
AUTOMATIC INVESTMENT PLAN
Our automatic investment plan offers a convenient way to invest in the Fund.
Under the plan, you can have money transferred automatically from your checking
account to the Fund each month to buy additional shares. If you are interested
in this program, please refer to the shareholder application included with this
prospectus or contact your investment representative. The market value of the
Fund's shares may fluctuate and a systematic investment plan such as this will
not assure a profit or protect against a loss. You may discontinue the program
at any time by notifying Investor Services by mail or phone.
SYSTEMATIC WITHDRAWAL PLAN
Our systematic withdrawal plan allows you to sell your shares and receive
regular payments from your account on a monthly, quarterly, semiannual or annual
basis. The value of your account must be at least $5,000 and the minimum payment
amount for each withdrawal must be at least $50. For retirement plans subject to
mandatory distribution requirements, the $50 minimum will not apply.
If you would like to establish a systematic withdrawal plan, please complete the
systematic withdrawal plan section of the shareholder application included with
this prospectus and indicate how you would like to receive your payments. You
may choose to direct your payments to buy the same class of shares of another
Franklin Templeton Fund or have the money sent directly to you, to another
person, or to a checking account. Once your plan is established, any
distributions paid by the Fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
You may discontinue a systematic withdrawal plan, change the amount and schedule
of withdrawal payments, or suspend one payment by notifying us in writing at
least seven business days before the end of the month preceding a scheduled
payment. Please see "How Do I Buy, Sell and Exchange Shares? - Systematic
Withdrawal Plan" in the SAI for more information.
STATEMENTS AND REPORTS TO SHAREHOLDERS
We will send you the following statements and reports on a regular basis:
o Confirmation and account statements reflecting transactions in your
account, including additional purchases and dividend reinvestments.
PLEASE VERIFY THE ACCURACY OF YOUR STATEMENTS WHEN YOU RECEIVE THEM.
o Financial reports of the Fund will be sent every six months. To reduce
Fund expenses, we attempt to identify related shareholders within a
household and send only one copy of a report. Call Fund Information if
you would like an additional free copy of the Fund's financial reports.
INSTITUTIONAL ACCOUNTS
Additional methods of buying, selling or exchanging shares of the Fund may be
available to institutional accounts. Institutional investors may also be
required to complete an institutional account application. For more information,
call Institutional Services.
AVAILABILITY OF THESE SERVICES
The services above are available to most shareholders. If, however, your shares
are held by a financial institution, in a street name account, or networked
through the NSCC, the Fund may not be able to offer these services directly to
you.
Please contact your investment representative.
WHAT IF I HAVE QUESTIONS ABOUT MY ACCOUNT?
If you have any questions about your account, you may write to Investor Services
at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California 94403-7777.
The Fund, Distributors and Advisers are also located at this address. You may
also contact us by phone at one of the numbers listed below.
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
(1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday)
Retirement Plan Services 1-800/527-2020 5:30 a.m. to 5:00 p.m.
Institutional Services 1-800/321-8563 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
Your phone call may be monitored or recorded to ensure we provide you with high
quality service. You will hear a regular beeping tone if your call is being
recorded. You will hear a regular beeping tone if your call is being recorded.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter. The SAI lists the officers and Board members who are affiliated
with Distributors. See "Officers and Trustees."
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MARKET TIMERS - Market Timers generally include market timing or asset
allocation services, accounts administered so as to buy, sell or exchange shares
based on predetermined market indicators, or any person or group whose
transactions seem to follow a timing pattern or whose transactions include
frequent or large exchanges.
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NSCC - National Securities Clearing Corporation
NYSE - New York Stock Exchange
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
TRUST COMPANY - Franklin Templeton Trust Company. Trust Company is an affiliate
of Distributors and both are wholly owned subsidiaries of Resources.
U.S. - United States
WE/OUR/US - Unless the context indicates a different meaning, these terms refer
to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
FRANKLIN
REAL ESTATE SECURITIES FUND
FRANKLIN REAL ESTATE SECURITIES TRUST
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets? ................ 2
What are the Fund's Potential Risks? ................ 6
Investment Restrictions ............................. 9
Officers and Trustees ............................... 10
Investment Management
and Other Services ................................. 14
How does the Fund Buy
Securities for its Portfolio? ...................... 15
How Do I Buy, Sell and Exchange Shares? ............. 16
How are Fund Shares Valued? ......................... 19
Additional Information on
Distributions and Taxes ............................ 20
The Fund's Underwriter .............................. 21
How does the Fund Measure Performance? ............. 23
Miscellaneous Information ........................... 26
Financial Statements ................................ 27
Useful Terms and Definitions ........................ 27
Appendix Description of Ratings .................... 27
- -------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- -------------------------------------------------------------------------------
The Franklin Real Estate Securities Fund (the "Fund") is a non-diversified
series of Franklin Real Estate Securities Trust (the "Trust"), an open-end
management investment company. The Fund's investment objective is maximizing
total return. The Fund seeks to achieve its objective by investing primarily in
securities of companies operating in the real estate industry.
The Prospectus, dated September 1, 1997, as may be amended from time to time,
contains the basic information you should know before investing in the Fund. For
a free copy, call 1-800/DIAL BEN or write the Fund at the address shown.
This SAI describes the Fund's Class I and Class II shares. The Fund currently
offers another class of shares with a different sales charge and expense
structure, which affects performance. This class is described in a separate SAI
and prospectus. For more information, contact your investment representative or
call 1-800/DIAL BEN.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
REPURCHASE TRANSACTIONS. In a repurchase agreement, the seller of a security
agrees to repurchase the security sold at a mutually agreed upon time and price.
A repurchase may also be viewed as the loan of money by the Fund to the seller.
The resale price is normally in excess of the purchase price, reflecting an
agreed upon interest rate. The interest rate is effective for the period of time
in which the Fund is invested in the agreement and is not related to the coupon
rate on the underlying security. The period of these repurchase agreements will
usually be short, from overnight to one week, and at no time will the Fund
invest in repurchase agreements with durations of more than one year. The
securities that are subject to repurchase agreements, however, may have maturity
dates in excess of one year from the effective date of the repurchase
agreements. The Fund will pay for these securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. The
Fund may not enter into a repurchase agreement with more than seven days
duration if, as a result, more than 10% of the market value of the Fund's net
assets would be invested in these repurchase agreements.
SHORT-TERM INVESTMENTS. Based upon the terms of an SEC order that granted
exemptive relief from certain provisions of the 1940 Act, the Fund may invest
its short-term cash in shares of one or more money market funds managed by
Advisers or its affiliates.
ILLIQUID INVESTMENTS. The Board has authorized the Fund to invest in restricted
securities where this investment is consistent with the Fund's investment
objective and has authorized these securities to be considered liquid to the
extent Advisers determines that there is a liquid institutional or other market
for these securities - for example, restricted securities that may be freely
transferred among qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, and for which a liquid institutional market
has developed. The Board will review any determination by Advisers to treat a
restricted security as a liquid security on an ongoing basis, including
Advisers' assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, Advisers and the Board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and the
number of other potential buyers; (iii) dealer undertakings to make a market in
the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
WHEN-ISSUED SECURITIES. Securities are sometimes offered on a "when-issued"
basis. When offered this way, the price, which is generally expressed in yield
terms, is fixed at the time the commitment to buy is made, but delivery and
payment for the when-issued securities take place at a later date. Normally the
settlement date occurs within one month of the purchase of these securities.
During the period between purchase and settlement, no payment is made by the
buyer to the issuer and no interest accrues to the buyer. While when-issued
securities may be sold prior to the settlement date, the Fund intends to buy
these securities with the purpose of actually acquiring them, unless a sale
appears desirable for investment reasons. At the time the Fund makes the
commitment to buy a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of when-issued securities may be more or less than the
price at which the Fund has agreed to buy these securities.
TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES
WRITING CALL AND PUT OPTIONS. Call options written by the Fund give the holder
the right to buy the underlying securities from the Fund at a stated exercise
price; put options written by the Fund give the holder the right to sell the
underlying security to the Fund at a stated exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security that
is subject to the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian bank. A put option written by the Fund is "covered"
if the Fund maintains cash and high grade debt securities with a value equal to
the exercise price in a segregated account with its custodian bank, or else
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 with regard to certain options the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer must
fulfill the obligation to buy the underlying security at the exercise price,
which will usually exceed the then current market value of the underlying
security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. A writer,
however, may not effect a closing purchase transaction after being notified of
the exercise of an option. Likewise, an investor who is the holder of an option
may liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. In the case of a written
put option, a closing transaction will permit the Fund to write another put
option to the extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing before or at the same time as the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option; the Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price, and the Fund's
return will be the premium received from the put options minus the amount by
which the market price of the security is below the exercise price.
BUYING CALL AND PUT OPTIONS. The Fund may buy call options on securities it
intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The Fund may also buy call options on securities
held in its portfolio and on which it has written call options. A call option
gives the option holder the right to buy the underlying securities from the
option writer at a stated exercise price. Before its expiration, a call option
may be sold in a closing sale transaction. Profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the call option plus the related transaction costs.
The Fund intends to buy put options on particular securities in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option. A put option gives the
option holder the right to sell the underlying security at the option exercise
price at any time during the option period. The ability to buy put options will
allow the Fund to protect the unrealized gain in an appreciated security in its
portfolio without actually selling the security. In addition, the Fund will
continue to receive interest or dividend income on the security. The Fund may
sell a put option it has previously purchased before the sale of the securities
underlying the option. These sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option that is sold. The gain or loss
may be wholly or partially offset by a change in the value of the underlying
security which the Fund owns or has the right to acquire.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund intends to write covered put and call
options and buy put and call options that trade in the OTC market to the same
extent that it will engage in exchange traded options. Just as with exchange
traded options, OTC call options give the option holder the right to buy an
underlying security from an option writer at a stated exercise price; OTC put
options give the holder the right to sell an underlying security to an option
writer at a stated exercise price. OTC options, however, differ from exchange
traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options,
however, are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer. The Fund
will purchase OTC options only from dealers and institutions that Advisers
believe present a minimal credit risk.
There can be no assurance that a continuous liquid secondary market will exist
for any particular option at any specific time. Consequently, the Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option before its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
OPTIONS ON STOCK INDICES. The Fund may also buy and sell call options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to options
on securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
it will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale of
futures contracts based upon securities or financial indices ("financial
futures"). Financial futures contracts are commodity contracts that obligate the
long or short holder to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A "sale" of a
futures contract means the acquisition of a contractual obligation to deliver
the security or 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 security or cash value called for by the
contract at a specified date. Futures contracts have been designed by exchanges
that have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC") and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract market.
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.
At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, or the cash value of the index, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or cash. The offsetting of a
contractual obligation is accomplished by buying (or selling, as the case may
be) on a commodities exchange an identical 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 futures
contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to buy
and, to the extent consistent therewith, to accommodate cash flows. The Fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one-third of the Fund's net assets
would be represented by futures contracts or related options. In addition, the
Fund may not buy or sell futures contracts or buy or sell related options if,
immediately thereafter, the sum of the amount of margin deposits on its existing
futures and related options positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. In instances
involving the purchase of futures contracts or related call options, money
market instruments equal to the market value of the futures contract or related
option will be deposited in a segregated account with the Fund's custodian bank
to collateralize these long positions.
To the extent the Fund enters into a futures contract, it will maintain with its
custodian bank, to the extent required by the rules of the SEC, assets in a
segregated account to cover its obligations with respect to the contract. These
assets will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the difference between the fluctuating
market value of the futures contract and the aggregate value of the initial and
variation margin payments made by the Fund with respect to these futures
contracts.
STOCK INDEX FUTURES. As noted above, stock index futures contracts obligate the
seller to deliver (and the buyer to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and sell call and put options
on stock index futures to hedge against risks of marketside price movements. The
need to hedge against these risks will depend on the extent of diversification
of the Fund's common stock portfolio and the sensitivity of these 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 a stock index futures contract 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.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
these opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. What are the Fund's Potential Risks?
OPTIONS, FUTURES AND OPTIONS ON FUTURES. Successful use by the Fund of options
on securities, stock indexes, stock index futures, financial futures and related
options will be subject to Advisers' ability to predict correctly movements in
the direction of the securities markets generally or of a particular segment.
This requires different skills and techniques than predicting changes in the
price of individual stocks.
Positions in options, futures and related options on futures may be closed out
only on an exchange which provides a secondary market. There can be no assurance
that a liquid secondary market will exist for any particular 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 could
also have an adverse impact on the Fund's ability to effectively hedge its
securities. The Fund will enter into an option or futures position only if there
appears to be a liquid secondary market for these options or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option before its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of a put or call option might also
find it difficult to terminate its position on a timely basis in the absence of
a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are also imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Fund does not believe that these trading and
positions limits will have an adverse impact on the Fund's strategies for
hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisers may still not
result in a successful transaction.
Futures contracts entail other risks as well. Although the Fund believes that
the use of these contracts will be beneficial, if Advisers' investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any futures
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition, in
these situations, if the Fund has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements. These
sales may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
HIGH YIELD SECURITIES. Issuers of high yield, fixed-income securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with buying the securities of
these issuers is generally greater than the risk associated with higher-quality
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of lower-quality securities may experience
financial stress and may not have sufficient cash flow to make interest
payments. The issuer's ability to make timely interest and principal payments
may also be adversely affected by specific developments affecting the issuer,
including the issuer's inability to meet specific projected business forecasts
or the unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
FOREIGN SECURITIES. Investors should consider carefully the substantial risks
involved in foreign securities, which are in addition to the usual risks
associated with investing in U.S. issuers. These risks can be significantly
greater for investments in emerging or developing markets. There is generally
less government supervision and regulation of securities exchanges, brokers,
dealers and listed companies than in the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy with respect to growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Securities that are acquired by the Fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
the securities in the foreign trading market, the Fund reasonably believes it
can readily dispose of the securities for cash in the U.S. or foreign market,
and current market quotations are readily available. Investments may be in
securities of foreign issuers, whether located in developed or undeveloped
countries.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of foreign
investments. Changes in governmental administrations or economic or monetary
policies, in the U.S. or abroad, or changes in circumstances in dealings between
nations or currency convertibility or exchange rates could result in investment
losses for the Fund. Investments in foreign securities may also subject the Fund
to losses due to nationalization, expropriation, holding and transferring assets
through foreign subcustodians, depositories and broker-dealers, or differing
accounting practices and treatment.
Foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Moreover, investors should
recognize that foreign securities are often traded with less frequency and
volume and, therefore, may have greater price volatility than is the case with
many U.S. securities. Notwithstanding the fact that the Fund generally intends
to acquire the securities of foreign issuers where there are public trading
markets, investments by the Fund in the securities of foreign issuers may tend
to increase the risks with respect to the liquidity of the Fund's portfolio and
the Fund's ability to meet a large number of shareholder redemption requests
should there be economic or political turmoil in a country in which the Fund has
a substantial portion of its assets invested or should relations between the
U.S. and foreign countries deteriorate markedly. Furthermore, the reporting and
disclosure requirements applicable to foreign issuers may differ from those
applicable to domestic issuers, and there may be difficulties in obtaining or
enforcing judgments against foreign issuers.
The Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluations in the currencies in which the Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. Advisers endeavors to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where from time to time the Fund's investments are placed.
The exercise of this policy may include decisions to buy securities with
substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of security
to another. No assurance can be given that profits, if any, will exceed losses.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund may not:
1. Invest directly in real estate, except that the Fund could own real estate
directly as a result of a default on debt securities it owns.
2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan.
3. Borrow money, except from banks in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency (but not investment) purposes, in an amount up to
10% of the value of the Fund's total assets (including the amount borrowed)
based on the lesser of cost or market, less liabilities (not including the
amount borrowed) at the time the borrowing is made. While borrowings exceed 5%
of the Fund's total assets, the Fund will not make any additional investments.
4. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry, except that the Fund will concentrate its
investments in real estate securities, and except that, to the extent this
restriction is applicable, all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and policies as the Fund.
5. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities), except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund.
6. Invest more than 10% of the value of its total assets in illiquid securities
with legal or contractual restrictions on resale (although the Fund may invest
in such securities to the extent permitted under the federal securities laws) or
which are not readily marketable, except that all or substantially all of the
assets of the Fund may be invested in another registered investment company
having the same investment objective and policies as the Fund.
7. Invest in securities which have a record of less than three years continuous
operation, including the operations of any predecessor companies, if more than
5% of the Fund's total assets would be invested in such companies except that
all or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund. (This limitation does not apply to issuers of real estate
investment trusts.)
8. Invest in securities for the purpose of exercising management or control of
the issuer, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund.
9. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts, except that the Fund may invest in financial futures
and related options on futures with respect to securities and securities
indices.
10. Lease or acquire any interests, including interests issued by limited
partnerships (other than publicly traded equity securities) in oil, gas, or
other mineral exploration or development programs.
11. Invest in excess of 5% of its total assets in options unrelated to any Fund
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof.
12. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). (Although the Fund may engage
in short sales if it owns securities equivalent in kind and amount to the
securities sold short, the Fund does not currently intend to employ this
investment technique.)
13. Invest in the securities of other investment companies, except to the extent
permitted by the 1940 Act or other applicable state law, and except in
connection with a merger, consolidation, acquisition or reorganization. To the
extent permitted by exemptions granted under the 1940 Act, the Fund may invest
in shares of one or more money market funds managed by Advisers or its
affiliates.
14. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if, to the knowledge of the Fund,
one or more of the officers or trustees of the Fund, or its investment adviser,
own beneficially more than 0.5 of 1% of the securities of such issuer and all
such officers and trustees together own beneficially more than 5% of such
securities, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund, or except as permitted under investment restriction Number 13
regarding the purchase of shares of money market funds managed by Advisers or
its affiliates.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to pledge, mortgage or
hypothecate the Fund's assets as security for loans, nor to engage in joint or
joint and several trading accounts in securities, except that it may participate
in joint repurchase arrangements, lend its portfolio securities, invest its
short-term cash in shares of one or more investment companies, of the type
generally referred to as money market funds, managed by Advisers or its
affiliates, (pursuant to the terms of any order, and any conditions therein,
issued by the SEC permitting such investments), or combine orders to buy or sell
with orders from other persons to obtain lower brokerage commissions. The Fund
may not invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not listed
on either the NYSE or AMEX. It is also the policy of the Fund that it may,
consistent with its objective, invest a portion of its assets, as permitted by
the 1940 Act and the rules adopted thereunder, in securities or other
obligations issued by companies engaged in securities related businesses,
including companies that are securities brokers, dealers, underwriters or
investment advisors.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
POSITIONS AND PRINCIPAL OCCUPATION
NAME, AGE AND OFFICES WITH THE DURING THE PAST FIVE
ADDRESS TRUST YEARS
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
Harmon E. Burns (52) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 54 of the investment companies in the Franklin Templeton Group of
Funds.
David W. Garbellano (82) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director or trustee, as the case
may be, of 27 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (64) Chairman of the
777 Mariners Island Blvd. Board and
San Mateo, CA 94404 Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President and
777 Mariners Island Blvd. Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most other subsidiaries of Franklin Resources, Inc. and of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (68) Trustee
20833 Stevens Creek Blvd.,Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 26 of the investment companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (69) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare Investors, and President, National Association
of Securities Dealers, Inc.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President and Director, Templeton Worldwide,
Inc.; Executive Vice President, Chief Operating Officer and Director, Templeton
Investment Counsel, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc.; Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief
Financial Officer, Franklin Investment Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.; Senior Vice President, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of 57 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief Investment
Officer and Director, Franklin Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice President, Franklin Advisers,
Inc.; officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 36 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 34 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are not currently
paid fees. As shown above, the nonaffiliated Board members also serve as
directors or trustees of other investment companies in the Franklin Templeton
Group of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES RECEIVED IN THE FRANKLIN
FROM THE FRANKLIN TEMPLETON GROUP
TEMPLETON GROUP OF FUNDS ON WHICH
OF FUNDS* EACH SERVES**
Frank H. Abbott, III....................$165,236 28
Harris J. Ashton........................ 343,591 52
S. Joseph Fortunato..................... 360,411 54
David W. Garbellano..................... 148,916 27
Frank W. T. LaHaye...................... 139,233 26
Gordon S. Macklin....................... 335,541 49
*For the calendar year ended December 31, 1996.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 158
Class I shares, or less than 1% of the total outstanding Class I shares of the
Fund. Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of average
daily net assets up to and including $100 million; 0.50 of 1% of the value of
average daily net assets over $100 million up to and including $250 million;
0.45 of 1% of the value of average daily net assets over $250 million up to and
including $10 billion; 0.44 of 1% of the value of average daily net assets over
$10 billion up to and including $12.5 billion; 0.42 of 1% of the value of
average daily net assets over $12.5 billion up to and including $15 billion; and
0.40 of 1% of the value of average daily net assets in excess of $15 billion.
The fee is computed at the close of business on the last business day of each
month. Each class pays its proportionate share of the management fee.
For the fiscal years ended April 30, 1995, 1996 and 1997, management fees,
before any advance waiver, totaled $81,809, $169,354 and $619,802, respectively.
Under an agreement by Advisers to waive or limit its fees, the Fund paid
management fees totaling $0, $14,092 and $510,202, respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 60 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York, 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $25,162, $46,628, and $287,728, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities Dealers may at times receive the entire
sales charge. A Securities Dealer who receives 90% or more of the sales charge
may be deemed an underwriter under the Securities Act of 1933, as amended.
Securities laws of states where the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required by state law to register as Securities Dealers. Financial
institutions or their affiliated brokers may receive an agency transaction fee
in the percentages indicated in the table under "How Do I Buy Shares? - Purchase
Price of Fund Shares" in the Prospectus.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to these banks' trust accounts without a sales charge. The
banks may charge service fees to their customers who participate in the trusts.
A portion of these service fees may be paid to Distributors or one of its
affiliates to help defray expenses of maintaining a service office in Taiwan,
including expenses related to local literature fulfillment and communication
facilities.
Class I shares of the Fund may be offered to investors in Taiwan through
securities advisory firms known locally as Securities Investment Consulting
Enterprises. In conformity with local business practices in Taiwan, Class I
shares may be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
Under $30,000........................ 3.0%
$30,000 but less than $50,000........ 2.5%
$50,000 but less than $100,000....... 2.0%
$100,000 but less than $200,000...... 1.5%
$200,000 but less than $400,000...... 1.0%
$400,000 or more..................... 0%
OTHER PAYMENTS TO SECURITIES DEALERS. Distributors may pay the following
commissions, out of its own resources, to Securities Dealers who initiate and
are responsible for purchases of Class I shares of $1 million or more: 1% on
sales of $1 million to $2 million, plus 0.80% on sales over $2 million to $3
million, plus 0.50% on sales over $3 million to $50 million, plus 0.25% on sales
over $50 million to $100 million, plus 0.15% on sales over $100 million.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to Securities Dealers who initiate and are responsible for
purchases of Class I shares by certain retirement plans without a front-end
sales charge, as discussed in the Prospectus: 1% on sales of $500,000 to $2
million, plus 0.80% on sales over $2 million to $3 million, plus 0.50% on sales
over $3 million to $50 million, plus 0.25% on sales over $50 million to $100
million, plus 0.15% on sales over $100 million. Distributors may make these
payments in the form of contingent advance payments, which may be recovered from
the Securities Dealer or set off against other payments due to the dealer if
shares are sold within 12 months of the calendar month of purchase. Other
conditions may apply. All terms and conditions may be imposed by an agreement
between Distributors, or one of its affiliates, and the Securities Dealer.
These breakpoints are reset every 12 months for purposes of additional
purchases.
Distributors and/or its affiliates provide financial support to various
Securities Dealers that sell shares of the Franklin Templeton Group of Funds.
This support is based primarily on the amount of sales of fund shares. The
amount of support may be affected by: total sales; net sales; levels of
redemptions; the proportion of a Securities Dealer's sales and marketing efforts
in the Franklin Templeton Group of Funds; a Securities Dealer's support of, and
participation in, Distributors' marketing programs; a Securities Dealer's
compensation programs for its registered representatives; and the extent of a
Securities Dealer's marketing programs relating to the Franklin Templeton Group
of Funds. Financial support to Securities Dealers may be made by payments from
Distributors' resources, from Distributors' retention of underwriting
concessions and, in the case of funds that have Rule 12b-1 plans, from payments
to Distributors under such plans. In addition, certain Securities Dealers may
receive brokerage commissions generated by fund portfolio transactions in
accordance with the NASD's rules.
LETTER OF INTENT. You may qualify for a reduced sales charge when you buy Class
I shares, as described in the Prospectus. At any time within 90 days after the
first investment that you want to qualify for a reduced sales charge, you may
file with the Fund a signed shareholder application with the Letter of Intent
section completed. After the Letter is filed, each additional investment will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter. Sales charge reductions based on purchases in more than one Franklin
Templeton Fund will be effective only after notification to Distributors that
the investment qualifies for a discount. Your holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter, but they will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make during the 13
month period, except in the case of certain retirement plans, will be subtracted
from the amount of the purchases for purposes of determining whether the terms
of the Letter have been completed. If the Letter is not completed within the 13
month period, there will be an upward adjustment of the sales charge, depending
on the amount actually purchased (less redemptions) during the period. The
upward adjustment does not apply to certain retirement plans. If you execute a
Letter before a change in the sales charge structure of the Fund, you may
complete the Letter at the lower of the new sales charge structure or the sales
charge structure in effect at the time the Letter was filed.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in Class I shares of the Fund registered in
your name until you fulfill the Letter. This policy of reserving shares does not
apply to certain retirement plans. If total purchases, less redemptions, equal
the amount specified under the Letter, the reserved shares will be deposited to
an account in your name or delivered to you or as you direct. If total
purchases, less redemptions, exceed the amount specified under the Letter and is
an amount that would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the Securities Dealer through
whom purchases were made pursuant to the Letter (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in Offering Price will be
applied to the purchase of additional shares at the Offering Price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, you will remit to Distributors an amount equal to the difference in the
dollar amount of sales charge actually paid and the amount of sales charge that
would have applied to the aggregate purchases if the total of the purchases had
been made at a single time. Upon remittance, the reserved shares held for your
account will be deposited to an account in your name or delivered to you or as
you direct. If within 20 days after written request the difference in sales
charge is not paid, the redemption of an appropriate number of reserved shares
to realize the difference will be made. In the event of a total redemption of
the account before fulfillment of the Letter, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to you.
If a Letter is executed on behalf of certain retirement plans, the level and any
reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the next business day
for Class I shares and on the prior business day for Class II shares. If the
processing dates are different, the date of the Net Asset Value used to redeem
the shares will also be different for Class I and Class II shares.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class as of the scheduled
close of the NYSE, generally 1:00 p.m. Pacific time, each day that the NYSE is
open for trading. As of the date of this SAI, the Fund is informed that the NYSE
observes the following holidays: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Net Asset Value of each
class. If events materially affecting the values of these foreign securities
occur during this period, the securities will be valued in accordance with
procedures established by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value of each class is determined as of such times. Occasionally,
events affecting the values of these securities may occur between the times at
which they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value of each class. If events
materially affecting the values of these securities occur during this period,
the securities will be valued at their fair value as determined in good faith by
the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that its distributions will be sufficient to
avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, gain or loss will be capital gain or loss and
will be long-term for federal income tax purposes if the shares have been held
for more than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of the shares sold or exchanged within
ninety (90) days of their purchase (for purposes of determining gain or loss
with respect to the shares) if the sales proceeds are reinvested in the Fund or
in another fund in the Franklin Templeton Group of Funds and a sales charge
which would otherwise apply to the reinvestment is reduced or eliminated. Any
portion of the sales charge excluded from the tax basis of the shares sold will
be added to the tax basis of the shares acquired in the reinvestment. You should
consult with your tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares repurchased.
Any loss realized upon the sale of shares within six months from the date of
their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during this
six-month period.
The Fund's investment in options and futures contracts, including stock options,
stock index options, stock index futures and options on stock index futures are
subject to many complex and special tax rules. For example, OTC options on debt
securities and equity options, including options on stock and on narrow-based
stock indexes, will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse,
or closing out of the option or sale of the underlying stock or security. By
contrast, the Fund treatment of certain other options, futures and forward
contracts entered into by the Fund is generally governed by Section 1256 of the
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to
recognize taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, the Fund may
be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and timing of income distributed to you by the Fund.
When the Fund holds an option, future or forward contract which substantially
diminishes the Fund's risk of loss with respect to another position of the Fund
(as might occur in some hedging transactions), this combination of positions
could be treated as a "straddle" for tax purposes, resulting in possible
deferral of losses, adjustments in the holding periods of Fund securities and
conversion of short-term capital losses into long-term capital losses. Certain
tax elections exist for mixed straddles (i.e., straddles comprised of at least
one Section 1256 position and at least one non-Section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is subject to the requirement that
less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options, futures and forward contracts and certain other hedging
transactions because these transactions are often consummated in less than three
months, may require the sale of portfolio securities held less than three months
and may, as in the case of short sales of portfolio securities, reduce the
holding periods of certain securities within the Fund, resulting in additional
short-short income for the Fund.
The Fund will monitor its transactions in these options, futures and forward
contracts and may make certain other tax elections in order to mitigate the
effect of the above rules and to prevent disqualification of the Fund as a
regulated investment company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal years ended April 30, 1995, 1996 and 1997, were
$383,480, $503,536 and $2,915,643, respectively. After allowances to dealers,
Distributors retained $14,048, $50,862 and $276,391 in net underwriting
discounts and commissions and received $0, $487 and $6,832 in connection with
redemptions or repurchases of shares, for the respective years. Distributors may
be entitled to reimbursement under the Rule 12b-1 plan for each class, as
discussed below. Except as noted, Distributors received no other compensation
from the Fund for acting as underwriter.
THE RULE 12B-1 PLANS
Class I and Class II have separate distribution plans or "Rule 12b-1 plans" that
were adopted pursuant to Rule 12b-1 of the 1940 Act.
