File No. 33-69048
AS FILED JUNE 29, 1999
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. |_|
(Check appropriate box or boxes)
FRANKLIN REAL ESTATE SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
(650) 312-2000
(Area Code and Telephone Number)
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94404
Address of Principal Executive Offices:
(Number, Street, City, State, Zip Code)
DEBORAH R. GATZEK, ESQUIRE
777 MARINERS ISLAND BLVD.
SAN MATEO, CA 94404
Name and Address of Agent for Service:
(Number and Street) (City) (State) (Zip Code)
Copies to:
BRUCE G. LETO, ESQUIRE
STRADLEY RONON STEVENS & YOUNG, LLP
2600 ONE COMMERCE SQUARE
PHILADELPHIA, PA 19103
Approximate Date of Proposed Public Offering: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON JULY 29, 1999,
PURSUANT TO RULE 488.
TITLE OF THE SECURITIES BEING REGISTERED: SHARES OF BENEFICIAL INTEREST, PAR
VALUE $.01 PER SHARE, OF FRANKLIN REAL ESTATE SECURITIES FUND - CLASS A AND
FRANKLIN REAL ESTATE SECURITIES FUND - CLASS C. NO FILING FEE IS DUE BECAUSE
REGISTRANT IS RELYING ON SECTION 24(F) OF THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED.
Dear Shareholder:
Enclosed is a Notice of Meeting for a Special Shareholders' Meeting of
Templeton Global Real Estate Fund ("Templeton Fund"). The Meeting has been
called for September 16, 1999 at 10:00 a.m. Eastern time at the offices of
Templeton Fund at 500 East Broward Boulevard, Fort Lauderdale, FL
33394-3091. The accompanying Prospectus/Proxy Statement describes an
important proposal being presented for your consideration and requests your
prompt attention and vote via the enclosed proxy card.
PLEASE TAKE A MOMENT TO FILL OUT, SIGN AND
RETURN THE ENCLOSED PROXY CARD
This meeting is critically important. The Trustees of your fund
unanimously recommend that you consider and approve an Agreement and Plan of
Reorganization that would result in your shares of Templeton Fund being
exchanged for those of a fund called Franklin Real Estate Securities Fund
("Franklin Fund"). If shareholders of Templeton Fund approve the proposal,
you will receive shares of Franklin Fund equal in value to your investment in
Templeton Fund. You will no longer be a shareholder of Templeton Fund, and
you will instead be a shareholder of Franklin Fund.
The proposed transaction is intended to be a tax-free reorganization
under the Internal Revenue Code of 1986, as amended, as further described in
the accompanying Prospectus/Proxy Statement, which means that you will not
have a Federal taxable gain or loss on the exchange of your shares.
The transaction is being proposed because the projected growth in
assets of Templeton Fund was not sufficient to continue to offer a fund with
competitive performance and high quality service to shareholders over the
long term. Franklin Fund has investment goals and investment policies that
are similar to those of Templeton Fund, as outlined in the Prospectus/Proxy
Statement. Templeton Fund is managed by Templeton Global Advisors Limited
("Global Advisors") and Franklin Fund is managed by Franklin Advisers, Inc.,
which is affiliated with Global Advisors. Franklin Fund is a larger fund
that should be better able to obtain certain cost savings for shareholders.
Please take the time to review this document and vote now. THE TRUSTEES
OF YOUR FUND UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOR OF THIS PROPOSAL.
o To ensure that your vote is counted, indicate your position on the
enclosed proxy card.
o Sign and return your card promptly.
o If you determine at a later date that you wish to attend this meeting,
you may revoke your proxy and vote in person.
Thank you for your attention to this matter.
Sincerely,
Barbara J. Green
Secretary
TEMPLETON GLOBAL REAL ESTATE FUND
500 EAST BROWARD BOULEVARD
FORT LAUDERDALE, FL 33394-3091
NOTICE OF SPECIAL SHAREHOLDERS' MEETING
TO BE HELD ON SEPTEMBER 16, 1999
To the Shareholders of Templeton Global Real Estate Fund:
NOTICE IS HEREBY GIVEN that a Special Shareholders' Meeting of
Templeton Global Real Estate Fund ("Templeton Fund") will be held at the
offices of Templeton Fund, 500 East Broward Boulevard, Fort Lauderdale, FL
33394-3091 on September 16, 1999 at 10:00 a.m. Eastern time. The Meeting is
being called for the following reasons:
1. To approve or disapprove an Agreement and Plan of Reorganization
between Templeton Fund and Franklin Real Estate Securities Trust (the
"Trust"), on behalf of its Franklin Real Estate Securities Fund ("Franklin
Fund"), that provides for the acquisition of substantially all of the assets
of Templeton Fund in exchange for Class A shares and Class C shares of
Franklin Fund, the distribution of such shares to the shareholders of
Templeton Fund, and the liquidation and dissolution of Templeton Fund.
2. To grant the proxyholders the authority to vote upon any other
business which may legally come before the Meeting or any adjournment thereof.
The Agreement and Plan of Reorganization in the attached
Prospectus/Proxy Statement describes this transaction more completely. A
copy of the Agreement and Plan of Reorganization is attached as Exhibit A to
the Prospectus/Proxy Statement.
Shareholders of record as of the close of business on July 20, 1999 are
entitled to notice of, and to vote at, the Meeting or any adjournment thereof.
By Order of the Board of Trustees,
Barbara J. Green
Secretary
July __, 1999
THE BOARD OF TRUSTEES URGES YOU TO COMPLETE, DATE, SIGN, AND RETURN THE
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. IT IS
IMPORTANT THAT YOU RETURN YOUR SIGNED PROXY CARD PROMPTLY SO THAT A QUORUM
MAY BE ENSURED.
PROSPECTUS AND PROXY STATEMENT
When reading this Prospectus/Proxy Statement, you will see certain terms
beginning with capital letters. This means the term is explained in our
glossary section.
TABLE OF CONTENTS
PAGE
COVER PAGE...............................................................Cover
SUMMARY..................................................................
What proposal am I voting on?......................................
How will the shareholder voting be handled?........................
What are the general tax consequences of the Transaction?..........
COMPARISONS OF SOME IMPORTANT FEATURES...................................
How do the investment goals and policies of the funds compare?.....
What are the risks of an investment in the funds?..................
Who manages the funds?.............................................
What are the fees and expenses of each fund and what might they be
after the .............................................Transaction?
Where can I find more financial information about the funds?.......
What are other key features of the funds?..........................
REASONS FOR THE TRANSACTION..............................................
INFORMATION ABOUT THE TRANSACTION........................................
How will the Transaction be carried out?...........................
Who will pay the expenses of the Transaction?......................
What are the tax consequences of the Transaction?..................
What should I know about the shares of Franklin Fund?..............
What are the capitalizations of the funds and what might the
capitalization
be after the Transaction?....................................
COMPARISON OF INVESTMENT GOALS AND POLICIES..............................
Are there any significant differences between the investment goals and
strategies of the funds?.....................................
How do the types of securities the funds buy and the investment
policies of the
funds compare?...............................................
How do the fundamental investment restrictions of the funds differ?
What are the risk factors associated with investments in the funds?
VOTING INFORMATION.......................................................
How many votes are necessary to approve the Agreement and Plan?....
How do I ensure my vote is accurately recorded?....................
Can I revoke my proxy?.............................................
What other matters will be voted upon at the Meeting?..............
Who is entitled to vote?...........................................
What other solicitations will be made?.............................
Are there dissenters' rights?......................................
INFORMATION ABOUT FRANKLIN FUND..........................................
INFORMATION ABOUT TEMPLETON FUND.........................................
PAGE
PRINCIPAL HOLDERS OF SHARES..............................................
GLOSSARY OF USEFUL TERMS AND DEFINITIONS.................................
EXHIBITS TO PROSPECTUS AND PROXY STATEMENT
EXHIBIT A - AGREEMENT AND PLAN OF REORGANIZATION................... A-1
EXHIBIT B - PROSPECTUS OF FRANKLIN REAL ESTATE SECURITIES FUND -
CLASS A, B & C DATED SEPTEMBER 1, 1998, AS AMENDED JANUARY 1,
1999 (ENCLOSED)
EXHIBIT C - ANNUAL REPORT TO SHAREHOLDERS OF FRANKLIN REAL ESTATE
SECURITIES FUND DATED APRIL 30, 1999 (ENCLOSED)
PROSPECTUS AND PROXY STATEMENT
DATED JULY [__], 1999
ACQUISITION OF THE ASSETS OF
TEMPLETON GLOBAL REAL ESTATE FUND
BY AND IN EXCHANGE FOR CLASS A SHARES AND CLASS C SHARES OF
FRANKLIN REAL ESTATE SECURITIES FUND,
A SERIES OF FRANKLIN REAL ESTATE SECURITIES TRUST
This Prospectus/Proxy Statement solicits proxies to be voted at a
Special Shareholders' Meeting (the "Meeting") of Templeton Global Real Estate
Fund ("Templeton Fund") to approve or disapprove an Agreement and Plan of
Reorganization (the "Agreement and Plan"). If shareholders of Templeton Fund
vote to approve the Agreement and Plan, the net assets of Templeton Fund will
be acquired by Franklin Real Estate Securities Fund ("Franklin Fund") and in
exchange for shares of Franklin Real Estate Securities Fund - Class A
("Franklin Fund Class A shares") and shares of Franklin Real Estate
Securities Fund - Class C ("Franklin Fund Class C shares"). Franklin Fund is
a series of Franklin Real Estate Securities Trust (the "Trust").
The Meeting will be held at the principal offices of Templeton Fund,
which are located at 500 East Broward Boulevard, Fort Lauderdale, FL
33394-3091 on September 16, 1999 at 10:00 a.m. Eastern time. The Board of
Trustees of Templeton Fund is soliciting these proxies. This
Prospectus/Proxy Statement will first be sent to shareholders on or about
July __, 1999.
If Templeton Fund shareholders vote to approve the Agreement and Plan,
you will receive Franklin Fund Class A shares equal in value to your
investment in Class A shares of Templeton Fund ("Templeton Fund Class A
shares"), or Franklin Fund Class C shares equal in value to your investment
in Class C shares of Templeton Fund ("Templeton Fund Class C shares").
Templeton Fund will then be liquidated and dissolved.
Both Templeton Fund and the Trust are open-end investment companies.
The investment goals of Franklin Fund and Templeton Fund are similar, but not
identical. Franklin Fund's investment goal is to maximize total return.
Templeton Fund's principal investment goal is long-term capital growth. Its
secondary goal is current income. The primary difference between the two
objectives is that a greater emphasis is placed on achieving income by
Templeton Fund. Franklin Fund is a non-diversified fund, which means it may
invest a greater portion of its assets in the securities of one issuer and,
therefore, a smaller number of individual issuers, than a diversified fund
such as Templeton Fund.
This Prospectus/Proxy Statement gives the information about the
proposed reorganization and Franklin Fund Class A shares and Class C shares
that you should know before investing. You should retain it for future
reference. Additional information about Franklin Fund and the proposed
reorganization has been filed with the SEC and can be found in the following
documents.
o The Prospectus of Franklin Fund - Class A, B & C dated September 1,
1998, as amended January 1, 1999 (the "Franklin Fund Prospectus"), is
enclosed and considered a part of this Prospectus/Proxy Statement.
o The Annual Report to Shareholders of the Trust dated April 30, 1999,
contains financial and performance information for Franklin Fund, is
enclosed and considered a part of this Prospectus/Proxy Statement.
o A Statement of Additional Information dated July [__], 1999 relating to
this Prospectus/Proxy Statement has been filed with the SEC and is
incorporated by reference into this Prospectus/Proxy Statement.
o The Prospectus of Templeton Fund - Class A&C dated January 1, 1999, as
supplemented May 19, 1999, (the "Templeton Fund Prospectus"), Templeton
Fund's Annual Report to Shareholders dated August 31, 1998, and Templeton
Fund's SemiAnnual Report to Shareholders dated February 28, 1999, which
contains financial and performance information for Templeton Fund, are on
file with the SEC (File nos. 33-30018 and 811-5844) and are incorporated
by reference into this Prospectus/Proxy Statement.
You may request a free copy of the SAI relating to this
Prospectus/Proxy Statement or any of the documents referred to above without
charge by calling 1-800/DIAL-BEN(R) or by writing to Franklin Fund at 777
Mariners Island Boulevard, San Mateo, CA 94403-7777 or Templeton Fund at 100
Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON
THE ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER U.S.
GOVERNMENT AGENCY. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL.
SUMMARY
This is only a summary of certain information contained in this
Prospectus/Proxy Statement. You should read the more complete information in
the rest of this Prospectus/Proxy Statement, including the Agreement and Plan
(attached as Exhibit A), the Franklin Fund Prospectus (enclosed as Exhibit
B), and the Annual Report to Shareholders of Franklin Fund (enclosed as
Exhibit C).
WHAT PROPOSAL AM I VOTING ON?
The Board of Trustees of Templeton Fund approved the Agreement and Plan
and recommends that shareholders of Templeton Fund vote to approve the
Agreement and Plan. If shareholders of Templeton Fund vote to approve the
Agreement and Plan, it will result in the transfer of the net assets of
Templeton Fund to Franklin Fund in exchange for an equal value of shares of
Franklin Fund. The shares of Franklin Fund will then be distributed to
Templeton Fund shareholders and Templeton Fund will be liquidated and
dissolved. (The proposed transaction is referred to in this Prospectus/Proxy
Statement as the "Transaction.") As a result of the Transaction, you will
cease to be a shareholder of Templeton Fund and will become a shareholder of
Franklin Fund. This exchange will occur on the closing date of the
Transaction, which is the specific date on which the Transaction takes place.
This means that your shares of Templeton Fund will be exchanged for an
equal value of shares of Franklin Fund. You will receive Franklin Fund Class
A shares equal in value to your investment in Templeton Fund Class A shares
or Franklin Fund - Class C shares equal in value to your investment in
Templeton Fund Class C shares.
Like the Templeton Fund, Franklin Fund is a mutual fund in the Franklin
Templeton Group of Funds. It is managed by Advisers. It has an investment
goal and policies that are similar, but not identical, to those of Templeton
Fund. For the reasons set forth in the "Reasons for the Transaction"
section, the Board of Trustees of Templeton Fund has determined that the
Transaction is in the best interests of the shareholders of Templeton Fund.
The Boards of Trustees of Templeton Fund and the Trust also concluded that no
dilution in value would result to the shareholders of Templeton Fund or
Franklin Fund, respectively, as a result of the Transaction.
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU
VOTE TO APPROVE THE AGREEMENT AND PLAN.
HOW WILL THE SHAREHOLDER VOTING BE HANDLED?
Shareholders who own shares of Templeton Fund at the close of business
on July 20, 1999 will be entitled to vote at the Meeting, and will be
entitled to one vote for each full share and a fractional vote for each
fractional share that they hold. To approve the Transaction, a majority of
the shares outstanding and entitled to vote of Templeton Fund must be voted
in favor of the Agreement and Plan.
Please vote by proxy as soon as you receive this Prospectus/Proxy
Statement. You may place your vote by completing and signing the enclosed
proxy card. If you return your signed proxy card, your votes will be
officially cast at the Meeting by the persons appointed as proxies.
You can revoke your proxy or change your voting instructions at any
time until the vote is taken at the Meeting. For more details about
shareholder voting, see the "Voting Information" section of this
Prospectus/Proxy Statement.
WHAT ARE THE GENERAL TAX CONSEQUENCES OF THE TRANSACTION?
It is expected that shareholders of Templeton Fund will not recognize
any gain or loss for federal income tax purposes, as a result of the exchange
of their shares for shares of Franklin Fund. You should, however, consult
your tax advisor regarding the effect, if any, of the Transaction in light of
your individual circumstances. You also should consult your tax advisor
about state and local tax consequences. For more information about the tax
consequences of the Transaction, please see the section "Information About
the Transaction - What are the tax consequences of the Transaction?"
COMPARISONS OF SOME IMPORTANT FEATURES
HOW DO THE INVESTMENT GOALS AND POLICIES OF THE FUNDS COMPARE?
Templeton Fund's primary investment goal is long-term capital growth,
with current income as a secondary goal. Franklin Fund's primary investment
goal is to maximize total return. The principal difference between the
funds' goals is Templeton Fund's emphasis on the income component. The
principal differences in the policies of the funds are the amount of their
assets that may be invested in real estate securities; the extent of their
foreign investments; and diversification.
Under normal market conditions, Franklin Fund invests at least 65% of
its total assets in equity securities of companies operating in the real
estate industry. Franklin Fund may invest up to 35% of its total assets in
securities of issuers engaged in businesses closely related to the real
estate industry or that have significant real estate holdings(at least 50% of
their assets). Under normal market conditions, Templeton Fund invests
primarily in the equity and debt securities of companies located anywhere in
the world which are engaged in or related to the real estate industry or
which own significant real estate assets. At least 65% of Templeton Fund's
total assets will be invested in these companies located in at least three
countries (including the U.S.). Templeton Fund may invest up to 35% of its
assets in equity and debt securities of companies outside the real estate
industry. While both funds concentrate their investments in real estate
securities, Templeton Fund has a broader definition of what is considered a
real estate security and may invest a greater portion of its assets in
securities not related to the real estate industry. Templeton Fund has the
ability to invest more of its assets in debt securities than Franklin Fund.
Templeton Fund invests a greater percentage of its total assets in securities
of issuers in foreign countries than Franklin Fund does. Franklin Fund may
only invest up to 10% of its total assets in securities of issuers in any
foreign country.
Finally, Templeton Fund, unlike Franklin Fund, is a diversified fund.
As a diversified fund, Templeton Fund is required to spread its investments
among more issuers.
For more information about the investment goals and policies of the
funds, please see the section "Comparison of Investment Goals and Policies."
WHAT ARE THE RISKS OF AN INVESTMENT IN THE FUNDS?
As with most investments, investments in Franklin Fund and Templeton
Fund involve risks. There can be no guarantee against losses resulting from
an investment in either fund, nor can there be any assurance that either fund
will achieve its investment goals. The risks associated with an investment
in each fund are substantially similar and include general stock risk as well
as real estate securities risk. To the extent Franklin Fund invests a
greater portion of its assets in real estate related securities, it has
increased exposure to real estate securities risk. Templeton Fund's ability
to invest a greater portion of its assets in foreign securities exposes that
fund to additional risks. Because Templeton Fund may invest a greater
portion of its assets in debt securities, as compared to Franklin Fund, it
may be subject to a greater extent than Franklin Fund to interest rate and
credit risk. Franklin Fund is a non-diversified fund, which means it may
invest a greater portion of its assets in the securities of one issuer and,
therefore, a smaller number of individual issuers than a diversified fund.
Therefore, Franklin Fund may be more sensitive to economic, business,
political or other changes affecting similar issuers or securities.
For more information about the risks of the funds, see the section
"What are the risk factors associated with investments in the funds?" under
the heading "Comparison of Investment Goals and Policies."
WHO MANAGES THE FUNDS?
The management of the business and affairs of each fund is the
responsibility of each fund's respective Board of Trustees. Both funds are
open-end, registered management investment companies, commonly referred to as
"mutual funds." Franklin Fund is a series of the Trust. The Trust was
organized as a Delaware business trust on September 22, 1993, and is
registered with the SEC. Templeton Fund was organized as a Massachusetts
business trust on July 17, 1989, and is also registered with the SEC.
Advisers manages the assets of Franklin Fund and makes that fund's
investment decisions. Global Advisors manages the assets of Templeton Fund
and makes that fund's investment decisions. Advisers and Global Advisors are
both wholly-owned subsidiaries of Resources. Resources is a publicly owned
company engaged in various aspects of the financial services industry through
its subsidiaries. Together, Advisers, Global Advisors and their affiliates
serve as investment manager or administrator to 54 registered investment
companies, with approximately 162 U.S.-based funds or series. They have over
$223 billion in combined assets under management for more than 7 million
U.S.-based mutual fund shareholder and other accounts. The principal
shareholders of Resources are Charles B. Johnson and Rupert H. Johnson, Jr.
The team responsible for the day-to-day management of Franklin Fund's
portfolio is: Matthew F. Avery, since its inception, and Douglas Barton,
since April 1998.
MATTHEW F. AVERY, SENIOR 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.
DOUGLAS BARTON, VICE PRESIDENT OF ADVISERS. Mr. Barton is a Chartered
Financial Analyst and holds a Master of Business Administration degree from
California State University in Hayward and a Bachelor of Science degree from
California State University in Chico. Mr. Barton joined the Franklin
Templeton Group in July 1988.
Templeton Fund's lead portfolio manager is Jeffrey A. Everett, CFA,
Executive Vice President of Global Advisors. Mr. Everett has been a manager
of the fund since 1993. He joined the Franklin Templeton Group in 1989. The
following individuals have secondary portfolio management responsibilities
for Templeton Fund: Lisa F. Myers, Portfolio Manager of Global Advisors, and
Richard Sean Farrington, CFA, Vice President of Global Advisors. Ms. Myers
has been a manager of the fund since 1998. She joined the Franklin Templeton
Group in 1996. Mr. Farrington has been a manager of the fund since 1993. He
joined the Franklin Templeton Group in 1991.
Franklin Fund has a management agreement with Advisers under which
Advisers is to receive a management fee equal to an annual rate of 0.625 of
1% of the value of its average daily net assets up to and including $100
million; 0.50 of 1% of the value of its average daily net assets over $100
million up to and including $250 million; 0.45 of 1% of the value of its
average daily net assets over $250 million up to and including $10 billion;
0.44 of 1% of the value of its average daily net assets over $10 billion up
to and including $12.5 billion; 0.42 of 1% of the value of its average daily
net assets over $12.5 billion up to and including $15 billion; and 0.40 of 1%
of the value of its average daily net assets in excess of $15 billion. Each
class of Franklin Fund pays its proportionate share of the management fee.
Templeton Fund has a management agreement with Global Advisors under
which Global Advisors receives a management fee equal to an annual rate of
0.75% of the value of its average daily net assets. Each class of Templeton
Fund pays its proportionate share of the management fee.
WHAT ARE THE FEES AND EXPENSES OF EACH FUND AND WHAT MIGHT THEY BE AFTER THE
TRANSACTION?
FEE TABLE FOR
TEMPLETON FUND AND FRANKLIN FUND+
ACTUAL
Franklin Fund
- Class A
Franklin After
Templeton Fund - Transaction
Fund - CLASS A CLASS A (PROJECTED)
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge (as a
percentage of Offering 5.75% 5.75% 5.75%
Price).....................
Paid at time of purchase1 5.75% 5.75% 5.75%
Paid at time of None None None
redemption2................
Exchange Fee (per None None None
transaction)3............