THE CLASS I PLAN. Under the Class I plan, the Fund may pay up to a maximum of
0.25% per year of Class I's average daily net assets, payable quarterly, for
expenses incurred in the promotion and distribution of Class I shares.
The Class I plan does not permit unreimbursed expenses incurred in a particular
year to be carried over to or reimbursed in later years.
THE CLASS II PLAN. Under the Class II plan, the Fund pays Distributors up to
0.75% per year of Class II's average daily net assets, payable quarterly, for
distribution and related expenses. These fees may be used to compensate
Distributors or others for providing distribution and related services and
bearing certain Class II expenses. All distribution expenses over this amount
will be borne by those who have incurred them without reimbursement by the Fund.
Under the Class II plan, the Fund also pays an additional 0.25% per year of
Class II's average daily net assets, payable quarterly, as a servicing fee.
THE CLASS I AND CLASS II PLANS. In addition to the payments that Distributors or
others are entitled to under each plan, each plan also provides that to the
extent the Fund, Advisers or Distributors or other parties on behalf of the
Fund, Advisers or Distributors make payments that are deemed to be for the
financing of any activity primarily intended to result in the sale of shares of
each class within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to have been made pursuant to the plan. The terms and
provisions of each plan relating to required reports, term, and approval are
consistent with Rule 12b-1.
In no event shall the aggregate asset-based sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the NASD.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. These banking institutions, however, are permitted to receive fees under
the plans for administrative servicing or for agency transactions. If you are a
customer of a bank that is prohibited from providing these services, you would
be permitted to remain a shareholder of the Fund, and alternate means for
continuing the servicing would be sought. In this event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
Each plan has been approved in accordance with the provisions of Rule 12b-1. The
plans are renewable annually by a vote of the Board, including a majority vote
of the Board members who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such Board members be done by the non-interested
members of the Board. The plans and any related agreement may be terminated at
any time, without penalty, by vote of a majority of the non-interested Board
members on not more than 60 days' written notice, by Distributors on not more
than 60 days' written notice, by any act that constitutes an assignment of the
management agreement with Advisers or by vote of a majority of the outstanding
shares of the class. The Class I plan may also be terminated by any act that
constitutes an assignment of the underwriting agreement with Distributors.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
The plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of the outstanding shares of the class, and all material amendments to the plans
or any related agreements shall be approved by a vote of the non-interested
members of the Board, cast in person at a meeting called for the purpose of
voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the plans should be continued.
For the fiscal year ended April 30, 1997, Distributors had eligible expenditures
of $286,806 and $608,704 for advertising, printing, and payments to underwriters
and broker-dealers pursuant to the Class I and Class II plans, respectively, of
which the Fund paid Distributors $186,257 and $250,655 under the Class I and
Class II plans.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation. An explanation of these and other methods used by
the Fund to compute or express performance follows. Regardless of the method
used, past performance does not guarantee future results, and is an indication
of the return to shareholders only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-year and from inception
periods that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes the maximum front-end sales
charge is deducted from the initial $1,000 purchase, and income dividends and
capital gain distributions are reinvested at Net Asset Value. The quotation
assumes the account was completely redeemed at the end of each one-year and from
inception period and the deduction of all applicable charges and fees. If a
change is made to the sales charge structure, historical performance information
will be restated to reflect the maximum front-end sales charge currently in
effect. The average annual total return for each class for the one year and from
inception periods ended April 30, 1997 was 20.26% and 15.73%, respectively, for
Class I and 22.67% and 23.45%, respectively, for Class II.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-year and from inception periods at the end of the
one-year and from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes the maximum front-end sales charge is deducted from the initial
$1,000 purchase, and income dividends and capital gain distributions are
reinvested at Net Asset Value. Cumulative total return, however, will be based
on the actual return for each class for a specified period rather than on the
average return over one-year and from inception periods. The cumulative total
return for each class for the one year and from inception periods ended April
30, 1997, was 20.26% and 62.46%, respectively, for Class I and 22.67% and
52.36%, respectively, for Class II.
YIELD
CURRENT YIELD. Current yield of each class shows the income per share earned by
the Fund. It is calculated by dividing the net investment income per share of
each class earned during a 30-day base period by the applicable maximum Offering
Price per share on the last day of the period and annualizing the result.
Expenses accrued for the period include any fees charged to all shareholders of
the class during the base period. The yield for each class for the 30-day period
ended April 30, 1997, was 3.37% for Class I and 2.76% for Class II.
These figures were obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period tha
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders of a
class. Amounts paid to shareholders are reflected in the quoted current
distribution rate. The current distribution rate is usually computed by
annualizing the dividends paid per share by a class during a certain period and
dividing that amount by the current maximum Offering Price. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time. The current
distribution rate for each class for the 30-day period ended April 30, 1997, was
2.23% for Class I and 2.03% for Class II.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
The Fund may also quote the performance of shares without a sales charge. Sales
literature and advertising may quote a current distribution rate, yield,
cumulative total return, average annual total return and other measures of
performance as described elsewhere in this SAI with the substitution of Net
Asset Value for the public Offering Price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) NAREIT Equity REIT Index - a compilation of market weighted securities data
collected from all tax-qualified equity real estate investment trusts listed on
the NYSE and AMEX and the NASDAQ. The index tracks performance, as well as REIT
assets, by property type and geographic region.
b) Russell-NCREIF Property Index - a compilation of real estate investment data
collected from the members of the National Council of Real Estate Investment
Fiduciaries. The index is a property-specific institutional real estate
performance benchmark in the U.S., which summarizes the historical performance
of income-producing properties owned by pension and profit sharing plans.
c) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
d) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
e) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
f) 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.
g) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
h) 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.
i) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
j) Valueline Index - an unmanaged index which follows the stock of approximately
1,700 companies.
k) Bateman Eichler Hill Richards Western Stock Index - a managed index
representing 215 stocks of companies within the Western U.S. Seventy-five
percent of the stocks are California companies, the remaining 25% represent
companies in Arizona, Hawaii, Nevada, Oregon and Washington.
l) 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.
m) 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.
n) 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) Russell 3000 Index - composed of 3,000 large U.S. companies by market
capitalization, representing approximately 98% of the U.S. equity market.
p) Russell 2000 Small Stock Index - consists of the smallest 2,000 companies in
the Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.
q) 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.
r) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
s) Wilshire Real Estate Securities Index - a market capitalization weighted
index of publicly traded real estate securities, such as: Real Estate Investment
Trusts (REITs), Real Estate Operating Companies (REOCs) and partnerships. The
Index comprises companies whose charter is the equity ownership and operation of
commercial real estate.
t) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of August 5, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
ADVISOR CLASS
Matthew F. Avery
2530 Fillmore Street
San Francisco, CA 94115 5,736.099 7%
Franklin Templeton Fund
Allocator Series -
Franklin Templeton
Conservative Target Fund
c/o 1810 Gateway 8,617.296 10%
San Mateo, CA 94404
Franklin Templeton Fund
Allocator Series -
Franklin Templeton
Moderate Target Fund
c/o 1810 Gateway 22,568.133 28%
San Mateo, CA 94404
Franklin Templeton Fund
Allocator Series -
Franklin Templeton
Growth Target Fund
c/o 1810 Gateway 24,552.029 30%
San Mateo, CA 94404
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
AMEX - American Stock Exchange
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
Code - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON FUNDS - The U.S. registered mutual funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds except Franklin Valuemark
Funds, Franklin Government Securities Trust, Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
LETTER - Letter of Intent
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
OFFERING PRICE - The public offering price is based on the Net Asset Value per
share of the class and includes the front-end sales charge. The maximum
front-end sales charge is 4.50% for Class I and 1% for Class II.
PROSPECTUS - The prospectus for the Fund's Class I and Class II shares dated
September 1, 1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN
REAL ESTATE
SECURITIES FUND -
ADVISOR CLASS
FRANKLIN REAL ESTATE SECURITIES TRUST
STATEMENT OF
ADDITIONAL INFORMATION
SEPTEMBER 1, 1997
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
TABLE OF CONTENTS
How does the Fund Invest its Assets?................... 2
What are the Fund's Potential Risks?................... 6
Investment Restrictions................................ 9
Officers and Trustees.................................. 10
Investment Management
and Other Services.................................... 14
How does the Fund Buy
Securities for its Portfolio?......................... 15
How Do I Buy, Sell and Exchange Shares?............... 16
How are Fund Shares Valued?............................ 17
Additional Information on
Distributions and Taxes............................... 18
The Fund's Underwriter................................. 20
How does the Fund Measure Performance?................ 20
Miscellaneous Information.............................. 23
Financial Statements................................... 24
Useful Terms and Definitions........................... 24
Appendix............................................... 25
Description of Ratings................................ 25
- -------------------------------------------------------------------------------
When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and Definitions."
- -------------------------------------------------------------------------------
The Franklin Real Estate Securities Fund (the "Fund") is a non-diversified
series of Franklin Real Estate Securities Trust (the "Trust"), an open-end
management investment company. The Fund's investment objective is maximizing
total return. The Fund seeks to achieve its objective by investing primarily in
securities of companies operating in the real estate industry.
This SAI describes the Fund's Advisor Class shares. The Prospectus, dated
September 1, 1997, as may be amended from time to time, contains the basic
information you should know before investing in the Fund. For a free copy, call
1-800/DIAL BEN or write the Fund at the address shown.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND,
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
HOW DOES THE FUND INVEST ITS ASSETS?
The following provides more detailed information about some of the securities
the Fund may buy and its investment policies. You should read it together with
the section in the Prospectus entitled "How does the Fund Invest its Assets?"
REPURCHASE TRANSACTIONS. In a repurchase agreement, the seller of a security
agrees to repurchase the security sold at a mutually agreed upon time and price.
A repurchase may also be viewed as the loan of money by the Fund to the seller.
The resale price is normally in excess of the purchase price, reflecting an
agreed upon interest rate. The interest rate is effective for the period of time
in which the Fund is invested in the agreement and is not related to the coupon
rate on the underlying security. The period of these repurchase agreements will
usually be short, from overnight to one week, and at no time will the Fund
invest in repurchase agreements with durations of more than one year. The
securities that are subject to repurchase agreements, however, may have maturity
dates in excess of one year from the effective date of the repurchase
agreements. The Fund will pay for these securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian bank. The
Fund may not enter into a repurchase agreement with more than seven days
duration if, as a result, more than 10% of the market value of the Fund's net
assets would be invested in these repurchase agreements.
SHORT-TERM INVESTMENTS. Based upon the terms of an SEC order that granted
exemptive relief from certain provisions of the 1940 Act, the Fund may invest
its short-term cash in shares of one or more money market funds managed by
Advisers or its affiliates.
ILLIQUID INVESTMENTS. The Board has authorized the Fund to invest in restricted
securities where this investment is consistent with the Fund's investment
objective and has authorized these securities to be considered liquid to the
extent Advisers determines that there is a liquid institutional or other market
for these securities - for example, restricted securities that may be freely
transferred among qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended, and for which a liquid institutional market
has developed. The Board will review any determination by Advisers to treat a
restricted security as a liquid security on an ongoing basis, including
Advisers' assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, Advisers and the Board will take into
account the following factors: (i) the frequency of trades and quotes for the
security; (ii) the number of dealers willing to buy or sell the security and the
number of other potential buyers; (iii) dealer undertakings to make a market in
the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
WHEN-ISSUED SECURITIES. Securities are sometimes offered on a "when-issued"
basis. When offered this way, the price, which is generally expressed in yield
terms, is fixed at the time the commitment to buy is made, but delivery and
payment for the when-issued securities take place at a later date. Normally the
settlement date occurs within one month of the purchase of these securities.
During the period between purchase and settlement, no payment is made by the
buyer to the issuer and no interest accrues to the buyer. While when-issued
securities may be sold prior to the settlement date, the Fund intends to buy
these securities with the purpose of actually acquiring them, unless a sale
appears desirable for investment reasons. At the time the Fund makes the
commitment to buy a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of when-issued securities may be more or less than the
price at which the Fund has agreed to buy these securities.
TRANSACTIONS IN OPTIONS, FUTURES
AND OPTIONS ON FINANCIAL FUTURES
WRITING CALL AND PUT OPTIONS. Call options written by the Fund give the holder
the right to buy the underlying securities from the Fund at a stated exercise
price; put options written by the Fund give the holder the right to sell the
underlying security to the Fund at a stated exercise price. A call option
written by the Fund is "covered" if the Fund owns the underlying security that
is subject to the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian bank) upon
conversion or exchange of other securities held in its portfolio. A call option
is also covered if the Fund holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written or (b) is
greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and high grade debt securities in a segregated
account with its custodian bank. A put option written by the Fund is "covered"
if the Fund maintains cash and high grade debt securities with a value equal to
the exercise price in a segregated account with its custodian bank, or else
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 with regard to certain options the writer may be assigned an
exercise notice at any time prior to the termination of the obligation. Whether
or not an option expires unexercised, the writer retains the amount of the
premium. This amount may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer experiences a profit or loss from the
sale of the underlying security. If a put option is exercised, the writer must
fulfill the obligation to buy the underlying security at the exercise price,
which will usually exceed the then current market value of the underlying
security.
The writer of an option that wants to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be canceled by the clearing corporation. A writer,
however, may not effect a closing purchase transaction after being notified of
the exercise of an option. Likewise, an investor who is the holder of an option
may liquidate its position by effecting a "closing sale transaction." This is
accomplished by selling an option of the same series as the option previously
purchased. There is no guarantee that either a closing purchase or a closing
sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will permit
the Fund to write another call option on the underlying security with either a
different exercise price or expiration date or both. In the case of a written
put option, a closing transaction will permit the Fund to write another put
option to the extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing transaction will permit
the cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing before or at the same time as the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option; the Fund will realize a loss from a
closing transaction if the price of the transaction is more than the premium
received from writing the option or is less than the premium paid to buy the
option. Because increases in the market price of a call option will generally
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund.
The writing of covered put options involves certain risks. For example, if the
market price of the underlying security rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund may elect to close the
position or take delivery of the security at the exercise price, and the Fund's
return will be the premium received from the put options minus the amount by
which the market price of the security is below the exercise price.
BUYING CALL AND PUT OPTIONS. The Fund may buy call options on securities it
intends to buy in order to limit the risk of a substantial increase in the
market price of the security. The Fund may also buy call options on securities
held in its portfolio and on which it has written call options. A call option
gives the option holder the right to buy the underlying securities from the
option writer at a stated exercise price. Before its expiration, a call option
may be sold in a closing sale transaction. Profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the call option plus the related transaction costs.
The Fund intends to buy put options on particular securities in order to protect
against a decline in the market value of the underlying security below the
exercise price less the premium paid for the option. A put option gives the
option holder the right to sell the underlying security at the option exercise
price at any time during the option period. The ability to buy put options will
allow the Fund to protect the unrealized gain in an appreciated security in its
portfolio without actually selling the security. In addition, the Fund will
continue to receive interest or dividend income on the security. The Fund may
sell a put option it has previously purchased before the sale of the securities
underlying the option. These sales will result in a net gain or loss depending
on whether the amount received on the sale is more or less than the premium and
other transaction costs paid for the put option that is sold. The gain or loss
may be wholly or partially offset by a change in the value of the underlying
security which the Fund owns or has the right to acquire.