ANNUAL FUND OPERATING EXPENSES
(as percentage of average net
assets)
Management Fees............. 0.75% 0.51% 0.50%
Distribution and service 0.25% 0.25% 0.25%
(12b-1) Fees4..............
Other Expenses.............. 0.45% 0.20% 0.20%
----- ----- -----
Total Annual Fund Operating 1.45% 0.96% 0.95%
===== ===== =====
Expenses...................
ACTUAL
Franklin Fund
-Class C
Franklin After
Templeton Fund - Transaction
Fund - CLASS C CLASS C (PROJECTED)
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge (as a
percentage of Offering 1.99% 1.99% 1.99%
Price).....................
Paid at time of purchase. 1.00% 1.00% 1.00%
Paid at time of 0.99% 0.99% 0.99%
redemption2................
Exchange Fee (per None None None
transaction)3...........
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets):
Management Fees............. 0.75% 0.51% 0.50%
Distribution and service 1.00% 1.00% 1.00%
(12b-1) Fees4....................
Other Expenses.............. 0.45% 0.20% 0.20%
----- ----- -----
Total Annual Fund Operating 2.20% 1.71% 1.70%
===== ===== =====
Expenses...................
+ Information provided is for Templeton Fund shares for the fiscal year ended
August 31, 1998. Information for Franklin Fund shares is provided for the
fiscal year ended April 30, 1999.
* If your transaction is processed through your Securities Dealer, you may be
charged a fee by your Securities Dealer for this service.
1 There is no front-end sales charge if you invest $1 million or more in
Class A shares. Although Class C has a lower front-end sales charge than
Class A, its Rule 12b-1 fees are higher. Over time you may pay more for
Class C shares. Please see "How Do I Buy Shares? - Choosing a Share Class"
in the Franklin Fund Prospectus.
2 A Contingent Deferred Sales Charge (CDSC) of 1% may apply to Class A
purchases of $1 million or more if you sell the shares within one year and
any Class C purchase if you sell the shares within 18 months. A Contingent
Deferred Sales Charge may also apply to purchases by certain retirement
plans that qualify to buy Class A shares without a front-end sales charge.
The charge is based on 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 for
Class C is different depending on whether the charge is shown based on the
Net Asset Value or the Offering Price, the dollar amount you would pay is
the same. See "How Do I Sell Shares? - Contingent Deferred Sales Charge"
in the Franklin Fund Prospectus for details.
3 There is a $5 fee for both funds for each exchange by a Market Timer. We
process all other exchanges without a fee.
4 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 charges permitted under the NASD's Rules.
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 $10,000 that you invest in
a fund.
CLASS A 1 YEAR* 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
Templeton Fund $714 $1,007 $1,322 $2,210
Franklin Fund $667 $ 863 $1,075 $1,685
Projected Franklin Fund (after
Transaction) $665 $ 857 $1,065 $1,663
CLASS C 1 YEAR** 3 YEARS 5 YEARS 10 YEARS
- ------- ------ ------- ------- --------
Templeton Fund $419 $781 $1,268 $2,609
Franklin Fund $370 $633 $1,019 $2,099
Projected Franklin Fund (after
Transaction) $369 $630 $1,014 $2,089
* Assumes a Contingent Deferred Sales Charge will not apply.
**For the same Class C investment, you would pay projected expenses of $321
for Templeton Fund, $272 for Franklin Fund, and $271 for Franklin Fund
after the Transaction if you did not sell your shares at the end of the
first year. The 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. Each 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.
WHERE CAN I FIND MORE FINANCIAL INFORMATION ABOUT THE FUNDS?
The current Annual Report to Shareholders of the Trust, which is
enclosed, contains more financial information about Franklin Fund and a
discussion of Franklin Fund's performance during the fiscal year ended April
30, 1999.
The Templeton Fund Prospectus as well as the Annual and SemiAnnual
Reports for the Templeton Fund contain more financial information about
Templeton Fund. These documents are available free of charge upon request
(see the section "Information About Templeton Fund").
WHAT ARE OTHER KEY FEATURES OF THE FUNDS?
TRANSFER AGENCY AND CUSTODY SERVICES. Investor Services, a wholly owned
subsidiary of Resources, is the shareholder servicing agent and acts as the
transfer agent and dividend-paying agent for the funds.
Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as the custodian of the securities and other assets of
Franklin Fund. The Chase Manhattan Bank, at its principal office at Metro
Tech Center, Brooklyn, NY 11245, and at the offices of its branches and
agencies throughout the world, acts as custodian of Templeton Fund's assets.
ADMINISTRATIVE SERVICES. Under an administration agreement with
Templeton Fund, FT Services, a wholly-owned subsidiary of Resources, provides
certain administrative facilities and services to the fund. Under an
administration agreement with Advisers, FT Services also provides certain
administrative facilities and services to Franklin Fund. The fee rates under
each administration agreement are the same. For Templeton Fund, the fee is
paid by the fund and it is a separate expense of the fund. For Franklin
Fund, the fee is paid by Advisers and it is not a separate expense of the
fund.
DISTRIBUTION SERVICES. Pursuant to underwriting agreements with each
fund, Distributors acts as the principal underwriter in the continuous public
offering of the funds' shares. Distributors pays the expenses of the
distribution of fund shares, including advertising expenses and the costs of
printing sales materials and prospectuses used to offer shares to the public.
DISTRIBUTION AND SERVICE (12B-1) FEES. Each class of Templeton Fund
and Franklin Fund has a separate distribution or "Rule 12b-1" plan. Under
each plan, the fund shall pay or may reimburse Distributors or others for the
expenses of activities that are primarily intended to sell shares of the
class. These expenses may include, among others, distribution or service fees
paid to Securities Dealers or others who have executed a servicing agreement
with the fund, Distributors or its affiliates; a prorated portion of
Distributors' overhead expenses; and the expenses of printing prospectuses
and reports used for sales purposes, and preparing and distributing sales
literature and advertisements. The distribution and service (12b-1) fees
charged to each class are based only on the fees attributable to that
particular class.
Payments by Franklin Fund under its Class A plan may not exceed 0.25%
per year of Class A's average daily net assets and payments by Templeton Fund
under its plan similarly may not exceed 0.25% per year of Class A's average
daily net assets. The Class A plan for Franklin Fund does not permit
unreimbursed expenses incurred in a particular year to be carried over to or
reimbursed in later years. Under the Class A plan for Templeton Fund,
expenses not reimbursed in any quarter may be reimbursed in future quarters
or years. This includes expenses not reimbursed because they exceeded the
applicable limit under the plan.
Under the Class C plan for both Franklin Fund and Templeton Fund, each
fund pays Distributors up to 0.75% per year of the Class C's average daily
net assets, payable quarterly, to pay Distributors or others for providing
distribution and related services and bearing certain Class C expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. The funds may also pay a servicing fee of up to 0.25% per
year of the Class C's average daily net assets, payable quarterly. This fee
may be used to pay Securities Dealers or others for, among other things,
helping to establish and maintain customer accounts and records, helping with
requests to buy and sell shares, receiving and answering correspondence,
monitoring dividend payments from the fund on behalf of customers, and
similar servicing and account maintenance activities. The expenses relating
to the Class C plan for each fund are also used to pay Distributors for
advancing the commission costs to Securities Dealers with respect to the
initial sale of Class C Shares.
For more information regarding Franklin Fund's Rule 12b-1 plans, please
see "The Fund's Underwriter" in the current SAI for Franklin Fund.
PURCHASES AND REDEMPTIONS. The maximum front-end sales charge imposed
on purchases of Class A shares of Franklin Fund and Templeton Fund is 5.75%
with reduced charges for purchases of $50,000 or more and no front-end sales
charges for purchases of $1 million or more. The maximum sales charge
imposed on purchases of Class C shares of Franklin Fund and Templeton Fund is
1.00%. Each fund generally requires a minimum initial investment of $1,000
and subsequent investments of at least $50.
You may sell (redeem) your shares at any time. Shares of each fund also
may be exchanged for shares of other Franklin Templeton Funds, subject to
certain limitations, as provided in the prospectus of the respective Franklin
Templeton Fund. Because an exchange is technically a sale and a purchase of
shares, an exchange is a taxable transaction.
Shares of each fund may be redeemed at their respective Net Asset Value
per share. However, redemptions of Class A shares of each fund which were
purchased in amounts of $1,000,000 or more generally are subject to a
Contingent Deferred Sales Charge. There is also a 1% Contingent Deferred
Sales Charge on any Class C shares you sell within 18 months of purchase.
The Contingent Deferred Sales Charge for each fund's Class C shares is waived
in certain circumstances. Franklin Fund shares acquired by Templeton Fund
shareholders as a result of this Transaction are subject to a Contingent
Deferred Sales Charge to the same extent that the Templeton Fund shares were
subject to a Contingent Deferred Sales Charge.
Additional information and specific instructions explaining how to buy,
sell, and exchange shares of Franklin Fund are outlined in the current
Franklin Fund Prospectus under the heading "About Your Account." Similar
information is outlined in the current Templeton Fund Prospectus under the
heading "Your Account." The accompanying Franklin Fund Prospectus also lists
phone numbers for you to call if you have any questions about your account
under the heading "What If I Have Questions About My Account?" These phone
numbers are the same for both funds.
DIVIDENDS AND DISTRIBUTIONS. Each fund intends to pay a dividend at
least annually representing substantially all of its net investment income
and any net realized capital gains. The amount of these distributions will
vary and there is no guarantee the funds will pay dividends.
Each fund automatically reinvests distributions in additional shares of
the same share class of the fund, unless you select a different option.
Specific instructions explaining how to select a different option are
outlined in the enclosed Franklin Fund Prospectus under the heading "What
Distributions Might I Receive From the Fund?" and in the current Templeton
Fund Prospectus under the heading "Investor Services - Distribution Options."
Distributions from the funds, whether you receive them in cash or in
additional shares, are generally subject to income tax. Each fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions
you received from the fund in the prior year.
Ordinary dividends and capital gain distributions that you receive from
a fund, and gains arising from redemptions or exchanges of your fund shares,
will generally be subject to state and local income tax. The holding of fund
shares may also be subject to state and local intangibles taxes.
For more information about the tax implications of investments in the
funds, see the enclosed Franklin Fund Prospectus under the heading "How
Taxation Affects the Fund and Its Shareholders" or the current Templeton Fund
Prospectus under the heading "Distributions and Taxes."
REASONS FOR THE TRANSACTION
The Board of Trustees of Templeton Fund has recommended the Transaction
for purposes of combining Templeton Fund with a larger fund. Because of the
relatively low demand for Templeton Fund, Global Advisors recommended to the
Board of Trustees of Templeton Fund that the assets of Templeton Fund be
combined with a larger fund that has similar investment goals and policies.
A larger fund should have greater investment flexibility and be better able
to obtain certain savings in costs for Templeton Fund and its shareholders.
The Transaction was also recommended to combine similar funds within the
Franklin Templeton Group to eliminate duplication of expenses and internal
competition.
The Agreement and Plan was presented to the Board of Trustees of
Templeton Fund at a meeting held on May 19, 1999. At the meeting, the Board
of Trustees questioned management about the potential benefits and costs to
shareholders of Templeton Fund. In deciding whether to recommend approval of
the Transaction to shareholders, the Board of Trustees considered, among
other things: the expense ratios of Franklin Fund and Templeton Fund; the
comparative investment performance of Franklin Fund and Templeton Fund, the
compatibility of the investment goals, policies, restrictions and investments
of Templeton Fund with those of Franklin Fund; the tax consequences of the
Transaction; and the significant experience of Advisers. During the course
of its deliberations, the Board of Trustees also considered that the expenses
of the Transaction will be shared one-quarter by Franklin Fund, one-quarter
by Templeton Fund, one-quarter by Advisers and one-quarter by Global Advisors.
The Board of Trustees concluded that the Transaction is in the best
interests of the shareholders of Templeton Fund and that no dilution of value
would result to the shareholders of Templeton Fund from the Transaction. The
Board of Trustees then decided to approve the Agreement and Plan and to
recommend that shareholders of Templeton Fund vote to approve the
Transaction. As required by law, the Board members approving the Agreement
and Plan included a majority of the trustees who are not interested persons
of Templeton Fund.
The Board of Trustees' conclusion was based on a number of factors,
including that the Transaction would permit shareholders to pursue their
investment goals in a larger fund. A larger fund should have an enhanced
ability to effect portfolio transactions on more favorable terms and should
have greater investment flexibility. A fund with higher aggregate net assets
may also be able to reduce or eliminate certain duplicative costs and
expenses. This may result in lower overall expense ratios through the
spreading of fixed costs of fund operations over a larger asset base.
However, variable expenses that are based on the value of assets or the
number of shareholder accounts, such as custody and transfer agency fees,
would be largely unaffected by the Transaction.
The Board of Trustees of the Trust, on behalf of Franklin Fund, also
determined that the Transaction was in the best interests of Franklin Fund
and its shareholders and that no dilution would result to those shareholders.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF TRUSTEES OF
TEMPLETON FUND RECOMMENDS THAT YOU VOTE FOR THE AGREEMENT AND PLAN.
If shareholders of Templeton Fund do not approve the Agreement and
Plan, the Board of Trustees will consider other possible courses of action
for Templeton Fund, including liquidation and dissolution.
INFORMATION ABOUT THE TRANSACTION
This is only a summary of the Agreement and Plan. You should read the
actual Agreement and Plan. It is attached as Exhibit A.
HOW WILL THE TRANSACTION BE CARRIED OUT?
If the shareholders of Templeton Fund approve the Agreement and Plan,
the Transaction will take place after various conditions are satisfied by
Templeton Fund and by the Trust, on behalf of Franklin Fund, including the
delivery of certain documents. Templeton Fund and the Trust will agree on a
specific date for the actual Transaction to take place. This is called the
closing date. If the shareholders of Templeton Fund do not approve the
Agreement and Plan, the Transaction will not take place.
If shareholders of Templeton Fund approve the Agreement and Plan at the
Meeting, shares of Templeton Fund will no longer be offered for sale, except
for the reinvestment of dividend and capital gain distributions. Until the
close of business on the day of the Meeting, you may continue to add to your
existing account subject to your applicable minimum additional investment
amount or buy additional shares through the reinvestment of dividend and
capital gain distributions.
If the shareholders approve the Agreement and Plan, Templeton Fund will
deliver to Franklin Fund substantially all of its assets on the closing
date. In exchange, Templeton Fund will receive Class A shares and Class C
shares of Franklin Fund that have a value equal to the dollar value of the
assets delivered to Franklin Fund. The stock transfer books of Templeton
Fund will be permanently closed as of 4:00 p.m. Eastern time on the closing
date. Templeton Fund will only accept requests for redemption received in
proper form before 4:00 p.m. on the closing date. Requests received after
that time will be considered requests to redeem shares of Franklin Fund.
To the extent permitted by law, the funds may agree to amend the
Agreement and Plan without shareholder approval. They may also agree to
terminate and abandon the Transaction at any time before or, to the extent
permitted by law, after the approval of shareholders of Templeton Fund.
WHO WILL PAY THE EXPENSES OF THE TRANSACTION?
The expenses resulting from the Transaction will be paid one-quarter by
Franklin Fund, one-quarter by Templeton Fund, one-quarter by Advisers, the
investment manager for Franklin Fund, and one-quarter by Global Advisors, the
investment manager for Templeton Fund.
WHAT ARE THE TAX CONSEQUENCES OF THE TRANSACTION?
The Transaction is intended to qualify as a tax-free reorganization for
federal income tax purposes under Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended. Based on certain assumptions and representations
received from Templeton Fund and the Trust, on behalf of Franklin Fund, it is
the opinion of Stradley Ronon Stevens & Young, LLP, counsel to the funds,
that shareholders of Templeton Fund will not recognize any gain or loss for
federal income tax purposes as a result of the exchange of their shares of
Templeton Fund for shares of Franklin Fund and that neither Franklin Fund nor
its shareholders will recognize any gain or loss upon receipt of the assets
of Templeton Fund.
You will continue to be responsible for tracking the purchase cost and
holding period of your shares and should consult your tax advisor regarding
the effect, if any, of the Transaction in light of your individual
circumstances. You should also consult your tax advisor as to state and
local tax consequences, if any, of the Transaction, because this discussion
only relates to the federal income tax consequences.
WHAT SHOULD I KNOW ABOUT THE SHARES OF FRANKLIN FUND?
Class A shares and Class C shares of Franklin Fund will be distributed
to shareholders of the Templeton Fund's Class A shares and Class C shares,
respectively. Each share of Franklin Fund will be fully paid and
nonassessable when issued with no personal liability attaching to the
ownership thereof. Each share will have no preemptive or conversion rights
and will be transferable upon the books of Franklin Fund. The shares of
Franklin Fund will be recorded electronically in each shareholder's account.
Franklin Fund will then send a confirmation to each shareholder. As
described in the Franklin Fund Prospectus, Franklin Fund does not issue share
certificates unless requested. Former shareholders of Templeton Fund whose
shares are represented by outstanding share certificates will not be allowed
to redeem shares of Franklin Fund until Templeton Fund certificates have been
returned.
Both Franklin Fund and Templeton Fund have non-cumulative voting
rights. This gives the holders of more than 50% of the shares voting the
ability to elect 100% of the trustees.
Like Templeton Fund, Franklin Fund does not routinely hold
shareholders' meetings. Franklin Fund may hold special meetings for matters
requiring shareholder approval. A meeting of Franklin Fund's shareholders
may also be called by the Board of Trustees in its discretion.
WHAT ARE THE CAPITALIZATIONS OF THE FUNDS AND WHAT MIGHT THE CAPITALIZATION
BE AFTER THE TRANSACTION?
The following table sets forth, as of April 30, 1999, the
capitalization of the Class A and C shares of Templeton Fund and Franklin
Fund. The table also shows the projected capitalization of Franklin Fund
Class A and C shares as adjusted to give effect to the proposed Transaction.
The capitalization of Franklin Fund and its classes is likely to be different
when the Transaction is consummated.
Franklin
Fund -
Projected
Templeton Franklin after
Fund Fund Transaction
(UNAUDITED) (UNAUDITED) (UNAUDITED)1
Net assets (all classes)...... $90,113,957 $ 387,857,520 2 $478,005,100
Total shares outstanding (all 6,314,523 25,655,282 2 31,595,755
classes)......................
Class A net assets............ $85,663,567 $278,301,203 $363,964,770
Class A shares outstanding.... 6,000,585 18,339,216 23,982,402
Class A net asset value per $14.28 $15.18 $15.18
share.........................
Class C net assets............ $4,450,390 $105,861,019 $110,311,409
Class C shares outstanding.... 313,938 7,072,878 7,370,165
Class C net asset value per $14.18 $14.97 $14.97
share.........................
1 Full pro forma financial statements are included in the SAI relating
to this Prospectus/Proxy Statement.
2 Franklin Fund offers two additional classes of shares, Class B and
Advisor Class.
COMPARISON OF INVESTMENT GOALS AND POLICIES
This section describes key investment policies of Franklin Fund and
Templeton Fund, and certain noteworthy differences between the investment
goals and policies of the two funds. For a complete description of Franklin
Fund's investment policies and risks, you should read the Franklin Fund
Prospectus, which is enclosed to this Prospectus/Proxy Statement as Exhibit B.
ARE THERE ANY SIGNIFICANT DIFFERENCES BETWEEN THE INVESTMENT GOALS AND
STRATEGIES OF THE FUNDS?
Templeton Fund's principal investment goal is long-term capital growth,
with current income as a secondary goal. Franklin Fund's principal
investment goal is to maximize total return. The funds' investment goals are
fundamental. The principal difference between the funds' goals is that
Templeton Fund places a greater emphasis on income.
While the ways in which both funds seek to achieve their goals are
similar, there are several important differences between the funds. Under
normal market conditions, Templeton Fund invests primarily in equity and debt
securities of companies located anywhere in the world that are engaged in or
related to the real estate industry or which own significant real estate
assets. At least 65% of Templeton Fund's assets will be invested in these
types of companies located in at least three countries (including the U.S.).
For Templeton Fund's purposes, a company is principally engaged in or related
to the real estate industry if at least 50% of its assets, gross income or
net profits are attributable to ownership, construction, management or sale
of residential, commercial or industrial real estate, or to products or
services that are related to the real estate industry, and includes real
estate investment trusts ("REITs"). Templeton Fund may invest up to 35% of
its total assets in equity and debt of companies outside the real estate
industry.
Under normal market conditions, Franklin Fund invests at least 65% of
its total assets in equity securities of companies operating in the real
estate industry. For Franklin Fund's purposes, these companies include: (i)
companies qualifying as REITs for federal income tax purposes, and (ii)
companies, such as homebuilders and developers, that have 50% of their assets
or revenues attributable to the ownership, construction, management or sale
of residential, commercial or industrial real estate. Franklin Fund may
invest up to 35% of its total assets in securities of issuers engaged in
businesses closely related to the real estate industry. This includes
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 which have significant real estate holdings (at
least 50% of their assets).
While both funds invest in real estate securities, there are
differences in what each fund considers to be a real estate security.
Franklin Fund invests a greater portion of its total assets (at least 65%
under normal market conditions) in the equity securities of companies that
actually operate in the real estate industry. By comparison, Templeton Fund
invests at least the same amount of its assets in the securities of companies
that either operate in OR ARE RELATED TO the real estate industry. In other
words, a greater percentage of Franklin Fund's assets may be invested in the
companies operating in, as opposed to merely related to, the real estate
industry.
In addition, Templeton Fund may invest up to 35% of its assets in
companies outside the real estate industry, while Franklin Fund may invest
that same amount in securities of issuers engaged in businesses closely
related to, as opposed to those operating in, the real estate industry.
Therefore, Franklin Fund, unlike Templeton Fund, does not have the ability to
invest in securities unrelated to the real estate industry.
A significant difference between the funds is the level of their
investments in foreign securities and debt securities. As compared to
Franklin Fund, Templeton Fund invests a greater portion of its assets in
foreign securities. Franklin Fund is only permitted to invest up to 10% of
its assets in securities of foreign issuers, while Templeton Fund has no
limitation on the percentage of assets it may invest in foreign securities of
developed markets. Templeton Fund may only invest 20% of its assets in
developing market issuers. In addition, Templeton Fund has the ability to
invest a greater portion of its assets in debt securities than Franklin Fund
does.
Templeton Fund is a diversified fund and Franklin Fund is a
non-diversified fund. As a non-diversified fund, Franklin Fund may invest a
greater portion of its assets in the securities of one issuer and, therefore,
a smaller number of individual issuers than a diversified fund. Economic,
business, political or other changes can affect all securities of a similar
type. Because it is a non-diversified fund, Franklin Fund may be more
sensitive to these changes.
Policies or restrictions that are deemed fundamental may not be changed
without the approval of the lesser of (i) a majority of the outstanding
shares of the fund, or (ii) 67% or more of the shares represented at a
meeting of shareholders at which the holders of more than 50% of the
outstanding shares are represented ("Majority Vote").