OVER-THE-COUNTER ("OTC") OPTIONS. The Fund intends to write covered put and call
options and buy put and call options that trade in the OTC market to the same
extent that it will engage in exchange traded options. Just as with exchange
traded options, OTC call options give the option holder the right to buy an
underlying security from an option writer at a stated exercise price; OTC put
options give the holder the right to sell an underlying security to an option
writer at a stated exercise price. OTC options, however, differ from exchange
traded options in certain material respects.
OTC options are arranged directly with dealers and not, as is the case with
exchange traded options, with a clearing corporation. Thus, there is a risk of
non-performance by the dealer. Because there is no exchange, pricing is
typically done by reference to information from market makers. OTC options,
however, are available for a greater variety of securities, and in a wider range
of expiration dates and exercise prices, than exchange traded options; and the
writer of an OTC option is paid the premium in advance by the dealer. The Fund
will purchase OTC options only from dealers and institutions that Advisers
believe present a minimal credit risk.
There can be no assurance that a continuous liquid secondary market will exist
for any particular option at any specific time. Consequently, the Fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option before its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it.
OPTIONS ON STOCK INDICES. The Fund may also buy and sell call options on stock
indices in order to hedge against the risk of market or industry-wide stock
price fluctuations. Call and put options on stock indices are similar to options
on securities except that, rather than the right to buy or sell stock at a
specified price, options on a stock index give the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the
underlying stock index is greater than (or less than, in the case of puts) the
exercise price of the option. This amount of cash is equal to the difference
between the closing price of the index and the exercise price of the option
expressed in dollars multiplied by a specified number. Thus, unlike stock
options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or segment
of the market) rather than price movements in individual stocks.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account containing cash or high quality fixed-income securities with
its custodian bank in an amount at least equal to the market value of the
underlying stock index and will maintain the account while the option is open or
it will otherwise cover the transaction.
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale of
futures contracts based upon securities or financial indices ("financial
futures"). Financial futures contracts are commodity contracts that obligate the
long or short holder to take or make delivery of a specified quantity of a
financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price. A "sale" of a
futures contract means the acquisition of a contractual obligation to deliver
the security or 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 security or cash value called for by the
contract at a specified date. Futures contracts have been designed by exchanges
that have been designated "contracts markets" by the Commodity Futures Trading
Commission ("CFTC") and must be executed through a futures commission merchant,
or brokerage firm, which is a member of the relevant contract market.
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.
At the same time a futures contract is purchased or sold, the Fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the Fund would provide or receive cash that reflects any
decline or increase in the contract's value.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, or the cash value of the index, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or cash. The offsetting of a
contractual obligation is accomplished by buying (or selling, as the case may
be) on a commodities exchange an identical 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 futures
contracts.
The Fund will not engage in transactions in futures contracts or related options
for speculation but only as a hedge against changes resulting from market
conditions in the values of its securities or securities which it intends to buy
and, to the extent consistent therewith, to accommodate cash flows. The Fund
will not enter into any stock index or financial futures contract or related
option if, immediately thereafter, more than one-third of the Fund's net assets
would be represented by futures contracts or related options. In addition, the
Fund may not buy or sell futures contracts or buy or sell related options if,
immediately thereafter, the sum of the amount of margin deposits on its existing
futures and related options positions and premiums paid for related options
would exceed 5% of the market value of the Fund's total assets. In instances
involving the purchase of futures contracts or related call options, money
market instruments equal to the market value of the futures contract or related
option will be deposited in a segregated account with the Fund's custodian bank
to collateralize these long positions.
To the extent the Fund enters into a futures contract, it will maintain with its
custodian bank, to the extent required by the rules of the SEC, assets in a
segregated account to cover its obligations with respect to the contract. These
assets will consist of cash, cash equivalents or high quality debt securities
from its portfolio in an amount equal to the difference between the fluctuating
market value of the futures contract and the aggregate value of the initial and
variation margin payments made by the Fund with respect to these futures
contracts.
STOCK INDEX FUTURES. As noted above, stock index futures contracts obligate the
seller to deliver (and the buyer to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
The Fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of its equity
securities that might otherwise result. When the Fund is not fully invested in
stocks and anticipates a significant market advance, it may buy stock index
futures in order to gain rapid market exposure that may in part or entirely
offset increases in the cost of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. The Fund may buy and sell call and put options
on stock index futures to hedge against risks of marketside price movements. The
need to hedge against these risks will depend on the extent of diversification
of the Fund's common stock portfolio and the sensitivity of these 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 a stock index futures contract 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.
FUTURE DEVELOPMENTS. The Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
these opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. What are the Fund's Potential Risks?
OPTIONS, FUTURES AND OPTIONS ON FUTURES. Successful use by the Fund of options
on securities, stock indexes, stock index futures, financial futures and related
options will be subject to Advisers' ability to predict correctly movements in
the direction of the securities markets generally or of a particular segment.
This requires different skills and techniques than predicting changes in the
price of individual stocks.
Positions in options, futures and related options on futures may be closed out
only on an exchange which provides a secondary market. There can be no assurance
that a liquid secondary market will exist for any particular 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 could
also have an adverse impact on the Fund's ability to effectively hedge its
securities. The Fund will enter into an option or futures position only if there
appears to be a liquid secondary market for these options or futures.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, the Fund may
be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option before its expiration only by entering into a closing purchase
transaction with the dealer to which the Fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of a put or call option might also
find it difficult to terminate its position on a timely basis in the absence of
a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are also imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The Fund does not believe that these trading and
positions limits will have an adverse impact on the Fund's strategies for
hedging its securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Advisers may still not
result in a successful transaction.
Futures contracts entail other risks as well. Although the Fund believes that
the use of these contracts will be beneficial, if Advisers' investment judgment
about the general direction of interest rates is incorrect, the Fund's overall
performance would be poorer than if it had not entered into any futures
contract. For example, if the Fund has hedged against the possibility of an
increase in interest rates which would adversely affect the price of bonds held
in its portfolio and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its bonds which it has hedged
because it will have offsetting losses in its futures positions. In addition, in
these situations, if the Fund has insufficient cash, it may have to sell
securities from its portfolio to meet daily variation margin requirements. These
sales may be, but will not necessarily be, at increased prices which reflect the
rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
HIGH YIELD SECURITIES. Issuers of high yield, fixed-income securities are often
highly leveraged and may not have more traditional methods of financing
available to them. Therefore, the risk associated with buying the securities of
these issuers is generally greater than the risk associated with higher-quality
securities. For example, during an economic downturn or a sustained period of
rising interest rates, issuers of lower-quality securities may experience
financial stress and may not have sufficient cash flow to make interest
payments. The issuer's ability to make timely interest and principal payments
may also be adversely affected by specific developments affecting the issuer,
including the issuer's inability to meet specific projected business forecasts
or the unavailability of additional financing.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in
the Fund's portfolio defaults, the Fund may have unrealized losses on the
security, which may lower the Fund's Net Asset Value. Defaulted securities tend
to lose much of their value before they default. Thus, the Fund's Net Asset
Value may be adversely affected before an issuer defaults. In addition, the Fund
may incur additional expenses if it must try to recover principal or interest
payments on a defaulted security.
High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from the Fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, Advisers may find it necessary to replace
the securities with lower-yielding securities, which could result in less net
investment income for the Fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for the
Fund to manage the timing of its income. Under the Code and U.S. Treasury
regulations, the Fund may have to accrue income on defaulted securities and
distribute the income to shareholders for tax purposes, even though the Fund is
not currently receiving interest or principal payments on the defaulted
securities. To generate cash to satisfy these distribution requirements, the
Fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of Fund shares.
Lower-quality, fixed-income securities may not be as liquid as higher-quality
securities. Reduced liquidity in the secondary market may have an adverse impact
on market price of a security and on the Fund's ability to sell a security in
response to a specific economic event, such as a deterioration in the
creditworthiness of the issuer, or if necessary to meet the Fund's liquidity
needs. Reduced liquidity may also make it more difficult to obtain market
quotations based on actual trades for purposes of valuing the Fund's portfolio.
The Fund may buy high yield, fixed-income securities that are sold without
registration under the federal securities laws and therefore carry restrictions
on resale. While many high yielding securities have been sold with registration
rights, covenants and penalty provisions for delayed registration, if the Fund
is required to sell restricted securities before the securities have been
registered, it may be deemed an underwriter of the securities under the
Securities Act of 1933, which entails special responsibilities and liabilities.
The Fund may also incur special costs in disposing of restricted securities,
although the Fund will generally not incur any costs when the issuer is
responsible for registering the securities.
The Fund may buy high yield, fixed-income securities during an initial
underwriting. These securities involve special risks because they are new
issues. Advisers will carefully review their credit and other characteristics.
The Fund has no arrangement with its underwriter or any other person concerning
the acquisition of these securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. The recession that began in 1990
disrupted the market for high yield securities and adversely affected the value
of outstanding securities, as well as the ability of issuers of high yield
securities to make timely principal and interest payments. Although the economy
has improved and high yield securities have performed more consistently since
that time, the adverse effects previously experienced may reoccur. For example,
the highly publicized defaults on some high yield securities during 1989 and
1990 and concerns about a sluggish economy that continued into 1993, depressed
the prices of many of these securities. While market prices may be temporarily
depressed due to these factors, the ultimate price of any security generally
reflects the true operating results of the issuer. Factors adversely impacting
the market value of high yield securities may lower the Fund's Net Asset Value.
The Fund relies on Advisers' judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, Advisers takes into
consideration, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
FOREIGN SECURITIES. Investors should consider carefully the substantial risks
involved in foreign securities, which are in addition to the usual risks
associated with investing in U.S. issuers. These risks can be significantly
greater for investments in emerging or developing markets. There is generally
less government supervision and regulation of securities exchanges, brokers,
dealers and listed companies than in the U.S., thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Individual foreign economies may differ favorably or
unfavorably from the U.S. economy with respect to growth of gross national
product, rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position.
Securities that are acquired by the Fund outside the U.S. and that are publicly
traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
the securities in the foreign trading market, the Fund reasonably believes it
can readily dispose of the securities for cash in the U.S. or foreign market,
and current market quotations are readily available. Investments may be in
securities of foreign issuers, whether located in developed or undeveloped
countries.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and tax laws (including laws imposing withholding taxes on any
dividend or interest income) and laws limiting the amount and types of foreign
investments. Changes in governmental administrations or economic or monetary
policies, in the U.S. or abroad, or changes in circumstances in dealings between
nations or currency convertibility or exchange rates could result in investment
losses for the Fund. Investments in foreign securities may also subject the Fund
to losses due to nationalization, expropriation, holding and transferring assets
through foreign subcustodians, depositories and broker-dealers, or differing
accounting practices and treatment.
Foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to U.S. companies. The Fund, therefore, may
encounter difficulty in obtaining market quotations for purposes of valuing its
portfolio and calculating its Net Asset Value. Moreover, investors should
recognize that foreign securities are often traded with less frequency and
volume and, therefore, may have greater price volatility than is the case with
many U.S. securities. Notwithstanding the fact that the Fund generally intends
to acquire the securities of foreign issuers where there are public trading
markets, investments by the Fund in the securities of foreign issuers may tend
to increase the risks with respect to the liquidity of the Fund's portfolio and
the Fund's ability to meet a large number of shareholder redemption requests
should there be economic or political turmoil in a country in which the Fund has
a substantial portion of its assets invested or should relations between the
U.S. and foreign countries deteriorate markedly. Furthermore, the reporting and
disclosure requirements applicable to foreign issuers may differ from those
applicable to domestic issuers, and there may be difficulties in obtaining or
enforcing judgments against foreign issuers.
The Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the Fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded. Certain of these
currencies have experienced a steady devaluation relative to the U.S. dollar.
Any devaluations in the currencies in which the Fund's portfolio securities are
denominated may have a detrimental impact on the Fund. Advisers endeavors to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where from time to time the Fund's investments are placed.
The exercise of this policy may include decisions to buy securities with
substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of security
to another. No assurance can be given that profits, if any, will exceed losses.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions as fundamental policies. These
restrictions may not be changed without the approval of a majority of the
outstanding voting securities of the Fund. Under the 1940 Act, this means the
approval of (i) more than 50% of the outstanding shares of the Fund or (ii) 67%
or more of the shares of the Fund present at a shareholder meeting if more than
50% of the outstanding shares of the Fund are represented at the meeting in
person or by proxy, whichever is less. The Fund MAY NOT:
1. Invest directly in real estate, except that the Fund could own real estate
directly as a result of a default on debt securities it owns.
2. Make loans to other persons, except by the purchase of bonds, debentures or
similar obligations which are publicly distributed or of a character usually
acquired by institutional investors or through loans of the Fund's portfolio
securities, or to the extent the entry into a repurchase agreement may be deemed
a loan.
3. Borrow money, except from banks in order to meet redemption requests that
might otherwise require the untimely disposition of portfolio securities or for
other temporary or emergency (but not investment) purposes, in an amount up to
10% of the value of the Fund's total assets (including the amount borrowed)
based on the lesser of cost or market, less liabilities (not including the
amount borrowed) at the time the borrowing is made. While borrowings exceed 5%
of the Fund's total assets, the Fund will not make any additional investments.
4. Invest more than 25% of the Fund's assets (at the time of the most recent
investment) in any single industry, except that the Fund will concentrate its
investments in real estate securities, and except that, to the extent this
restriction is applicable, all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and policies as the Fund.
5. Underwrite securities of other issuers (does not preclude the Fund from
obtaining such short-term credit as may be necessary for the clearance of
purchases and sales of its portfolio securities), except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund.
6. Invest more than 10% of the value of its total assets in illiquid securities
with legal or contractual restrictions on resale (although the Fund may invest
in such securities to the extent permitted under the federal securities laws) or
which are not readily marketable, except that all or substantially all of the
assets of the Fund may be invested in another registered investment company
having the same investment objective and policies as the Fund.
7. Invest in securities which have a record of less than three years continuous
operation, including the operations of any predecessor companies, if more than
5% of the Fund's total assets would be invested in such companies except that
all or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund. (This limitation does not apply to issuers of real estate
investment trusts.)
8. Invest in securities for the purpose of exercising management or control of
the issuer, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund.
9. Maintain a margin account with a securities dealer or invest in commodities
and commodity contracts, except that the Fund may invest in financial futures
and related options on futures with respect to securities and securities
indices.
10. Lease or acquire any interests, including interests issued by limited
partnerships (other than publicly traded equity securities) in oil, gas, or
other mineral exploration or development programs.
11. Invest in excess of 5% of its total assets in options unrelated to any Fund
transactions in futures, including puts, calls, straddles, spreads, or any
combination thereof.
12. Effect short sales, unless at the time the Fund owns securities equivalent
in kind and amount to those sold (which will normally be for deferring
recognition of gains or losses for tax purposes). (Although the Fund may engage
in short sales if it owns securities equivalent in kind and amount to the
securities sold short, the Fund does not currently intend to employ this
investment technique.)
13. Invest in the securities of other investment companies, except to the extent
permitted by the 1940 Act or other applicable state law, and except in
connection with a merger, consolidation, acquisition or reorganization. To the
extent permitted by exemptions granted under the 1940 Act, the Fund may invest
in shares of one or more money market funds managed by Advisers or its
affiliates.
14. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
purchase or retain securities of any issuer if, to the knowledge of the Fund,
one or more of the officers or trustees of the Fund, or its investment adviser,
own beneficially more than 0.5 of 1% of the securities of such issuer and all
such officers and trustees together own beneficially more than 5% of such
securities, except that, to the extent this restriction is applicable, all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and policies
as the Fund, or except as permitted under investment restriction Number 13
regarding the purchase of shares of money market funds managed by Advisers or
its affiliates.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without shareholder approval) not to pledge, mortgage or
hypothecate the Fund's assets as security for loans, nor to engage in joint or
joint and several trading accounts in securities, except that it may participate
in joint repurchase arrangements, lend its portfolio securities, invest its
short-term cash in shares of one or more investment companies, of the type
generally referred to as money market funds, managed by Advisers or its
affiliates, (pursuant to the terms of any order, and any conditions therein,
issued by the SEC permitting such investments), or combine orders to buy or sell
with orders from other persons to obtain lower brokerage commissions. The Fund
may not invest in excess of 5% of its net assets, valued at the lower of cost or
market, in warrants, nor more than 2% of its net assets in warrants not listed
on either the NYSE or AMEX. It is also the policy of the Fund that it may,
consistent with its objective, invest a portion of its assets, as permitted by
the 1940 Act and the rules adopted thereunder, in securities or other
obligations issued by companies engaged in securities related businesses,
including companies that are securities brokers, dealers, underwriters or
investment advisors.
If a bankruptcy or other extraordinary event occurs concerning a particular
security owned by the Fund, the Fund may receive stock, real estate, or other
investments that the Fund would not, or could not, buy. In this case, the Fund
intends to dispose of the investment as soon as practicable while maximizing the
return to shareholders.
If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in the value or liquidity of
portfolio securities or the amount of assets will not be considered a violation
of any of the foregoing restrictions.
OFFICERS AND TRUSTEES
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities. The
Board, in turn, elects the officers of the Fund who are responsible for
administering the Fund's day-to-day operations. The affiliations of the officers
and Board members and their principal occupations for the past five years are
shown below. Members of the Board who are considered "interested persons" of the
Fund under the 1940 Act are indicated by an asterisk (*).
NAME, AGE AND POSITIONS AND OFFICES PRINCIPAL OCCUPATIONS
ADDRESS WITH THE TRUST DURING PAST FIVE YEARS
Frank H. Abbott, III (76) Trustee
1045 Sansome Street
San Francisco, CA 94111
President and Director, Abbott Corporation (an investment company); and director
or trustee, as the case may be, of 28 of the investment companies in the
Franklin Templeton Group of Funds.
Harris J. Ashton (65) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods (a meat packing company); and director or
trustee, as the case may be, of 52 of the investment companies in the Franklin
Templeton Group of Funds.
*Harmon E. Burns (52) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc. and
Franklin Templeton Services, Inc.; Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (65) Trustee
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director, General Host
Corporation (nursery and craft centers); and director or trustee, as the case
may be, of 54 of the investment companies in the Franklin Templeton Group of
Funds.
David W. Garbellano (82) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director or trustee, as the case
may be, of 27 of the investment companies in the Franklin Templeton Group of
Funds.
*Charles B. Johnson (64) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 and Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin Advisory
Services, Inc., Franklin Investment Advisory Services, Inc. and Franklin
Templeton Distributors, Inc.; Director, Franklin/Templeton Investor Services,
Inc., Franklin Templeton Services, Inc. and General Host Corporation (nursery
and craft centers); and officer and/or director or trustee, as the case may be,
of most of the other subsidiaries of Franklin Resources, Inc. and of 53 of the
investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (57) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Senior Vice President and Director, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of most other subsidiaries of Franklin Resources, Inc. and of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (68) Trustee
20833 Stevens Creek Blvd.,
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Corporation (software
firm); Director, Fischer Imaging Corporation (medical imaging systems) and
Digital Transmission Systems, Inc. (wireless communications); and director or
trustee, as the case may be, of 26 of the investment companies in the Franklin
Templeton Group of Funds.
Gordon S. Macklin (69) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
Chairman, White River Corporation (financial services); Director, Fund American
Enterprises Holdings, Inc., MCI Communications Corporation, CCC Information
Services Group, Inc. (information services), MedImmune, Inc. (biotechnology),
Shoppers Express (home shopping), and Spacehab, Inc. (aerospace services); and
director or trustee, as the case may be, of 49 of the investment companies in
the Franklin Templeton Group of Funds; formerly Chairman, Hambrecht and Quist
Group, Director, H & Q Healthcare Investors, and President, National Association
of Securities Dealers, Inc.
Martin L. Flanagan (37) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President and Director, Templeton Worldwide,
Inc.; Executive Vice President, Chief Operating Officer and Director, Templeton
Investment Counsel, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc.; Treasurer, Franklin Advisory Services, Inc.; Treasurer and Chief
Financial Officer, Franklin Investment Advisory Services, Inc.; President,
Franklin Templeton Services, Inc.; Senior Vice President, Franklin/Templeton
Investor Services, Inc.; and officer and/or director or trustee, as the case may
be, of 57 of the investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (48) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Vice President, Franklin Advisers, Inc. and Franklin
Advisory Services, Inc.; Vice President, Chief Legal Officer and Chief Operating
Officer, Franklin Investment Advisory Services, Inc.; and officer of 57 of the
investment companies in the Franklin Templeton Group of Funds.
Charles E. Johnson (41) Vice President
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; President, Chief Executive Officer, Chief Investment
Officer and Director, Franklin Institutional Services Corporation; Chairman and
Director, Templeton Investment Counsel, Inc.; Vice President, Franklin Advisers,
Inc.; officer and/or director of some of the subsidiaries of Franklin Resources,
Inc.; and officer and/or director or trustee, as the case may be, of 36 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (58) Treasurer
777 Mariners Island Blvd. and Principal
San Mateo, CA 94404 Accounting Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 34 of
the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (60) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. Nonaffiliated members of the Board are not currently
paid fees. As shown above, the nonaffiliated Board members also serve as
directors or trustees of other investment companies in the Franklin Templeton
Group of Funds. They may receive fees from these funds for their services. The
following table provides the total fees paid to nonaffiliated Board members by
other funds in the Franklin Templeton Group of Funds.
NUMBER OF BOARDS
TOTAL FEES IN THE FRANKLIN
RECEIVED FROM THE TEMPLETON GROUP
FRANKLIN TEMPLETON OF FUNDS ON
NAME GROUP OF FUNDS* WHICH EACH SERVES**
Frank H. Abbott, III $165,236 28
Harris J. Ashton 343,591 52
S. Joseph Fortunato 360,411 54
David W. Garbellano 148,916 27
Frank W. T. LaHaye 139,233 26
Gordon S. Macklin 335,541 49
*For the calendar year ended December 31, 1996.
**We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the Board
members are responsible. The Franklin Templeton Group of Funds currently
includes 58 registered investment companies, with approximately 169 U.S. based
funds or series.
Nonaffiliated members of the Board are reimbursed for expenses incurred in
connection with attending board meetings, paid pro rata by each fund in the
Franklin Templeton Group of Funds for which they serve as director or trustee.
No officer or Board member received any other compensation, including pension or
retirement benefits, directly or indirectly from the Fund or other funds in the
Franklin Templeton Group of Funds. Certain officers or Board members who are
shareholders of Resources may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
As of August 5, 1997, the officers and Board members, as a group, owned of
record and beneficially the following shares of the Fund: approximately 158
Class I shares, or less than 1% of the total outstanding Class I shares of the
Fund. Many of the Board members also own shares in other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER AND SERVICES PROVIDED. The Fund's investment manager is
Advisers. Advisers provides investment research and portfolio management
services, including the selection of securities for the Fund to buy, hold or
sell and the selection of brokers through whom the Fund's portfolio transactions
are executed. Advisers' activities are subject to the review and supervision of
the Board to whom Advisers renders periodic reports of the Fund's investment
activities. Advisers and its officers, directors and employees are covered by
fidelity insurance for the protection of the Fund.
Advisers and its affiliates act as investment manager to numerous other
investment companies and accounts. Advisers may give advice and take action with
respect to any of the other funds it manages, or for its own account, that may
differ from action taken by Advisers on behalf of the Fund. Similarly, with
respect to the Fund, Advisers is not obligated to recommend, buy or sell, or to
refrain from recommending, buying or selling any security that Advisers and
access persons, as defined by the 1940 Act, may buy or sell for its or their own
account or for the accounts of any other fund. Advisers is not obligated to
refrain from investing in securities held by the Fund or other funds that it
manages. Of course, any transactions for the accounts of Advisers and other
access persons will be made in compliance with the Fund's Code of Ethics. Please
see "Miscellaneous Information - Summary of Code of Ethics."
MANAGEMENT FEES. Under its management agreement, the Fund pays Advisers a
management fee equal to an annual rate of 0.625 of 1% of the value of average
daily net assets up to and including $100 million; 0.50 of 1% of the value of
average daily net assets over $100 million up to and including $250 million;
0.45 of 1% of the value of average daily net assets over $250 million up to and
including $10 billion; 0.44 of 1% of the value of average daily net assets over
$10 billion up to and including $12.5 billion; 0.42 of 1% of the value of
average daily net assets over $12.5 billion up to and including $15 billion; and
0.40 of 1% of the value of average daily net assets in excess of $15 billion.
The fee is computed at the close of business on the last business day of each
month. Each class of the Fund's shares pays its proportionate share of the
management fee.
For the fiscal years ended April 30, 1995, 1996 and 1997, management fees,
before any advance waiver, totaled $81,809, $169,354 and $619,802, respectively.
Under an agreement by Advisers to waive or limit its fees, the Fund paid
management fees totaling $0, $14,092 and $510,202, respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1998. It may continue in effect for successive annual periods if its continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the Board members who are not parties to the
management agreement or interested persons of any such party (other than as
members of the Board), cast in person at a meeting called for that purpose. The
management agreement may be terminated without penalty at any time by the Board
or by a vote of the holders of a majority of the Fund's outstanding voting
securities, or by Advisers on 60 days' written notice, and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
ADMINISTRATIVE SERVICES. Under an agreement with Advisers, FT Services provides
certain administrative services and facilities for the Fund. These include
preparing and maintaining books, records, and tax and financial reports, and
monitoring compliance with regulatory requirements. FT Services is a wholly
owned subsidiary of Resources.
Under its administration agreement, Advisers pays FT Services a monthly
administration fee equal to an annual rate of 0.15% of the Fund's average daily
net assets up to $200 million, 0.135% of average daily net assets over $200
million up to $700 million, 0.10% of average daily net assets over $700 million
up to $1.2 billion, and 0.075% of average daily net assets over $1.2 billion.
The fee is paid by Advisers. It is not a separate expense of the Fund.
SHAREHOLDER SERVICING AGENT. Investor Services, a wholly owned subsidiary of
Resources, is the Fund's shareholder servicing agent and acts as the Fund's
transfer agent and dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account. The Fund may also reimburse Investor
Services for certain out-of-pocket expenses, which may include payments by
Investor Services to entities, including affiliated entities, that provide
sub-shareholder services, recordkeeping and/or transfer agency services to
beneficial owners of the Fund. The amount of reimbursements for these services
per benefit plan participant Fund account per year may not exceed the per
account fee payable by the Fund to Investor Services in connection with
maintaining shareholder accounts.
CUSTODIAN. Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, New York 10286, acts as custodian of the securities and other assets of
the Fund. The custodian does not participate in decisions relating to the
purchase and sale of portfolio securities.
AUDITORS. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California
94105, are the Fund's independent auditors. During the fiscal year ended April
30, 1997, their auditing services consisted of rendering an opinion on the
financial statements of the Trust included in the Trust's Annual Report to
Shareholders for the fiscal year ended April 30, 1997.
HOW DOES THE FUND
BUY SECURITIES FOR ITS PORTFOLIO?
Advisers selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement
and any directions that the Board may give.
When placing a portfolio transaction, Advisers seeks to obtain prompt execution
of orders at the most favorable net price. For portfolio transactions on a
securities exchange, the amount of commission paid by the Fund is negotiated
between Advisers and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. Advisers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of Advisers, a
better price and execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or concession paid by the
issuer to the underwriter, and purchases from dealers will include a spread
between the bid and ask price.
Advisers may pay certain brokers commissions that are higher than those another
broker may charge, if Advisers determines in good faith that the amount paid is
reasonable in relation to the value of the brokerage and research services it
receives. This may be viewed in terms of either the particular transaction or
Advisers' overall responsibilities to client accounts over which it exercises
investment discretion. The services that brokers may provide to Advisers
include, among others, supplying information about particular companies,
markets, countries, or local, regional, national or transnational economies,
statistical data, quotations and other securities pricing information, and other
information that provides lawful and appropriate assistance to Advisers in
carrying out its investment advisory responsibilities. These services may not
always directly benefit the Fund. They must, however, be of value to Advisers in
carrying out its overall responsibilities to its clients.
It is not possible to place a dollar value on the special executions or on the
research services Advisers receives from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. If the Fund's
officers are satisfied that the best execution is obtained, the sale of Fund
shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, may also be considered a factor in the selection of broker-dealers to
execute the Fund's portfolio transactions.
Because Distributors is a member of the NASD, it may sometimes receive certain
fees when the Fund tenders portfolio securities pursuant to a tender-offer
solicitation. As a means of recapturing brokerage for the benefit of the Fund,
any portfolio securities tendered by the Fund will be tendered through
Distributors if it is legally permissible to do so. In turn, the next management
fee payable to Advisers will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by Advisers are considered at or about the same
time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by
Advisers, taking into account the respective sizes of the funds and the amount
of securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the Fund is
concerned. In other cases it is possible that the ability to participate in
volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Fund.
During the fiscal years ended April 30, 1995, 1996 and 1997, the Fund paid
brokerage commissions totaling $25,162, $46,628 and $287,728, respectively.
As of April 30, 1997, the Fund did not own securities of its regular
broker-dealers.
HOW DO I BUY, SELL AND EXCHANGE SHARES?
ADDITIONAL INFORMATION ON BUYING SHARES
The Fund continuously offers its shares through Securities Dealers who have an
agreement with Distributors. Securities laws of states where the Fund offers its
shares may differ from federal law. Banks and financial institutions that sell
shares of the Fund may be required by state law to register as Securities
Dealers.
When you buy shares, if you submit a check or a draft that is returned unpaid to
the Fund we may impose a $10 charge against your account for each returned item.
Other Payments to Securities Dealers. Distributors and/or its affiliates provide
financial support to various Securities Dealers that sell shares of the Franklin
Templeton Group of Funds. This support is based primarily on the amount of sales
of fund shares. The amount of support may be affected by: total sales; net
sales; levels of redemptions; the proportion of a Securities Dealer's sales and
marketing efforts in the Franklin Templeton Group of Funds; a Securities
Dealer's support of, and participation in, Distributors' marketing programs; a
Securities Dealer's compensation programs for its registered representatives;
and the extent of a Securities Dealer's marketing programs relating to the
Franklin Templeton Group of Funds. Financial support to Securities Dealers may
be made by payments from Distributors' resources, from Distributors' retention
of underwriting concessions and, in the case of funds that have Rule 12b-1
plans, from payments to Distributors under such plans. In addition, certain
Securities Dealers may receive brokerage commissions generated by fund portfolio
transactions in accordance with the NASD's rules.