HOW DO THE TYPES OF SECURITIES THE FUNDS BUY AND INVESTMENT POLICIES OF THE
FUNDS COMPARE?
EQUITY SECURITIES.
Both funds seek to achieve their investment goals by investing
primarily in equity securities of real estate companies. Equity securities
generally entitle the holder to participate in a company's general operating
results and include common stocks, preferred stocks and convertible
securities. Both funds invest primarily in common stocks, although both
funds may also invest in preferred stocks and convertible securities.
Franklin Fund anticipates that a substantial portion of its assets will be
invested in equity securities of small or medium capitalization companies.
REITS. REITs typically invest directly in real estate and/or mortgages
and loans collateralized by real estate. "Equity" REITs are real estate
companies that own and manage income-producing properties such as apartments,
hotels, shopping centers or office buildings. The income, primarily rent
from these properties, is generally passed on to investors in the form of
dividends. These companies provide experienced property management and
generally concentrate on a specific geographic region or property type.
"Mortgage" REITs make loans to commercial real estate developers and earn
income from interest payments. Franklin Fund's primary REIT investments are
in equity REITs.
DEBT SECURITIES.
While each fund's principal investments are in common stocks, they may
also invest in debt securities. Debt securities represent an obligation of
the issuer to repay a loan of money to it, and generally provide for the
payment of interest. These include bonds, notes and debentures. Templeton
Fund may invest in the debt securities of companies and governments located
anywhere in the world, and in structured investments. To the extent
Templeton Fund buys debt securities, they will be rated no lower than A by
Moody's or S&P or, if unrated, determined by the fund's manager to be of
comparable quality and may have an average weighted maturity of up to 30
years. Franklin Fund may buy debt securities rated B or better by Moody's or
S&P, or unrated debt that it determines to be of comparable quality. At
present, Franklin Fund does not intend to invest more than 5% of its total
assets in non-investment grade securities (rated lower than BBB by S&P or Baa
by Moody's).
FOREIGN SECURITIES.
Under normal market conditions, at least 65% of Templeton Fund's total
assets will be invested in companies located in at least three countries
(including the U.S.) that are engaged in or related to the real estate
industry or that own significant real estate assets. Templeton Fund may buy
securities in any developed foreign country. The fund may also invest up to
20% of its total assets in developing countries, if the securities are listed
on a securities exchange, as well as a limited right to buy securities if
they are unlisted. In addition, Templeton Fund may invest 5% of its total
assets in Russian securities.
Franklin Fund's investment in foreign securities is limited to 10% of
its assets. Franklin Fund may invest in the securities of issuers in any
foreign country, developed or developing. Templeton Fund invests to a much
greater degree in foreign securities as compared to Franklin Fund.
DEPOSITARY RECEIPTS.
Both funds invest in American, European and Global Depositary
Receipts. Depositary Receipts are certificates typically issued by a bank or
trust company that give their holders the right to receive securities issued
by a foreign or domestic company.
CONVERTIBLE SECURITIES.
Both funds may also invest in convertible securities. A convertible
security generally is a preferred stock or debt security that pays dividends
or interest and may be converted into common stock.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES.
Franklin Fund has the authority to write (sell) covered put and call
options and buy put and call options that trade on securities exchanges and
in the over-the-counter ("OTC") market in order to hedge against the risk of
market or industry-wide stock price fluctuations or to increase income to the
fund. Franklin Fund may also 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,
Franklin Fund may sell futures and options to "close out" futures and options
it may have purchased. Franklin Fund does not currently intend to enter into
options and futures transactions.
Templeton Fund may sell covered call and put options and buy call and
put options on securities or stock indices that are traded on U.S. and
foreign exchanges and in the OTC markets. Templeton Fund may buy and sell
financial futures contracts for hedging purposes only. Templeton Fund does
not currently intend to enter into these options and futures transctions.
Options, futures and options on futures are generally considered
"derivative securities."
FOREIGN CURRENCY HEDGING TRANSACTIONS.
In order to hedge against foreign currency exchange rate risks,
Templeton Fund may enter into forward foreign currency exchange contracts and
foreign currency futures contracts, as well as purchase put or call options
on foreign currencies. Templeton Fund may conduct its foreign currency
exchange transactions on a spot (i.e., cash) basis at the spot rate
prevailing in the foreign currency exchange market. Templeton Fund will not
enter into forward contracts if, as a result, the fund will have more than
20% of the value of its total assets committed to the consummation of such
contracts.
Franklin Fund has no stated policy on foreign currency hedging
transactions.
REPURCHASE AGREEMENTS.
Each fund will generally have a portion of its assets in cash and cash
equivalents for a variety of reasons, including waiting for a special
investment opportunity or taking a defensive position. To earn income on
this portion of its assets, each fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the
fund agrees to buy a U.S. government security from a bank or broker-dealer at
one price and agrees to sell the security back to the bank or broker-dealer
at a higher price after a short period of time (generally, less than seven
days). The bank or broker-dealer must transfer to the fund's custodian
securities with an initial value of at least 102% of the dollar amount
invested by the fund in each repurchase agreement. If the bank or
broker-dealer does not purchase the securities as agreed, the funds may
experience a loss or delay in the liquidation of the securities underlying
the repurchase agreement and may also incur liquidation costs. Both funds
intend to enter into repurchase agreements with banks or broker-dealers
considered to be creditworthy by their managers.
TEMPORARY INVESTMENTS.
When either fund's manager believes unusual or adverse economic, market
or other conditions exist, each fund's portfolio may be invested in a
temporary defensive manner. Under these circumstances, Franklin Fund may
invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents, including money market funds
managed by Advisers or its affiliates. Franklin Fund may also invest cash
being held for liquidity purposes in these same instruments. When investing
in a temporary defensive manner, Templeton Fund may invest up to 100% of its
assets in money market securities denominated in the currency of any nation
including short-term securities (maturities of less than 12 months) and
medium-term securities (maturities up to 5 years) issued or guaranteed by the
U.S. or a foreign government, their agencies or instrumentalities, finance
company and corporate commercial paper, and other short-term corporate
obligations, rated A by S&P or Prime-1 by Moody's or, if unrated, determined
by the fund to be of comparable quality, and repurchase agreements. In
addition, Templeton Fund may invest up to 25% of its total assets in
obligations of banks (including certificates of deposit, time deposits and
bankers' acceptances), provided the fund limits its investment in time
deposits for which there is a penalty for early withdrawal to 10% of its
total assets.
Under these circumstances, the funds may be unable to pursue their
investment goals because they may not invest or may invest less in real
estate securities.
SECURITIES LENDING.
Both funds may lend their portfolio securities to qualified securities
dealers or other institutional investors. Such loans may not exceed 33 1/3%,
in the case of Templeton Fund, and 10%, in the case of Franklin Fund, of the
value of each fund's total assets measured at the time of the most recent
loan. For each loan, the borrower must maintain collateral with each fund's
custodian with a value at least equal to 100% of the current market value of
the loaned securities. Both funds will continue to receive any interest or
dividends paid on the loaned securities and will continue to have voting
rights with respect to the securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS.
Franklin Fund may, but does not intend to, engage in when-issued and
delayed delivery transactions. These are transactions where the fund buys
securities that have not yet been issued with payment and delivery for the
securities to take place at a future date. Since the market price of the
security may fluctuate during the time before payment and delivery, the fund
assumes the risk that the value of the security at delivery may be more or
less than the purchase price. When the fund is the buyer in the transaction,
it will maintain cash or liquid 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.
ILLIQUID SECURITIES.
As a fundamental policy, Franklin Fund may not invest more than 10% of
its total assets in securities with a limited trading market. 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.
Templeton Fund may not invest more than 15% of its net assets in
illiquid securities. As a fundamental policy, Templeton Fund may not invest
more than 15% of its total assets in securities of foreign companies that are
not listed on a recognized U.S. or foreign securities exchange, including no
more than 10% of its total assets in restricted securities and other
securities (including repurchase agreements having more than seven days
remaining to maturity and over-the-counter options purchased by the fund and
the assets used as cover for over-the-counter option written by the fund)
which are not restricted but which are not readily marketable (i.e., trading
in the security is suspended or, in the case of unlisted securities, market
makers do not exist or will not entertain bids or offers).
DIVERSIFICATION.
Unlike Franklin Fund, Templeton Fund is a diversified fund under the
1940 Act. As a diversified fund, 75% of Templeton Fund's total assets may
not be invested in more than 5% of a single issuer's securities or be used to
purchase 10% or more of the outstanding securities of a single issuer. In
addition, Templeton Fund has a fundamental policy prohibiting it from
investing more than 5% of its total assets in the securities of any one
issuer.
Although Franklin Fund may invest a greater portion of its assets in
the securities of one issuer than a diversified fund, it does intend to meet
the diversification requirements of the Internal Revenue Code.
HOW DO THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE FUNDS DIFFER?
As described below, the funds have adopted similar restrictions as
fundamental policies, which may not be changed without the approval of a
Majority Vote. The restrictions described below do not prohibit Franklin Fund
from investing all or substantially all of its assets in another registered
investment company having the same investment goal and policies of the fund
or from purchasing shares of money market funds managed by Advisers or its
affiliates.
Neither fund may invest directly in real estate. This restriction does
not prohibit each fund from purchasing securities secured by real estate
interests, or issued by companies or investment trusts that invest in real
estate or interests therein. Each fund could own real estate directly as a
result of a default on securities it owns.
The funds are generally prohibited from making loans. Both funds,
however, may purchase bonds, debentures or similar obligations that are
publicly distributed, or of a character usually acquired by institutional
investors. In addition, each fund may lend its portfolio securities and
enter into repurchase agreements.
Franklin Fund may not 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 for
investment) purposes. When Franklin Fund is permitted to borrow money, it
may only borrow in an amount up to 10% of the value of its 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. Franklin Fund is also subject to the restriction that no additional
investments may be made while any borrowings exceed 5% of the fund's total
assets. Templeton Fund may not borrow money, except from a bank and then not
in excess of 30% of its total assets (not including the amount borrowed).
Templeton Fund may not mortgage, pledge or hypothecate any of its
assets, except to secure borrowings and then only to an extent not greater
than 15% of the fund's total assets. Franklin Fund, as a non-fundamental
policy, will not pledge, mortgage or hypothecate the fund's assets as
security for loans.
Neither fund may participate on a joint or joint and several basis in
any securities trading account. This is a non-fundamental policy for
Franklin Fund and this policy does not prohibit Franklin Fund from
participating in joint repurchase arrangements and does not prohibit either
fund from lending its portfolio securities, or combining orders to buy or
sell with orders from other persons to obtain lower brokerage commissions.
Each fund may not invest more than 25% of the value of its total assets
in any one industry, except that each fund will concentrate its investments
in real estate securities.
Neither fund may underwrite securities of other issuers. This policy
does not prohibit either fund from obtaining such short-term credit as may be
necessary for the clearance of purchases and sales of its portfolio
securities. In addition, Templeton Fund may not issue senior securities or
purchase on margin or sell securities short, except that the fund may make
margin payments in connection with futures contracts. Franklin Fund may not
effect short sales, unless at the time the fund owns securities equivalent in
kind and amount to those sold (although it does not currently intend to
engage in short sales).