REINVESTMENT DATE. Shares acquired through the reinvestment of dividends will be
purchased at the Net Asset Value determined on the business day following the
dividend record date (sometimes known as the "ex-dividend date"). The processing
date for the reinvestment of dividends may vary and does not affect the amount
or value of the shares acquired.
ADDITIONAL INFORMATION ON EXCHANGING SHARES
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be exchanged into
the new fund and will be invested at Net Asset Value. Backup withholding and
information reporting may apply. Information regarding the possible tax
consequences of an exchange is included in the tax section in this SAI and in
the Prospectus.
If a substantial number of shareholders should, within a short period, sell
their shares of the Fund under the exchange privilege, the Fund might have to
sell portfolio securities it might otherwise hold and incur the additional costs
related to such transactions. On the other hand, increased use of the exchange
privilege may result in periodic large inflows of money. If this occurs, it is
the Fund's general policy to initially invest this money in short-term,
interest-bearing money market instruments, unless it is believed that attractive
investment opportunities consistent with the Fund's investment objective exist
immediately. This money will then be withdrawn from the short-term, money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company are generally not
available until the fifth business day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange until
that fifth business day. The sale of Fund shares to complete an exchange will be
effected at Net Asset Value at the close of business on the day the request for
exchange is received in proper form. Please see "May I Exchange Shares for
Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be made
from the redemption of an equivalent amount of shares in your account, generally
on the 25th day of the month in which a payment is scheduled. If the 25th falls
on a weekend or holiday, we will process the redemption on the prior business
day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Because the amount
withdrawn under the plan may be more than your actual yield or income, part of
the payment may be a return of your investment.
The Fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if all
shares in your account are withdrawn or if the Fund receives notification of the
shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the Fund in
a timely fashion. Any loss to you resulting from your dealer's failure to do so
must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The Fund has committed itself to pay in cash (by check) all
requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of the 90-day period. This commitment
is irrevocable without the prior approval of the SEC. In the case of redemption
requests in excess of these amounts, the Board reserves the right to make
payments in whole or in part in securities or other assets of the Fund, in case
of an emergency, or if the payment of such a redemption in cash would be
detrimental to the existing shareholders of the Fund. In these circumstances,
the securities distributed would be valued at the price used to compute the
Fund's net assets and you may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind. If this
happens, however, you may not be able to recover your investment in a timely
manner.
GENERAL INFORMATION
If dividend checks are returned to the Fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your dividend
option to reinvest all distributions. The proceeds will be reinvested in
additional shares at Net Asset Value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other
income during the time the checks remain uncashed. Neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
If mail is returned as undeliverable or we are unable to locate you or verify
your current mailing address, we may deduct the costs of our efforts to find you
from your account. These costs may include a percentage of the account when a
search company charges a percentage fee in exchange for its location services.
All checks, drafts, wires and other payment mediums used to buy or sell shares
of the Fund must be denominated in U.S. dollars. We may, in our sole discretion,
either (a) reject any order to buy or sell shares denominated in any other
currency or (b) honor the transaction or make adjustments to your account for
the transaction as of a date and with a foreign currency exchange factor
determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions that
maintain omnibus accounts with the Fund on behalf of numerous beneficial owners
for recordkeeping operations performed with respect to such owners. For each
beneficial owner in the omnibus account, the Fund may reimburse Investor
Services an amount not to exceed the per account fee that the Fund normally pays
Investor Services. These financial institutions may also charge a fee for their
services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share of each class of the Fund's shares as
of the scheduled close of the NYSE, generally 1:00 p.m. Pacific time, each day
that the NYSE is open for trading. As of the date of this SAI, the Fund is
informed that the NYSE observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of the Fund, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter portfolio securities are
valued within the range of the most recent quoted bid and ask prices. Portfolio
securities that are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by Advisers.
Portfolio securities underlying actively traded call options are valued at their
market price as determined above. The current market value of any option held by
the Fund is its last sale price on the relevant exchange before the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, options are valued within the range of the
current closing bid and ask prices if the valuation is believed to fairly
reflect the contract's market value.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the NYSE, if that is earlier. The value is then converted into its U.S.
dollar equivalent at the foreign exchange rate in effect at noon, New York time,
on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the Net Asset Value. If events
materially affecting the values of these foreign securities occur during this
period, the securities will be valued in accordance with procedures established
by the Board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the scheduled close of the NYSE. The value of these securities used in computing
the Net Asset Value is determined as of such times. Occasionally, events
affecting the values of these securities may occur between the times at which
they are determined and the scheduled close of the NYSE that will not be
reflected in the computation of the Net Asset Value. If events materially
affecting the values of these securities occur during this period, the
securities will be valued at their fair value as determined in good faith by the
Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of the Board, the
Fund may utilize a pricing service, bank or Securities Dealer to perform any of
the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income generally in the form of
dividends, interest and other income derived from its investments. This income,
less the expenses incurred in the Fund's operations, is its net investment
income from which income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any capital loss carryforward or post-October
loss deferral) may generally be made once each year in December to reflect any
net short-term and net long-term capital gains realized by the Fund as of
October 31 of the current fiscal year and any undistributed capital gains from
the prior fiscal year. The Fund may adjust the timing of these distributions for
operational or other reasons.
TAXES
As stated in the Prospectus, the Fund has elected and qualified to be treated as
a regulated investment company under Subchapter M of the Code. The Board
reserves the right not to maintain the qualification of the Fund as a regulated
investment company if it determines this course of action to be beneficial to
shareholders. In that case, the Fund will be subject to federal and possibly
state corporate taxes on its taxable income and gains, and distributions to
shareholders will be taxable to the extent of the Fund's available earnings and
profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. Under these rules, certain distributions
which are declared in October, November or December but which, for operational
reasons, may not be paid to you until the following January, will be treated for
tax purposes as if paid by the Fund and received by you on December 31 of the
calendar year in which they are declared. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that its distributions will be sufficient to
avoid any or all federal excise taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between your basis in the shares
and the amount received, subject to the rules described below. If such shares
are a capital asset in your hands, gain or loss will be capital gain or loss and
will be long-term for federal income tax purposes if the shares have been held
for more than one year.
All or a portion of the sales charge incurred in buying shares of the Fund will
not be included in the federal tax basis of the shares sold or exchanged within
ninety (90) days of their purchase (for purposes of determining gain or loss
with respect to the shares) if the sales proceeds are reinvested in the Fund or
in another fund in the Franklin Templeton Group of Funds and a sales charge
which would otherwise apply to the reinvestment is reduced or eliminated. Any
portion of the sales charge excluded from the tax basis of the shares sold will
be added to the tax basis of the shares acquired in the reinvestment. You should
consult with your tax advisor concerning the tax rules applicable to the
redemption or exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares repurchased.
Any loss realized upon the sale of shares within six months from the date of
their purchase will be treated as a long-term capital loss to the extent of
amounts treated as distributions of net long-term capital gain during this
six-month period.
The Fund's investment in options and futures contracts, including stock options,
stock index options, stock index futures and options on stock index futures are
subject to many complex and special tax rules. For example, OTC options on debt
securities and equity options, including options on stock and on narrow-based
stock indexes, will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse,
or closing out of the option or sale of the underlying stock or security. By
contrast, the Fund treatment of certain other options, futures and forward
contracts entered into by the Fund is generally governed by Section 1256 of the
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to
recognize taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, the Fund may
be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect both the
amount, character and timing of income distributed to you by the Fund.
When the Fund holds an option, future or forward contract which substantially
diminishes the Fund's risk of loss with respect to another position of the Fund
(as might occur in some hedging transactions), this combination of positions
could be treated as a "straddle" for tax purposes, resulting in possible
deferral of losses, adjustments in the holding periods of Fund securities and
conversion of short-term capital losses into long-term capital losses. Certain
tax elections exist for mixed straddles (i.e., straddles comprised of at least
one Section 1256 position and at least one non-Section 1256 position) which may
reduce or eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is subject to the requirement that
less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income"). This requirement may limit the Fund's ability to
engage in options, futures and forward contracts and certain other hedging
transactions because these transactions are often consummated in less than three
months, may require the sale of portfolio securities held less than three months
and may, as in the case of short sales of portfolio securities, reduce the
holding periods of certain securities within the Fund, resulting in additional
short-short income for the Fund.
The Fund will monitor its transactions in these options, futures and forward
contracts and may make certain other tax elections in order to mitigate the
effect of the above rules and to prevent disqualification of the Fund as a
regulated investment company under Subchapter M of the Code.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement, Distributors acts as principal
underwriter in a continuous public offering of the Fund's shares. The
underwriting agreement will continue in effect for successive annual periods if
its continuance is specifically approved at least annually by a vote of the
Board or by a vote of the holders of a majority of the Fund's outstanding voting
securities, and in either event by a majority vote of the Board members who are
not parties to the underwriting agreement or interested persons of any such
party (other than as members of the Board), cast in person at a meeting called
for that purpose. The underwriting agreement terminates automatically in the
event of its assignment and may be terminated by either party on 90 days'
written notice.
Distributors pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as
underwriter of the Fund's Advisor Class shares.
HOW DOES THE FUND MEASURE PERFORMANCE?
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by the Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by the Fund are
based on the standardized methods of computing performance mandated by the SEC.
If a Rule 12b-1 plan is adopted, performance figures reflect fees from the date
of the plan's implementation.
For periods before January 1, 1997, standardized performance quotations for
Advisor Class are calculated by substituting Class I performance for the
relevant time period, excluding the effect of Class I's maximum initial sales
charge, and including the effect of the Rule 12b-1 fees applicable to Class I
shares of the Fund. For periods after January 1, 1997, standardized performance
quotations for Advisor Class are calculated as described below.
An explanation of these and other methods used by the Fund to compute or express
performance follows. Regardless of the method used, past performance does not
guarantee future results, and is an indication of the return to shareholders
only for the limited historical period used.
TOTAL RETURN
AVERAGE ANNUAL TOTAL RETURN. Average annual total return is determined by
finding the average annual rates of return over one-year and from inception
periods that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes income dividends and capital
gain distributions are reinvested at Net Asset Value. The quotation assumes the
account was completely redeemed at the end of each one-year and from inception
period and the deduction of all applicable charges and fees. If a change is made
to the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge currently in effect.
The average annual total return for Advisor Class for the one-year and from
inception periods ended April 30, 1997, was 23.13% and 17.37%, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-year and from inception periods at the end of the
one-year and from inception periods
CUMULATIVE TOTAL RETURN. Like average annual total return, cumulative total
return assumes income dividends and capital gain distributions are reinvested at
Net Asset Value. Cumulative total return, however, will be based on the actual
return for each class for a specified period rather than on the average return
over one-year and from inception periods. The cumulative total return for
Advisor Class for the one-year and from inception periods ended April 30, 1997,
was 23.13% and 70.21%, respectively.
YIELD
CURRENT YIELD. Current yield shows the income per share earned by the Fund. It
is calculated by dividing the net investment income per share of Advisor Class
earned during a 30-day base period by the Net Asset Value per share on the last
day of the period and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of the class during the base
period. The yield for Advisor Class for the 30-day period ended April 30, 1997,
was 3.77%.
These figures were obtained using the following SEC formula:
Yield = 2 [(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the periodthat
were entitled to receive dividends
d = the Net Asset Value per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the SEC,
is not indicative of the amounts which were or will be paid to shareholders.
Amounts paid to shareholders are reflected in the quoted current distribution
rate. For Advisor Class, the current distribution rate is usually computed by
annualizing the dividends paid per share by the class during a certain period
and dividing that amount by the current Net Asset Value. The current
distribution rate differs from the current yield computation because it may
include distributions to shareholders from sources other than dividends and
interest, such as premium income from option writing and short-term capital
gains, and is calculated over a different period of time.
VOLATILITY
Occasionally statistics may be used to show the Fund's volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's Net
Asset Value or performance to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market, as represented by
an index considered representative of the types of securities in which the fund
invests. A beta of more than 1.00 indicates volatility greater than the market
and a beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is used
to measure variability of Net Asset Value or total return around an average over
a specified period of time. The idea is that greater volatility means greater
risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Franklin Templeton Group of Funds. Resources is the parent company of the
advisors and underwriter of the Franklin Templeton Group of Funds.
COMPARISONS
To help you better evaluate how an investment in the Fund may satisfy your
investment objective, advertisements and other materials about the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
a) NAREIT Equity REIT Index - a compilation of market weighted securities data
collected from all tax-qualified equity real estate investment trusts listed on
the NYSE and AMEX and the NASDAQ. The index tracks performance, as well as REIT
assets, by property type and geographic region.
b) Russell-NCREIF Property Index - a compilation of real estate investment data
collected from the members of the National Council of Real Estate Investment
Fiduciaries. The index is a property-specific institutional real estate
performance benchmark in the U.S., which summarizes the historical performance
of income-producing properties owned by pension and profit sharing plans.
c) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones(R) Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
d) Standard & Poor's(R) 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks.
Comparisons of performance assume reinvestment of dividends.
e) The New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks listed on
the NYSE.
f) 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.
g) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
h) 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.
i) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for mutual funds.
j) Valueline Index - an unmanaged index which follows the stock of approximately
1,700 companies.
k) Bateman Eichler Hill Richards Western Stock Index - a managed index
representing 215 stocks of companies within the Western U.S. Seventy-five
percent of the stocks are California companies, the remaining 25% represent
companies in Arizona, Hawaii, Nevada, Oregon and Washington.
l) 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.
m) 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.
n) 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) Russell 3000 Index - composed of 3,000 large U.S. companies by market
capitalization, representing approximately 98% of the U.S. equity market.
p) Russell 2000 Small Stock Index - consists of the smallest 2,000 companies in
the Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.
q) 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.
r) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
s) Wilshire Real Estate Securities Index - a market capitalization weighted
index of publicly traded real estate securities, such as: Real Estate Investment
Trusts (REITs), Real Estate Operating Companies (REOCs) and partnerships. The
Index comprises companies whose charter is the equity ownership and operation of
commercial real estate.
t) Morningstar - information published by Morningstar, Inc., including
Morningstar proprietary mutual fund ratings. The ratings reflect Morningstar's
assessment of the historical risk-adjusted performance of a fund over specified
time periods relative to other funds within its category.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the Fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
Advertisements or information may also compare the Fund's performance to the
return on CDs or other investments. You should be aware, however, that an
investment in the Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a CD issued by a bank. For
example, as the general level of interest rates rise, the value of the Fund's
fixed-income investments, if any, as well as the value of its shares that are
based upon the value of such portfolio investments, can be expected to decrease.