Franklin Fund may not invest more than 10% of the value of its total
assets in illiquid securities with legal or contractual restrictions on
resale (although Franklin Fund may invest in such securities to the extent
permitted under the federal securities laws) or which are not readily
marketable. Templeton Fund may not invest more than 15% of its net assets in
illiquid securities. As a fundamental policy, Templeton Fund may not invest
more than 15% of its total assets in securities of foreign companies that are
not listed on a recognized U.S. or foreign securities exchange, including no
more than 10% of its total assets in restricted securities and other
securities (including repurchase agreements having more than seven days
remaining to maturity and over-the-counter options purchased by the fund and
the assets used as cover for over-the-counter option written by the fund)
which are not restricted but which are not readily marketable (i.e., trading
in the security is suspended or, in the case of unlisted securities, market
makers do not exist or will not entertain bids or offers). Templeton Fund
may not invest more than 10% of its total assets in securities with a limited
trading market. In addition, Templeton Fund has undertaken with a state
securities commission that it will limit investments in illiquid securities
to no more than 5% of its total assets.
Neither fund may invest more than 5% of the value of its total assets
in securities of any issuer that does not have a record, together with its
predecessors, of at least three years of continuous operation. For Franklin
Fund, this limitation does not apply to issuers of REITs.
Neither fund may invest in securities for the purpose of exercising
management or control of the issuer.
Both funds may not invest in (as well as lease in the case of Franklin
Fund) interests in oil, gas or mineral exploration or development programs
(other than publicly traded equity securities, in the case of both funds, and
publicly issued debentures, in the case of Templeton Fund) or invest in
commodities or in commodity contracts. This policy does not prohibit
Franklin Fund from investing in financial futures and related options on
futures with respect to securities and securities indices or prohibit
Templeton Fund from investing in futures contracts.
As a fundamental policy, Franklin Fund may not 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.
Templeton Fund has no stated policy in this regard.
Franklin Fund may not 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 or
acquisition of assets. Based upon the terms of an SEC order that granted
exemptive relief from certain provisions of the 1940 Act, Franklin Fund may
invest its short-term cash in shares of one or more money market funds
managed by Advisers or its affiliates. Templeton Fund may not invest in
other open-end investment companies, except in connection with a merger,
consolidation or acquisition of assets.
Franklin Fund may not 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. Templeton Fund has no stated
policy in this regard.
Franklin Fund may not 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 1/2 of 1% of the
securities of such issuer and all such officers and trustees together own
beneficially more than 5% of such securities. Templeton Fund may not
purchase or retain securities of any company in which officers of the fund or
the manager, individually owing more than 1/2 of 1% of such securities of such
company, in the aggregate own more than 5% of the securities of such company.
Templeton Fund may not invest in the securities of any one issuer (not
including securities of the U.S. government and its agencies and
instrumentalities), if more than 5% of the total assets of the fund would be
invested in such issuer, or purchase more than 10% of any class of securities
of one company, including more than 10% of its outstanding voting
securities. Franklin Fund is not subject to this restriction.
Templeton Fund may not invest in excess of 5% of its net assets, valued
at the lower of cost or market, in warrants. In addition, no more than 2% of
its net assets may be invested in warrants not listed on either the New York
Stock Exchange or American Stock Exchange. This is a non-fundamental policy
of Franklin Fund.
It is also the policy of Franklin Fund that it may, consistent with its
objective, invest a portion of its assets, as permitted by the 1940 Act and
the rules adopted thereunder, in securities or other obligations issued by
companies engaged in securities related businesses, including companies that
are securities brokers, dealers, underwriters or investment advisers.
Templeton Fund has no stated policy in this regard.
WHAT ARE THE RISK FACTORS ASSOCIATED WITH INVESTMENTS IN THE FUNDS?
Like all investments, an investment in both funds involves risk. There
is no assurance that the funds will meet their investment goals. The
achievement of the funds' goals depends upon market conditions, generally,
and on the investment managers' analytical and portfolio management skills.
The risks of the funds are basically the same as those of other investments
in real estate securities.
STOCK RISK.
While stocks have historically outperformed other asset classes over
the long term, they tend to go up and down more dramatically over the shorter
term. These price movements may result from factors affecting individual
companies, industries or securities markets as a whole.
MEDIUM AND SMALLER COMPANIES RISK. Franklin Fund invests a substantial
portion of its assets in equity securities of medium and smaller companies
and, therefore, it is subject to additional risks associated with those
securities. Historically, medium-size and smaller company securities have
been more volatile in price than larger company securities, especially over
the short term. Among the reasons for the greater price volatility are the
less certain growth prospects of medium-size and smaller companies, the lower
degree of liquidity in the markets for such securities, and the greater
sensitivity of these companies to changing economic conditions.
In addition, these companies may lack depth of management, they may be
unable to generate funds necessary for growth or development, or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established. While medium-size and
smaller companies may offer greater opportunities for capital growth than
larger, more established companies, they also involve greater risks and
should be considered speculative.
REAL ESTATE SECURITIES RISK.
The funds are generally subject to the same risks that affect direct
ownership in real estate and each fund's performance is closely tied to
conditions affecting the real estate industry. Real estate values rise and
fall in response to a variety of factors, including local, regional and
national 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 and other factors affecting supply and demand for
properties. When economic growth is slowing, demand for property decreases
and prices may decline. Rising interest rates, which drive up mortgage and
financing costs, can restrain construction and buying and selling activity
and make other investments more attractive.
Each fund's investment in REITs is subject to special risks. Equity
REITs may be affected by changes in the value of the underlying property
owned by the REITs, while mortgage REITs may be affected by the quality of
credit extended. Equity and mortgage REITs are dependent upon management
skill, 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, self-liquidation and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code and to
maintain exemption from the 1940 Act. By investing in REITs indirectly
through one of the funds, a shareholder will bear not only his proportionate
shares of the expenses of the fund but, also, indirectly, similar expenses of
the REIT.
REAL ESTATE RISK. In addition, because the funds invest primarily in
the real estate industry, they could own real estate directly as a result of
a default on debt securities they may own. Receipt of rental income or
income from the disposition of real property by either fund may adversely
affect its ability to retain its tax status as a regulated investment company.
FOREIGN SECURITIES RISK.
Securities of companies and governments located outside the U.S. may
involve risks that can increase the potential for losses in a fund.
Investments in Depositary Receipts also involve some or all of the following
risks. These risks, including currency risks, are greater for Templeton Fund
than Franklin Fund because Templeton Fund invests more heavily in foreign
securities.
COUNTRY RISK. General securities market movements in any country where
a fund has investments are likely to affect the value of the securities the
fund owns that trade in that country. These movements will affect a fund's
share price and fund performance.
The political, economic and social structures of some countries a fund
invests in may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the
imposition of exchange controls, currency devaluations, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks.
Investments in developing or emerging markets are subject to all of the
risks of foreign investing generally, and have additional heightened risks
due to a lack of established legal, business and social frameworks to support
securities markets. Foreign securities markets, including emerging markets,
may have substantially lower trading volumes than U.S. markets, resulting in
less liquidity and more volatility than experienced in the U.S. While
short-term volatility in these markets can be disconcerting, declines in
excess of 50% are not unusual.
COMPANY RISK. Foreign companies are not subject to the same
disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies and their securities may not be as liquid as
securities of similar U.S. companies. Foreign stock exchanges, trading
systems, brokers and companies generally have less government supervision and
regulation than in the U.S. A fund may have greater difficulty voting
proxies, exercising shareholder rights, pursuing legal remedies and obtaining
judgments with respect to foreign investments in foreign courts than with
respect to U.S. companies in U.S. courts.
CURRENCY RISK.
Many of Templeton Fund's investments are denominated in foreign
currencies. To the extent either fund's investments are denominated in
foreign currencies, changes in foreign currency exchange rates will affect
the value of the fund's foreign investments and the fund's share price.
Generally, when the U.S. dollar rises in value against a foreign currency, an
investment in that country loses value because that currency is worth fewer
U.S. dollars. Devaluation of currency by a country's government or banking
authority also has a significant impact on the value of any securities
denominated in that currency.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced
a new single currency, the euro, to replace the national currency for
participating member countries.
Because the change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers that a fund may hold in its portfolio, and
their impact on fund performance. To the extent either fund holds non-U.S.
dollar (euro or other) denominated securities, it will still be exposed to
currency risk due to fluctuations in those currencies versus the U.S. dollar.
CONVERTIBLE SECURITIES RISK.
To the extent a fund invests in convertible securities, it is subject
to the risks associated with them. A convertible security has risk
characteristics of both equity and debt securities. Its value may rise and
fall with the market value of the underlying stock or, like a debt security,
vary with changes in interest rates and the credit quality of the issuer. A
convertible security tends to perform more like a stock when the underlying
stock price is high (because it is assumed it will be converted) and more
like a debt security when the underlying stock price is low (because it is
assumed it will not be converted). Because its value can be influenced by
many different factors, a convertible security is not as sensitive to
interest rate changes as a similar non-convertible debt security, and
generally has less potential for gain or loss than the underlying stock.
DERIVATIVE SECURITIES RISK.
Options, futures, options on futures, and forward currency contracts
are considered derivative investments since their value depends on the value
of the underlying asset to be purchased or sold. A fund's investment in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent either fund enters into any of these transactions,
their success will depend on the manager's ability to predict market
movements.
ILLIQUID SECURITIES RISK.
Investments by a fund in illiquid securities involve the possibility
that the securities cannot be readily sold or can only be readily resold at a
price significantly lower than their value, which may have a negative effect
on the value of the fund's shares.
INTEREST RATE RISK.
When interest rates rise, debt security prices generally fall. The
opposite is also true: debt security prices generally go up when interest
rates fall. In general, securities with longer maturities are more sensitive
to these price changes. To the extent Templeton Fund invests more of its
assets in debt securities than Franklin Fund, Templeton Fund would be exposed
to a greater interest rate risk.
CREDIT RISK.
This is the possibility than an issuer will be unable to make interest
payments or repay principal. Changes in an issuer's financial strength or in
a security's credit rating may affect its value and, thus, impact the value
of a fund's shares. As with the interest rate risk, to the extent that
Templeton Fund invests more of its assets in debt securities than Franklin
Fund, Templeton Fund would be exposed to greater credit risk.
NON-DIVERSIFICATION RISK.
A potential difference in the risks associated with investments in each
of the funds arises from the fact that Franklin Fund, unlike Templeton Fund,
is non-diversified. To the extent Franklin Fund's investments are not
diversified, Franklin Fund may be more sensitive to economic, political,
business, or regulatory developments affecting a single issuer or industry.
This, in turn, may result in greater fluctuation in the value of Franklin
Fund's shares.
YEAR 2000 RISK.
When evaluating current and potential portfolio positions, Year 2000 is
one of the factors each fund's manager considers.
The managers will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S. may not be required to make the same level of disclosure about Year 2000
readiness as is required in the U.S. Neither manager, of course, cannot audit
any company and its major suppliers to verify their Year 2000 readiness.
If a company in which a fund is invested is adversely affected by Year
2000 problems, it is likely that the price of its security will also be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the price of the fund's
shares and the fund's performance.
Each fund's business operations depend on a worldwide network of
computer systems that contain date fields, including securities trading
systems, securities transfer agent operations and stock market links. Many of
the systems currently use a two digit date field to represent the date, and
unless these systems are changed or modified, they may not be able to
distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a leap year
may create difficulties for some systems.