Conversely, when interest rates decrease, the value of the Fund's shares can be
expected to increase. CDs are frequently insured by an agency of the U.S.
government. An investment in the Fund is not insured by any federal, state or
private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the Fund to calculate its figures. In addition,
there can be no assurance that the Fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
The Fund may help you achieve various investment goals such as accumulating
money for retirement, saving for a down payment on a home, college costs and
other long-term goals. The Franklin College Costs Planner may help you in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are based upon current costs published by the
College Board.) The Franklin Retirement Planning Guide leads you through the
steps to start a retirement savings program. Of course, an investment in the
Fund cannot guarantee that these goals will be met.
The Fund is a member of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 49 years and
now services more than 2.7 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Mutual Series Fund Inc., known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $207 billion in
assets under management for more than 5.4 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers 120
U.S. based open-end investment companies to the public. The Fund may identify
itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past nine years.
As of August 5, 1997, the principal shareholders of the Fund, beneficial or of
record, were as follows:
NAME AND ADDRESS SHARE AMOUNT PERCENTAGE
Matthew F. Avery
2530 Fillmore Street
San Francisco, CA 94115 5,736.099 7%
Franklin Templeton Fund
Allocator Series -
Franklin Templeton
Conservative Target Fund
c/o 1810 Gateway 8,617.296 10%
San Mateo, CA 94404
Franklin Templeton Fund
Allocator Series -
Franklin Templeton
Moderate Target Fund
c/o 1810 Gateway 22,568.133 28%
San Mateo, CA 94404
Franklin Templeton Fund
Allocator Series -
Franklin Templeton
Growth Target Fund
c/o 1810 Gateway 24,552.029 30%
San Mateo, CA 94404
From time to time, the number of Fund shares held in the "street name" accounts
of various Securities Dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
In the event of disputes involving multiple claims of ownership or authority to
control your account, the Fund has the right (but has no obligation) to: (a)
freeze the account and require the written agreement of all persons deemed by
the Fund to have a potential property interest in the account, before executing
instructions regarding the account; (b) interplead disputed funds or accounts
with a court of competent jurisdiction; or (c) surrender ownership of all or a
portion of the account to the IRS in response to a Notice of Levy.
SUMMARY OF CODE OF ETHICS. Employees of the Franklin Templeton Group who are
access persons under the 1940 Act are permitted to engage in personal securities
transactions subject to the following general restrictions and procedures: (i)
the trade must receive advance clearance from a compliance officer and must be
completed by the close of the business day following the day clearance is
granted; (ii) copies of all brokerage confirmations must be sent to a compliance
officer and, within 10 days after the end of each calendar quarter, a report of
all securities transactions must be provided to the compliance officer; and
(iii) access persons involved in preparing and making investment decisions must,
in addition to (i) and (ii) above, file annual reports of their securities
holdings each January and inform the compliance officer (or other designated
personnel) if they own a security that is being considered for a fund or other
client transaction or if they are recommending a security in which they have an
ownership interest for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Trust, for the fiscal year ended April 30, 1997, including the auditors'
report, are incorporated herein by reference.
USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., the Fund's investment manager
AMEX - American Stock Exchange
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS I, CLASS II AND ADVISOR CLASS - The Fund offers three classes of shares,
designated "Class I," "Class II," and "Advisor Class." The three classes have
proportionate interests in the Fund's portfolio. They differ, however, primarily
in their sales charge and expense structures.
CODE - Internal Revenue Code of 1986, as amended
DISTRIBUTORS - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter
FRANKLIN TEMPLETON GROUP - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries
FRANKLIN TEMPLETON GROUP OF FUNDS - All U.S. registered investment companies in
the Franklin Group of Funds(R) and the Templeton Group of Funds
FT SERVICES - Franklin Templeton Services, Inc., the Fund's administrator
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., the Fund's
shareholder servicing and transfer agent
IRS - Internal Revenue Service
MOODY'S - Moody's Investors Service, Inc.
NASD - National Association of Securities Dealers, Inc.
NET ASSET VALUE (NAV) - The value of a mutual fund is determined by deducting
the fund's liabilities from the total assets of the portfolio. The net asset
value per share is determined by dividing the net asset value of the fund by the
number of shares outstanding.
NYSE - New York Stock Exchange
PROSPECTUS - The prospectus for Advisor Class shares of the Fund dated September
1, 1997, as may be amended from time to time
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
S&P - Standard & Poor's Corporation
SEC - U.S. Securities and Exchange Commission
SECURITIES DEALER - A financial institution that, either directly or through
affiliates, has an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
U.S. - United States
WE/OUR/US - Unless a different meaning is indicated by the context, these terms
refer to the Fund and/or Investor Services, Distributors, or other wholly-owned
subsidiaries of Resources.
APPENDIX
DESCRIPTION OF RATINGS
CORPORATE BOND RATINGS
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating may also reflect the
filing of a bankruptcy petition under circumstances where debt service payments
are continuing. The C1 rating is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to repay
punctually their promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following designations, all judged to
be investment grade, to indicate the relative repayment capacity of rated
issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
FRANKLIN REAL ESTATE SECURITIES TRUST
File Nos. 33-69048
811-8034
PART C
OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Audited Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated April 30, 1997 as filed
with the SEC electronically on form type N-30D on July 9, 1997.
(i) Report of Independent Auditors.
(ii) Statement of Investments in Securities and Net Assets,
April 30, 1997.
(iii) Statements of Assets and Liabilities - April 30, 1997.
(iv) Statements of Operations for the year ended April 30,
1997.
(v) Statements of Changes in Net Assets for the years ended
April 30, 1997 and 1996.
(vi) Notes to Financial Statements.
b) Exhibits:
The following exhibits are incorporated by reference, except for exhibits 2(ii),
5(iii), 11(i), 18(i), 27(i), 27(ii), and 27(iii) which are filed herewith.
(1) Copies of the charter as now in effect:
(i) Certificate of Trust of Franklin Real Estate Securities Trust
dated September 14, 1993
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(ii) Agreement and Declaration of Trust of Franklin Real Estate
Securities Trust dated September 14, 1993
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(iii) Certificate of Amendment of Agreement and Declaration of Trust
of Franklin Real Estate Securities Trust dated February 16,
1995.
Filing: Post-Effective Amendment No. 4
to Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(2) Copies of the existing By-Laws or instruments corresponding thereto:
(i) By-Laws of Franklin Real Estate Securities Trust
Filing: Post-Effective Amendment No. 4 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(ii) Amendment to the By-Laws dated October 27, 1994
(3) Copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) Specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered.
Not Applicable
(5) Copies of all investment advisory contracts relating to the
managemen of the assets of the Registrant;
(i) Management Agreement between Registrant on behalf of Franklin
Real Estate Securities Fund and Franklin Advisers, Inc., dated
January 3, 1994
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(ii) Amendment to Management Agreement between Franklin Real Estate
Securities Trust, on behalf of Franklin Real Estate Securities
Fund, and Franklin Advisers Inc., dated August 1, 1995
Filing: Post-Effective Amendment No. 5
to Registration Statement on Form N-1A
File No. 33-69048
Filing Date: August 21, 1996
(iii) Subcontract for Fund Administrative Services
between Franklin Advisers, Inc. and Franklin
Templeton Services, Inc., providing service to
Franklin Real Estate Securities Trust dated
October 1 1996
(6) Copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between Registrant
and Franklin/Templeton Distributors, Inc., dated April 23
1995
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(ii) Forms of Dealer Agreements between Registrant and
Franklin/Templeton Distributors, Inc., dated May 1, 1995
Filing: Post-Effective Amendment No. 4 to Registration
Statement
on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
Trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the Investment Company Act of 1940 (the "1940
Act"), with respect to securities and similar investments of the
Registrant, including the schedule of remuneration;
(i) Master Custodian Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 5 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: August 21, 1996
(ii) Terminal Link Agreement between Registrant and Bank of New
York dated February 16, 1996
Filing: Post-Effective Amendment No. 5 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: August 21, 1996
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) An opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) All financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Letter of Understanding dated December 27, 1993
Filing: Post-Effective Amendment No. 4
to Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Copy of Model Retirement Plan:
Registrant: Franklin High Income Trust
Filing: Post-Effective Amendment No. 26
to Registration Statement on Form N-1A
File No. 2-3020
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-l
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Plan of Distribution pursuant to Rule 12b-1 dated January 3,
1994
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(ii) Class II Distribution Plan pursuant to Rule 12b-1 dated March
30, 1995
Filing: Post-Effective Amendment No. 4 to Registration
Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(16) schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 (which need not be
audited)
(i) Schedule for Computation of Performance Quotation
Registrant: Franklin Tax-Advantaged U.S. Government
Securities Fund
Filing: Post-Effective Amendment No. 8 to Registration
Statement of Registrant on Form N-1A
File No. 33-11963
Filing Dated: March 1, 1995
(17) Power of Attorney
(i) Power of Attorney dated January 17, 1995
Filing: Post-Effective Amendment No. 4
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(ii) Certificate of Secretary dated January 17, 1995
Filing: Post-Effective Amendment No. 4
to Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 30, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule 18f-3
under the 1940 Act
(i) Multiple Class Plan dated July 15, 1996
(ii) Multiple Class Plan for Advisor Class Shares
Filing: Post-Effective Amendment No. 6
to Registration Statement on Form N-1A
File No. 33-69048
Filing Date: December 31, 1996
(27) Financial Data Schedule Computation
(i) Financial Data Schedule for Franklin Real Estate
Securities Fund - Class I
(ii) Financial Data Schedule for Franklin Real Estate
Securities Fund - Class II
(iii) Financial Data Schedule for Franklin Real Estate
Securities Fund - Advisor Class
ITEM 25 PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT
None
ITEM 26 NUMBER OF HOLDERS OF SECURITIES
As of May 31, 1997, the number of record holders of each class of securities of
the Registrant are as follows:
NUMBER OF RECORD HOLDERS
Advisor
CLASS I CLASS II CLASS
Franklin Real Estate Securities Fund 12,376 4,863 63
ITEM 27 INDEMNIFICATION
See Article III, Section 7 and Article VII, Section 3 of the Agreement and
Declaration of Trust (Exhibit No. 1(ii)) and Article VI of the By-Laws (Exhibit
No. 2(i)) of Registrant. Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 28 BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin/Templeton Group of
Funds. In addition, Mr. Charles B. Johnson is a director of General Host
Corporation. For additional information please see Part B and Schedules A and D
of Form ADV of the Fund's Investment Manager (SEC File 801-26292), incorporated
herein by reference, which sets forth the officers and directors of the
Investment Manager and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 29 PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc. Franklin Equity Fund Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund Franklin Gold Fund Franklin High Income
Trust Franklin Investors Securities Trust Franklin Managed Trust Franklin Money
Fund Franklin Mutual Series Fund Inc. Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund Franklin New York Tax-Free Trust Franklin
Strategic Mortgage Portfolio Franklin Strategic Series Franklin Tax-Exempt Money
Fund Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Institutional Fiduciary Trust
Franklin Templeton Japan Fund
Templeton American Trust, Inc.
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Real Estate Fund
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
Templeton Variable Annuity Fund
Templeton Variable Products Series Fund
(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated person
of an affiliated person of the Registrant.
ITEM 30 LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 will be kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both of
whose address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 31 MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32 UNDERTAKINGS
(a) The Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not less
than 10 per cent of the Registrant's outstanding shares and to assist its
shareholders in the communicating with other shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Fund's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Mateo and the State of California, on the 29th day of August, 1997.
FRANKLIN REAL ESTATE SECURITIES TRUST
(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 and
Rupert H. Johnson, Jr. Trustee
Dated: August 29, 1997
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: August 29, 1997
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: August 29, 1997
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: August 29, 1997
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: August 29, 1997
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: August 29, 1997
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: August 29, 1997
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: August 29, 1997
DAVID W. GARBELLANO* Trustee
David W. Garbellano Dated: August 29, 1997
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: August 29, 1997
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: August 29, 1997
*By /S/ LARRY L. GREENE
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN REAL ESTATE SECURITIES TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.B1(i) Certificate of Trust of Franklin Real Estate *
Securities Trust dated September 14, 1993
EX-99.B1(ii) Agreement and Declaration of Trust of Franklin *
Real Estate Securities Trust dated September
14, 1993
EX-99.B1(iii) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin Real Estate
Securities Trust dated February 16, 1995
EX-99.B2(i) By-Laws *
EX-99.B2 (ii) Amendment to the By-Laws dated October 27, 1994 Attached
EX-99.B5(i) Management Agreement between the Registrant, on *
behalf of Franklin Real Estate Securities Fund,
and Franklin Advisers, Inc., dated January 3,
1994
EX-99.B5(ii) Amendment to Management Agreement between the *
Registrant, on behalf of Franklin Real Estate
Securities Fund, dated August 1, 1995
EX-99.B5 (iii) Subcontract for Fund Administrative Attached
Services between Franklin Advisers,
Inc. and Franklin Templeton Services,
Inc. providing service to Franklin Real
Estate Securities Trust dated October 1, 1996
EX-99.B6(i) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc., dated April 23, 1995
EX-99.B6(ii) Forms of Dealer Agreements between Registrant *
and Franklin/Templeton Distributors, Inc.,
dated May 1, 1995
EX-99.B8(i) Master Custodian Agreement between Registrant *
and Bank of New York dated February 16, 1996
EX-99.B8(ii) Terminal Link Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.B11(i) Consent of Independent Auditors Attached
EX-99.B13(i) Letter of Understanding dated December 27, 1993 *
EX-99.B14(i) Copy of model retirement plan *
EX-99.B15(i) Distribution Plan pursuant to Rule 12b-1 dated *
January 3, 1994
EX-99.B15(ii) Class II Distribution Plan pursuant to Rule *
12b-1 dated March 30, 1995
EX-99.B16(i) Schedule for Computation of Performance *
Quotations
EX-99.B17(i) Power of Attorney dated January 17, 1995 *
EX-99.B17(ii) Certificate of Secretary dated January 17, 1995 *
EX-99.B18(i) Multiple Class Plan dated July 15, 1996 Attached
EX-99.B18(ii) Multiple Class Plan for Advisor Class Shares *
EX-27.(i) Financial Data Schedule for Franklin Real Attached
Estate Securities Fund - Class I
EX-27.(ii) Financial Data Schedule for Franklin Real Attached
Estate Securities Fund - Class II
EX-27.(iii) Financial Data Schedule for Franklin Attached
Real Estate Securities Fund - Advisor Class
*Incorporated by Reference
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, Secretary of Franklin Real Estate Securities Trust, a
business trust organized under the laws of the State of Delaware, do hereby
certify that the following resolution was adopted by a majority of the trustees
present at a meeting held at the offices of the trust at 777 Mariners Island
Boulevard, San Mateo, California, on April 19, 1994.
WHEREAS, the Board of Trustees has determined that it is
advisable and in the best interests of the shareholders of the
Trust to revise the Trust's By-Laws to specifically provide
for the use of proxies which are communicated by an
electronic, telephonic, computerized or telecommunications
method;
NOW, THEREFORE, BE IT RESOLVED, that Section 10 of Article II
is hereby resolved to read as follows:
"Section 10. PROXIES. Every person entitled to vote for
Trustees or on any other matter shall have the right to
do so either in person or by one or more agents. except as
otherwise provided in the agreement and declaration of trust
or these by-laws, matters relating to the giving, voting or
validity of proxies will be governed by the Delaware General
Corporation Law relating to proxies, and Delaware judicial
interpretations thereunder, as if the Trust were a Delaware
corporation and Shareholders of the Trust were shareholders
of a Delaware corporation.