When the Year 2000 arrives, a fund's operations could be adversely
affected if the computer systems used by the manager, its service providers
and other third parties it does business with are not Year 2000 ready. For
example, the fund's portfolio and operational areas could be impacted,
including securities trade processing, interest and dividend payments,
securities pricing, shareholder account services, reporting, custody
functions and others. The fund could experience difficulties in effecting
transactions if any of its foreign subcustodians, or if foreign
broker-dealers or foreign markets are not ready for Year 2000.
The funds' managers and their affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the funds' ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the funds and their managers may have no control.
VOTING INFORMATION
HOW MANY VOTES ARE NECESSARY TO APPROVE THE AGREEMENT AND PLAN?
The affirmative vote of a majority of the total number of shares of
Templeton Fund outstanding and entitled to vote is necessary to approve the
Agreement and Plan. Each shareholder will be entitled to one vote for each
full share, and a fractional vote for each fractional share of Templeton Fund
held at the close of business on July 20, 1999 (the "Record Date"). If
sufficient votes to approve the Agreement and Plan are not received by the
date of the Meeting, the Meeting may be adjourned to permit further
solicitations of proxies.
Under relevant state law and Templeton Fund's governing documents,
abstentions and broker non-votes will be included for purposes of determining
whether a quorum is present at the Meeting, but will be treated as votes not
cast and, therefore, will not be counted for purposes of determining whether
the matters to be voted upon at the Meeting have been approved, and will have
the same effect as a vote against the Agreement and Plan.
HOW DO I ENSURE MY VOTE IS ACCURATELY RECORDED?
You can vote in any one of three ways:
o By mail, with the enclosed proxy card.
o In person at the Meeting.
o Through Shareholder Communications Corporation ("SCC"), a proxy
solicitor, by calling toll-free 1-800/645-3559.
A proxy card is, in essence, a ballot. IF YOU SIMPLY SIGN AND DATE THE PROXY
BUT GIVE NO VOTING INSTRUCTIONS, YOUR SHARES WILL BE VOTED IN FAVOR OF THE
AGREEMENT AND PLAN AND IN ACCORDANCE WITH THE VIEWS OF MANAGEMENT UPON ANY
UNEXPECTED MATTERS THAT COME BEFORE THE MEETING OR ADJOURNMENT(S) OF THE
MEETING.
CAN I REVOKE MY PROXY?
You may revoke your proxy at any time before it is voted by sending a
written notice to Templeton Fund expressly revoking your proxy, by signing
and forwarding to Templeton Fund a later-dated proxy, or by attending the
Meeting and voting in person.
WHAT OTHER MATTERS WILL BE VOTED UPON AT THE MEETING?
The Board of Trustees of Templeton Fund does not intend to bring any
matters before the Meeting other than those described in this proxy. It is
not aware of any other matters to be brought before the Meeting by others.
If any other matter legally comes before the Meeting, proxies for which
discretion has been granted will be voted in accordance with the views of
management.
WHO IS ENTITLED TO VOTE?
Shareholders of record of Templeton Fund on the Record Date will be
entitled to vote at the meeting. On the Record Date, there were
______________ outstanding shares of Templeton Fund - Class A and ________
outstanding shares of Templeton Fund - Class C.
WHAT OTHER SOLICITATIONS WILL BE MADE?
Templeton Fund will request broker-dealer firms, custodians, nominees
and fiduciaries to forward proxy material to the beneficial owners of the
shares of record. Templeton Fund may reimburse broker-dealer firms,
custodians, nominees and fiduciaries for their reasonable expenses incurred
in connection with such proxy solicitation. In addition to solicitations by
mail, officers and employees of Templeton Fund and Franklin Fund, without
extra pay, may conduct additional solicitations by telephone, personal
interviews and other means. Templeton Fund has engaged SCC to solicit
proxies from brokers, banks, other institutional holders and individual
shareholders for an approximate fee, including out-of-pocket expenses ranging
between $20,563 and $26,821. The costs of any such additional solicitation
and of any adjourned session will be shared one-quarter by Templeton Fund,
one-quarter by Franklin Fund, one-quarter by Advisers, and one-quarter by
Global Advisors.
ARE THERE DISSENTERS' RIGHTS?
Shareholders of Templeton Fund will not be entitled to any "dissenters'
rights" since the proposed Transaction involves two open-end investment
companies registered under the 1940 Act (commonly called mutual funds).
Although no dissenters' rights may be available, you have the right to redeem
your shares at Net Asset Value until the closing date. After the closing
date, you may redeem your Franklin Fund shares or exchange them for shares of
certain other funds in the Franklin Templeton Funds, subject to the terms in
the prospectus of the respective fund.
INFORMATION ABOUT FRANKLIN FUND
Information about Franklin Fund is included in the Franklin Fund
Prospectus, which is enclosed and considered a part of this Prospectus/Proxy
Statement. Additional information about Franklin Fund is included in its SAI
dated September 1, 1998, as supplemented April 1, 1999, which has been filed
with the SEC and is incorporated by reference into the SAI relating to this
Prospectus/Proxy Statement. You may request a free copy of Franklin Fund's
SAI and other information by calling 1-800/DIAL-BEN(R) or by writing to the
Franklin Fund at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA
94403-7777. The Franklin Fund's Annual Report to Shareholders for the fiscal
year ended April 30, 1999, is enclosed to and considered a part of this
Prospectus/Proxy Statement.
The Franklin Fund files proxy materials, reports and other information
with the SEC in accordance with the informational requirements of the
Securities Exchange Act of 1934 and the 1940 Act. These materials can be
inspected and copied at: the SEC's Public Reference Room at 450 Fifth Street
NW, Washington, DC 20549, and at the Regional Offices of the SEC located in
New York City at 7 World Trade Center, Suite 1300, New York, NY 10048 and in
Chicago at 500 West Madison Street, Suite 1400, Chicago, IL 60661. Also,
copies of such material can be obtained from the SEC's Public Reference
Section, Washington, DC 20549-6009, at prescribed rates, or from the SEC's
internet address at http://www.sec.gov.
INFORMATION ABOUT TEMPLETON FUND
Information about Templeton Fund is included in the current Templeton
Fund Prospectus, as well as Templeton Fund's SAI dated January 1, 1999, and
in the Templeton Fund's Annual Report to Shareholders dated August 31, 1998
and SemiAnnual Report dated February 28, 1999. These documents have been
filed with the SEC and the Templeton Fund Prospectus, Annual Report, and
SemiAnnual Report are incorporated by reference herein. You may request free
copies of these documents and other information relating to Templeton Fund by
calling 1-800/DIAL BEN(R) or by writing to Templeton Fund at 100 Fountain
Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030. Reports and other
information filed by the Templeton Fund can be inspected and copied at: the
SEC's Public Reference Room at 450 Fifth Street NW, Washington, DC 20549,
and at the Regional Offices of the SEC located in New York City at 7 World
Trade Center, Suite 1300, New York, NY 10048 and in Chicago at 500 West
Madison Street, Suite 1400, Chicago, IL 60661. Also, copies of such
material can be obtained from the SEC's Public Reference Section, Washington,
DC 20549-6009, at prescribed rates, or from the SEC's internet address at
http://www.sec.gov.
PRINCIPAL HOLDERS OF SHARES
As of the Record Date, the officers and trustees of Templeton Fund, as
a group, owned less than 1% of the outstanding voting shares of Class A or
Class C of Templeton Fund. In addition, as of the Record Date, the officers
and trustees of the Trust, as a group, owned less than 1% of the outstanding
voting shares of Class A or Class C of Franklin Fund. From time to time,
the number of fund shares held in the "street name" accounts of various
securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding.
Except as listed below, as of the Record Date, no other person owned
(beneficially or of record) 5% or more of the outstanding shares of Franklin
Fund or Templeton Fund.
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ----------------------------------------------------------------
GLOSSARY OF USEFUL TERMS AND DEFINITIONS
1940 ACT - Investment Company Act of 1940, as amended
ADVISERS - Franklin Advisers, Inc., 777 Mariners Island Blvd., San Mateo, CA
94404, the investment manager for Franklin Fund
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your Class A shares within 12 months of purchase and Class C
shares within 18 months of purchase.
DISTRIBUTORS - Franklin Templeton Distributors, Inc., 777 Mariners Island
Blvd., San Mateo, CA 94404, the principal underwriter for the funds
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, Templeton Capital Accumulator Fund, Inc., 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 Funds' administrator
GLOBAL ADVISORS - Templeton Global Advisors Limited, 500 East Broward Blvd.,
Fort Lauderdale, FL 33394-3091, the investment manager for Templeton Fund
INVESTOR SERVICES - Franklin/Templeton Investor Services, Inc., 777 Mariners
Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777, the shareholder
servicing and transfer agent to the funds
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 Services, 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.
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, if
applicable. For each fund, the maximum front-end sales charge is 5.75% for
Class A and 1% for Class C. We calculate the offering price to two decimal
places using standard rounding criteria.
RESOURCES - Franklin Resources, Inc.
SAI - Statement of Additional Information
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 funds This reference is for convenience only and does not
indicate a legal conclusion of capacity.
S&P - Standard & Poor's Corporation
U.S. - United States
EXHIBITS TO COMBINED PROSPECTUS
AND PROXY STATEMENT
EXHIBIT
A Agreement and Plan of Reorganization between Templeton Global
Real Estate Fund and Franklin Real Estate Securities Trust, on
behalf of Franklin Real Estate Securities Fund
B Prospectus of Franklin Real Estate Securities Fund - Class A, B &
C dated September 1, 1998, as amended January 1, 1999 (enclosed)
C Annual Report to Shareholders of Franklin Real Estate Securities
Fund dated April 30, 1999 (enclosed)
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement and Plan"), made
as of this ____ day of ______, 1999, by and between FRANKLIN REAL ESTATE
SECURITIES TRUST (the "Trust"), a business trust created under the laws of
the State of Delaware in 1993, with its principal place of business at 777
Mariners Island Boulevard, San Mateo, California 94404, on behalf of
Franklin Real Estate Securities Fund, a series of shares of the Trust
("Franklin Fund"), and TEMPLETON GLOBAL REAL ESTATE FUND ("Templeton Fund"),
a business trust created under the laws of the Commonwealth of Massachusetts
in 1989, with its principal place of business at 500 East Broward Boulevard,
Fort Lauderdale, Florida 33394.
PLAN OF REORGANIZATION
The reorganization (hereinafter referred to as the "Plan of
Reorganization") will consist of (i) the acquisition by the Trust, on behalf
of Franklin Fund, of substantially all of the property, assets and goodwill
of Templeton Fund in exchange solely for shares of beneficial interest, par
value $0.01 per share, of Franklin Fund - Class A ("Franklin Fund Class A
Shares") and shares of beneficial interest, par value $0.01 per share, of
Franklin Fund - Class C ("Franklin Fund Class C Shares") (collectively,
"Franklin Fund Shares"); (ii) the distribution of (a) Franklin Fund Class A
Shares to the shareholders of Templeton Fund - Class A shares ("Templeton
Fund Class A Shares") and (b) Franklin Fund Class C Shares to the
shareholders of Templeton Fund - Class C shares ("Templeton Fund Class C
Shares"), according to their respective interests; and (iii) the subsequent
dissolution of Templeton Fund as soon as practicable after the closing (as
defined in Section 3, hereinafter called the "Closing"), all upon and subject
to the terms and conditions of this Agreement and Plan hereinafter set forth.
AGREEMENT
In order to consummate the Plan of Reorganization and in consideration
of the promises and of the covenants and agreements hereinafter set forth,
and intending to be legally bound, the parties hereto covenant and agree as
follows:
1. SALE AND TRANSFER OF ASSETS, LIQUIDATION AND DISSOLUTION OF TEMPLETON
FUND.