IN WITNESS, WHEREOF, I have subscribed my name this 27th day of October, 1994.
/s/ DEBORAH R. GATZEK
Deborah R. Gatzek
Secretary
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services
("Subcontract") is made as of October 1, 1996 between FRANKLIN ADVISERS, INC., a
California corporation, hereinafter called the "Investment Manager," and
FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in fulfilling
certain of the Investment Manager's obligations under each investment management
and investment advisory agreement ("Agreement") between the Investment Manager
and each Investment Company listed on Exhibit A, ("Investment Company") for
itself or on behalf of each of its series listed on Exhibit A (each, a "Fund").
This Subcontract is subject to the terms of each Agreement, which is
incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to each Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
shareholders when asked to do so by the Fund's shareholder servicing agent or
other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data; and coordinating trade settlements;
(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, and under other applicable state and federal
laws; 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, as amended, 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 or
Directors ("Board") or by the Fund's investment adviser and applicable to the
Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including
without limitation Forms N-1A and NSAR, proxy statements, information
statements and U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out
these duties.
Nothing in this Agreement shall obligate the Investment Company or any 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 Investment Manager agrees to pay to the Administrator as
compensation for such services a monthly fee equal on an annual basis to 0.15%
of the first $200 million of the average daily net assets of each Fund during
the month preceding each payment, reduced as follows: on such net assets in
excess of $200 million up to $700 million, a monthly fee equal on an annual
basis to 0.135%; on such net assets in excess of $700 million up to $1.2
billion, a monthly fee equal on an annual basis to 0.1%; and on such net assets
in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
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 Subcontract shall become effective on the date written above
and shall continue in effect as to each Investment Company and each Fund so long
as (1) the Agreement applicable to the Investment Company or Fund is in effect
and (2) this Subcontract is not terminated. This Subcontract will terminate as
to any Investment Company or Fund immediately upon the termination of the
Agreement applicable to the Investment Company or Fund, and may in addition be
terminated by either party at any time, without the payment of any penalty, on
sixty (60) days' written notice to the other party.
(4) 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 Subcontract to
be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: /s/Deborah R. Gatzek
Deborah R. Gatzek
Title: Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By: /s/Harmon E. Burns
Harmon E. Burns
Title: Executive Vice President
TERMINATION OF AGREEMENT
Franklin Advisers, Inc. and Templeton Global Investors, Inc., hereby agree that
the Subcontracts for Administrative Services between them dated: (1) August 28,
1996 for the Franklin Templeton Global Trust on behalf of all series of the
Trust; (2) July 24, 1995 for the Franklin Templeton International Trust on
behalf of its series Templeton Foreign Smaller Companies Fund (formerly known as
Franklin International Equity Fund); (3) July 18, 1995 for the Franklin
Templeton International Trust on behalf of its series Templeton Pacific Growth
Fund; and (4) July 14, 1995 for the Franklin Investors Securities Trust on
behalf of its series Franklin Global Government Income Fund are terminated
effective as of the date of the Subcontract for Fund Administrative Services
above.
FRANKLIN ADVISERS, INC.
By /s/Harmon E. Burns
Harmon E. Burns
Executive Vice President
Templeton Global Investors, Inc.
By /s/Martin L. Flanaga
Martin L. Flanagan
President, CEO
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
BETWEEN
FRANKLIN ADVISERS, INC.
AND
FRANKLIN TEMPLETON SERVICES, INC.
EXHIBIT A
- --------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES ---(IF APPLICABLE)
- --------------------------------------------------------------------------------
Franklin High Income Trust AGE High Income Fund
Franklin Asset Allocation Fund
Franklin California Tax-Free
Income Fund, Inc.
Franklin California Tax-Free Trust Franklin California Insured Tax-Free
Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term
Tax-Free Income Fund
Franklin Custodian Funds, Inc. Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund
Franklin Federal Tax-Free Income Fund
Franklin Gold Fund
Franklin Government Securities Trust
Franklin Investors Securities Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S.
Government Securities Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Municipal Securities Trust Franklin Hawaii Municipal Bond Fund
Franklin California High Yield Municipal
Fund
Franklin Washington Municipal Bond Fund
Franklin Tennessee Municipal Bond Fund
Franklin Arkansas Municipal Bond Fund
Franklin New York Tax-Free Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Insured Tax-Free Income
Fund
Franklin Tax-Advantaged
International Bond Fund
Franklin Tax-Advantaged U.S.
Government Securities
Fund
Franklin Tax-Advantaged High Yield
Securities Fund.
Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust Franklin Massachusetts Insured Tax-Free
Income Fund
Franklin Michigan Insured Tax-Free Income
Fund
Franklin Minnesota Insured Tax-Free
Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income
Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income
Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Indiana Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income
Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-
Free Income Fund
Franklin Arizona Insured Tax-Free Income
Fund
Franklin Florida Insured Tax-Free Income
Fund
Franklin Michigan Tax-Free Income Fund
Franklin Templeton Internationa
Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Global Trust Franklin Templeton German Government Bond
Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton High Income Currency
Fund
CLOSED END FUNDS:
Franklin Multi-Income Trust
Franklin Principal Maturity Trust
Franklin Universal Trust
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 7
to the Registration Statement of Franklin Real Estate Securities Trust on Form
N-1A File No. 33-69048 of our report dated June 10, 1997, on our audit of the
financial statements and financial highlights of Franklin Real Estate Securities
Trust, which report is included in the Annual Report to Shareholders for the
year ended April 30, 1997, which is incorporated by reference in the
Registration Statement.
/s/COOPERS & LYBRAND L.L.P.
San Francisco, California
August 25, 1997
FRANKLIN REAL ESTATE SECURITIES FUND
Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Trustees of Franklin Real Estate Securities Trust (the "Investment
Company") for its series, Franklin Real Estate Securities Fund (the "Fund"). The
Board has determined that the Plan is in the best interests of each class of the
Fund and the Investment Company as a whole. The Plan sets forth the provisions
relating to the establishment of multiple classes of shares of the Fund.
1. The Fund shall offer three classes of shares, to be known as Class
I, Class II shares and Class Z shares.
2. Class I Shares shall carry a front-end sales charge ranging from 0%
- - 4.50 %, and Class II Shares shall carry a front-end sales charge of 1.00%.
Class Z Shares shall not be subject to any front-end sales charges.
3. Class I Shares shall not be subject to a contingent deferred sales
charge ("CDSC") except in the following limited circumstances. On investments of
$1 million or more, a contingent deferred sales charge of 1.00% of the lesser of
the then-current net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the contingency
period of 12 months from the calendar month following their purchase. The CDSC
is waived in certain circumstances, as described in the Fund's prospectus.
Class II Shares redeemed within 18 months of their purchase shall be
assessed a CDSC of 1.00% on the lesser of the then-current net asset value or
the original net asset value at the time of purchase. The CDSC is waived in
certain circumstances as described in the Fund's prospectus.
Class Z Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Investment Company pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule
12b-1 Plan") associated with the Class I Shares may be used to reimburse
Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses
incurred in the promotion and distribution of the Class I Shares. Such expenses
include, but are not limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of the Distributor's overhead expenses attributable
to the distribution of the Class I Shares, as well as any distribution or
service fees paid to securities dealers of their firms or others who have
executed a servicing agreement with the Investment Company for the Class I
Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class II Shares has two
components. The first component is a shareholder servicing fee, to be paid to
broker-dealers, banks, trust companies and others who provide personal
assistance to shareholders in servicing their accounts. The second component is
an asset-based sales charge to be retained by the Distributor during the first
year after the sale of shares, and in subsequent years, to be paid to dealers or
retained by the Distributor to be used in the promotion and distribution of
Class II Shares, in a manner similar to that described above for Class I Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Class Z Shares,
and therefore, the Class Z Shares shall not be subject to deductions relating to
rule 12b-1 fees.
The Rule 12b-1 Plans for the Class I and Class II Shares shall operate
in accordance with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, section 26(d).
5. The only difference in expenses as between Class I, Class II, and
Class Z Shares shall relate to differences in the Rule 12b-1 plan expenses of
each class, as described in the applicable Rule 12b-1 Plans.
6. There shall be no conversion features associated with the Class I,
Class II, and Class Z Shares.
7. Shares of Class I and Class II may be exchanged for shares of
another investment company within the Franklin Templeton Group of Funds
according to the terms and conditions stated in each fund's prospectus, as it
may be amended from time to time, to the extent permitted by the Investment
Company Act of 1940 and the rules and regulations adopted thereunder. There is
no conversion feature applicable to Class Z Shares.
8. Each class will vote separately with respect to any Rule 12b-1 Pla
related to that class.
9. On an ongoing basis, the Board members, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the Fund for the
existence of any material conflicts between the Board members interests of the
various classes of shares. The Board members, including a majority of the
independent Board members, shall take such action as is reasonably necessary to
eliminate any such conflict that may develop. Franklin Advisers, Inc. and
Franklin Templeton Distributors, Inc. shall be responsible for alerting the
Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority
of the Board members, including a majority of the Board members who are not
interested persons of the Investment Company.
11. I, Deborah R. Gatzek, Secretary of the Franklin Templeton Funds, do
hereby certify that this Multiple Class Plan was adopted by Franklin Real Estate
Securities Trust, on behalf of its series Franklin Real Estate Securities Fund,
by a majority of the Trustees of the Trust on July 15, 1996.
/s/Deborah R. Gatzek
Deborah R. Gatzek
Secretary
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
REAL ESTATE SECURITIES TRUST - FRANKLIN REAL ESTATE SECURITIES FUND APRIL 30,
1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN REAL ESTATE SECURITIES FUND - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 182,461,661
<INVESTMENTS-AT-VALUE> 197,685,678
<RECEIVABLES> 19,655,714
<ASSETS-OTHER> 485,942
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 217,827,334
<PAYABLE-FOR-SECURITIES> 4,635,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 506,649
<TOTAL-LIABILITIES> 5,142,524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 194,875,285
<SHARES-COMMON-STOCK> 9,942,723
<SHARES-COMMON-PRIOR> 2,660,576
<ACCUMULATED-NII-CURRENT> 1,651,344
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 934,164
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,224,017
<NET-ASSETS> 212,684,810
<DIVIDEND-INCOME> 4,346,992
<INTEREST-INCOME> 676,436
<OTHER-INCOME> 0
<EXPENSES-NET> (1,214,198)
<NET-INVESTMENT-INCOME> 3,809,230
<REALIZED-GAINS-CURRENT> 1,537,098
<APPREC-INCREASE-CURRENT> 11,595,001
<NET-CHANGE-FROM-OPS> 16,941,329
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,977,490)
<DISTRIBUTIONS-OF-GAINS> (549,503)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,056,249
<NUMBER-OF-SHARES-REDEEMED> (2,923,144)
<SHARES-REINVESTED> 149,042
<NET-CHANGE-IN-ASSETS> 172,768,475
<ACCUMULATED-NII-PRIOR> 373,600
<ACCUMULATED-GAINS-PRIOR> 123,399
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 619,802
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,323,798
<AVERAGE-NET-ASSETS> 104,425,388
<PER-SHARE-NAV-BEGIN> 12.640
<PER-SHARE-NII> .490
<PER-SHARE-GAIN-APPREC> 2.770
<PER-SHARE-DIVIDEND> (.360)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 15.440
<EXPENSE-RATIO> .980
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
REAL ESTATE SECURITIES TRUST - FRANKLIN REAL ESTATE SECURITIES FUND APRIL 30,
1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN REAL ESTATE SECURITIES FUND - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 182,461,661
<INVESTMENTS-AT-VALUE> 197,685,678
<RECEIVABLES> 19,655,714
<ASSETS-OTHER> 485,942
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 217,827,334
<PAYABLE-FOR-SECURITIES> 4,635,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 506,649
<TOTAL-LIABILITIES> 5,142,524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 194,875,285
<SHARES-COMMON-STOCK> 3,835,085
<SHARES-COMMON-PRIOR> 500,271
<ACCUMULATED-NII-CURRENT> 1,651,344
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 934,164
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,224,017
<NET-ASSETS> 212,684,810
<DIVIDEND-INCOME> 4,346,992
<INTEREST-INCOME> 676,436
<OTHER-INCOME> 0
<EXPENSES-NET> (1,214,198)
<NET-INVESTMENT-INCOME> 3,809,230
<REALIZED-GAINS-CURRENT> 1,537,098
<APPREC-INCREASE-CURRENT> 11,595,001
<NET-CHANGE-FROM-OPS> 16,941,329
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (553,996)
<DISTRIBUTIONS-OF-GAINS> (176,830)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,439,134
<NUMBER-OF-SHARES-REDEEMED> (147,017)
<SHARES-REINVESTED> 42,697
<NET-CHANGE-IN-ASSETS> 172,768,475
<ACCUMULATED-NII-PRIOR> 373,600
<ACCUMULATED-GAINS-PRIOR> 123,399
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 619,802
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,323,798
<AVERAGE-NET-ASSETS> 104,425,388
<PER-SHARE-NAV-BEGIN> 12.560
<PER-SHARE-NII> .430
<PER-SHARE-GAIN-APPREC> 2.683
<PER-SHARE-DIVIDEND> (.313)
<PER-SHARE-DISTRIBUTIONS> (.100)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 15.260
<EXPENSE-RATIO> 1.750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
REAL ESTATE SECURITIES TRUST - FRANKLIN REAL ESTATE SECURITIES FUND APRIL 30,
1997 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 013
<NAME> FRANKLIN REAL ESTATE SECURITIES FUND - ADVISOR CLASS
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 182,461,661
<INVESTMENTS-AT-VALUE> 197,685,678
<RECEIVABLES> 19,655,714
<ASSETS-OTHER> 485,942
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 217,827,334
<PAYABLE-FOR-SECURITIES> 4,635,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 506,649
<TOTAL-LIABILITIES> 5,142,524
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 194,875,285
<SHARES-COMMON-STOCK> 40,415
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,651,344
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 934,164
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 15,224,017
<NET-ASSETS> 212,684,810
<DIVIDEND-INCOME> 4,346,992
<INTEREST-INCOME> 676,436
<OTHER-INCOME> 0
<EXPENSES-NET> (1,214,198)
<NET-INVESTMENT-INCOME> 3,809,230
<REALIZED-GAINS-CURRENT> 1,537,098
<APPREC-INCREASE-CURRENT> 11,595,001
<NET-CHANGE-FROM-OPS> 16,941,329
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 57,886
<NUMBER-OF-SHARES-REDEEMED> (17,471)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 172,768,475
<ACCUMULATED-NII-PRIOR> 373,600
<ACCUMULATED-GAINS-PRIOR> 123,399
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 619,802
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,323,798
<AVERAGE-NET-ASSETS> 104,425,388
<PER-SHARE-NAV-BEGIN> 15.300
<PER-SHARE-NII> .180
<PER-SHARE-GAIN-APPREC> (0.030)
<PER-SHARE-DIVIDEND> .000
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 15.450
<EXPENSE-RATIO> .750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> .000
</TABLE>