(a) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of the Trust herein
contained, and in consideration of the delivery by the Trust of the number of
Franklin Fund Class A Shares and Franklin Fund Class C Shares hereinafter
provided, Templeton Fund agrees that it will convey, transfer and deliver to
the Trust, on behalf of Franklin Fund, at the Closing all of Templeton Fund's
then existing assets, free and clear of all liens, encumbrances, and claims
whatsoever (other than shareholders' rights of redemption), except for cash,
bank deposits, or cash equivalent securities in an estimated amount necessary
to: (i) pay the costs and expenses of carrying out this Agreement and Plan
(including, but not limited to, fees of counsel and accountants, and expenses
of its liquidation and dissolution contemplated hereunder), which costs and
expenses shall be established on Templeton Fund's books as liability
reserves; (ii) discharge its unpaid liabilities on its books at the closing
date (as defined in Section 3, hereinafter called the "Closing Date"),
including, but not limited to, its income dividends and capital gains
distributions, if any, payable for the period prior to, and through, the
Closing Date; and (iii) pay such contingent liabilities as the Board of
Trustees shall reasonably deem to exist against Templeton Fund, if any, at
the Closing Date, for which contingent and other appropriate liability
reserves shall be established on Templeton Fund's books (hereinafter "Net
Assets"). Templeton Fund shall also retain any and all rights that it may
have over and against any person that may have accrued up to and including
the close of business on the Closing Date.
(b) Subject to the terms and conditions of this Agreement and Plan,
and in reliance on the representations and warranties of Templeton Fund
herein contained, and in consideration of such sale, conveyance, transfer,
and delivery, the Trust agrees at the Closing to deliver to Templeton Fund:
(i) the number of Franklin Fund Class A Shares, determined by dividing the
net asset value per share of Templeton Fund Class A Shares by the net asset
value per share of Franklin Fund Class A Shares, and multiplying the result
thereof by the number of outstanding Templeton Fund Class A Shares, as of
1:00 p.m. Pacific time on the Closing Date; and (ii) the number of Franklin
Fund Class C Shares, determined by dividing the net asset value per share of
Templeton Fund Class C Shares by the net asset value per share of Franklin
Fund Class C Shares, and multiplying the result thereof by the number of
outstanding Templeton Fund Class C Shares, as of 1:00 p.m. Pacific time on
the Closing Date. All such values shall be determined in the manner and as
of the time set forth in Section 2 hereof.
(c) Immediately following the Closing, Templeton Fund shall dissolve
and distribute pro rata to its shareholders of record as of the close of
business on the Closing Date Franklin Fund Shares received by Templeton Fund
pursuant to this Section 1. Such liquidation and distribution shall be
accomplished by the establishment of accounts on the share records of
Templeton Fund of the type and in the amounts due such shareholders based on
their respective holdings as of the close of business on the Closing Date.
Fractional Franklin Fund Shares shall be carried to the third decimal place.
As promptly as practicable after the Closing, each holder of any outstanding
certificate or certificates representing shares of beneficial interest of
Templeton Fund shall be entitled to surrender the same to the transfer agent
for Franklin Fund in exchange for the number of Franklin Fund Shares into
which the shares of Templeton Fund theretofore represented by the certificate
or certificates so surrendered shall have been converted. Certificates for
Franklin Fund Shares shall not be issued, unless specifically requested by
the shareholders. Until so surrendered, each outstanding certificate which,
prior to the Closing, represented shares of beneficial interest of Templeton
Fund shall be deemed for all Franklin Fund's purposes to evidence ownership
of the number of Franklin Fund Shares into which the shares of beneficial
interest of Templeton Fund (which prior to the Closing were represented
thereby) have been converted.
2. VALUATION.
(a) The value of Templeton Fund's Net Assets to be acquired by the
Trust, on behalf of Franklin Fund, hereunder shall be computed as of 1:00
p.m. Pacific time on the Closing Date using the valuation procedures set
forth in Templeton Fund's currently effective prospectus.
(b) The net asset value of a share of beneficial interest of Franklin
Fund Class A Shares and of Franklin Fund Class C Shares shall be determined
to the nearest full cent as of 1:00 p.m. Pacific time on the Closing Date
using the valuation procedures set forth in Franklin Fund's currently
effective prospectus.
(c) The net asset value of a share of beneficial interest of
Templeton Fund Class A Shares and of Templeton Fund Class C Shares shall be
determined to the fourth decimal place as of 1:00 p.m. Pacific time on the
Closing Date using the valuation procedures set forth in Templeton Fund's
currently effective prospectus.
3. CLOSING AND CLOSING DATE.
The Closing Date shall be September 23, 1999, or such later date as the
parties may mutually agree. The Closing shall take place at the principal
office of the Trust at 2:00 p.m. Pacific time on the Closing Date. Templeton
Fund shall have provided for delivery as of the Closing of those Net Assets
of Templeton Fund to be transferred to Franklin Fund's Custodian, Bank of New
York, Mutual Funds Division, 90 Washington Street, New York, New York 10286.
Also, Templeton Fund shall deliver at the Closing a list of names and
addresses of the shareholders of record of its Templeton Fund Class A Shares
and Templeton Fund Class C Shares and the number of shares of beneficial
interest of such classes owned by each such shareholder, indicating thereon
which such shares are represented by outstanding certificates and which by
book-entry accounts, all as of 1:00 p.m. Pacific time on the Closing Date,
certified by its transfer agent or by its President to the best of its or his
knowledge and belief. The Trust shall issue and deliver a certificate or
certificates evidencing the shares of beneficial interest of Franklin Fund to
be delivered to said transfer agent registered in such manner as Templeton
Fund may request, or provide evidence satisfactory to Templeton Fund that
such Franklin Fund Shares have been registered in an account on the books of
Franklin Fund in such manner as Templeton Fund may request.
4. REPRESENTATIONS AND WARRANTIES BY TEMPLETON FUND.
Templeton Fund represents and warrants to the Trust that:
(a) Templeton Fund is a business trust created under the laws of the
Commonwealth of Massachusetts on July 17, 1989, and is validly existing and
in good standing under the laws of that commonwealth. Templeton Fund is duly
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as a diversified, open-end, management investment company and all its
shares sold were sold pursuant to an effective registration statement filed
under the Securities Act of 1933, as amended (the "1933 Act"), except for
those shares sold pursuant to the private offering exemption for the purpose
of raising the required initial capital.
(b) Templeton Fund is authorized to issue an unlimited number of
shares of beneficial interest, par value $0.01 per share, each outstanding
share of which is fully paid, non-assessable, freely transferable and has
full voting rights.
(c) The financial statements appearing in Templeton Fund's Annual
Report to Shareholders for the fiscal year ended August 31, 1998, audited by
McGladrey & Pullen L.L.P., and SemiAnnual Report to Shareholders for the six
month period ended February 28, 1999, copies of which have been delivered to
the Trust, fairly present the financial position of Templeton Fund as of such
dates and the results of its operations for the periods indicated in
conformity with generally accepted accounting principles applied on a
consistent basis.
(d) The books and records of Templeton Fund made available to the
Trust and/or its counsel accurately summarize the accounting data represented
and contain no material omissions with respect to the business and operations
of Templeton Fund.
(e) Templeton Fund has the necessary power and authority to conduct
its business as such business is now being conducted.
(f) Templeton Fund is not a party to or obligated under any provision
of its Amended and Restated Declaration of Trust or By-laws, or any contract
or any other commitment or obligation, and is not subject to any order or
decree that would be violated by its execution of or performance under this
Agreement and Plan.
(g) Templeton Fund has elected to be treated as a regulated
investment company ("RIC") for federal income tax purposes under Part I of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
has qualified as a RIC for each taxable year since its inception, and will
qualify as a RIC as of the Closing Date.
5. REPRESENTATIONS AND WARRANTIES BY THE TRUST.
The Trust represents and warrants to Templeton Fund that:
(a) The Trust is a business trust created under the laws of the State
of Delaware on September 22, 1993, and is validly existing and in good
standing under the laws of that state. The Trust is duly registered under
the 1940 Act as an open-end, management investment company and all of
Franklin Fund's shares sold were sold pursuant to an effective registration
statement filed under the 1933 Act, except for those shares sold pursuant to
the private offering exemption for the purpose of raising the required
initial capital.
(b) The Trust is authorized to issue an unlimited number of shares of
beneficial interest, par value $0.01 per share, each outstanding share of
which is fully paid, non-assessable, freely transferable, and has full voting
rights. Franklin Fund Shares to be issued pursuant to this Agreement and
Plan will be fully paid, non-assessable, freely transferable and have full
voting rights.
(c) At the Closing, Franklin Fund Class A Shares will be eligible for
offering to the public in those states of the United States and jurisdictions
in which the shares of Templeton Fund Class A Shares are presently eligible
for offering to the public, and Franklin Fund Class C Shares will be eligible
for offering to the public in those states of the United States and
jurisdictions in which the shares of Templeton Fund Class C Shares are
presently eligible for offering to the public; and there are a sufficient
number of Franklin Fund Class A Shares and Franklin Fund Class C Shares
registered under the 1933 Act to permit the transfers contemplated by this
Agreement and Plan to be consummated.
(d) The financial statements appearing in the Trust's Annual Report
to Shareholders for the fiscal year ended April 30, 1999, audited by Coopers
& Lybrand L.L.P., copies of which have been delivered to Templeton Fund,
fairly present the financial position of Franklin Fund as of such date and
the results of its operations for the period indicated in conformity with
generally accepted accounting principles applied on a consistent basis.
(e) The Trust has the necessary power and authority to conduct
Franklin Fund's business as such business is now being conducted.
(f) The Trust is not a party to or obligated under any provision of
the Trust's Agreement and Declaration of Trust or By-laws, or any contract or
any other commitment or obligation, and is not subject to any order or
decree, that would be violated by the Trust's execution of or performance
under this Agreement and Plan.
(g) The Trust has elected to treat Franklin Fund as a RIC for federal
income tax purposes under Part I of Subchapter M of the Code, and Franklin
Fund has qualified as a RIC for each taxable year since its inception and
will qualify as a RIC as of the Closing Date.
6. REPRESENTATIONS AND WARRANTIES BY TEMPLETON FUND AND THE TRUST.
Templeton Fund and the Trust each represents and warrants to the other
that:
(a) The statement of assets and liabilities to be furnished by it as
of 1:00 p.m. Pacific time on the Closing Date for the purpose of determining
the number of Franklin Fund Shares to be issued pursuant to Section 1 of this
Agreement and Plan will accurately reflect its Net Assets in the case of
Templeton Fund and its net assets in the case of Franklin Fund, and
outstanding shares of beneficial interest, as of such date, in conformity
with generally accepted accounting principles applied on a consistent basis.
(b) At the Closing, it will have good and marketable title to all of
the securities and other assets shown on the statement of assets and
liabilities referred to in "(a)" above, free and clear of all liens or
encumbrances of any nature whatsoever, except such imperfections of title or
encumbrances as do not materially detract from the value or use of the assets
subject thereto, or materially affect title thereto.
(c) Except as disclosed in its currently effective prospectus, there
is no material suit, judicial action, or legal or administrative proceeding
pending or threatened against it.
(d) There are no known actual or proposed deficiency assessments with
respect to any taxes payable by it.
(e) The execution, delivery, and performance of this Agreement and
Plan have been duly authorized by all necessary action of its Board of
Trustees, and this Agreement and Plan constitutes a valid and binding
obligation enforceable in accordance with its terms.
(f) It anticipates that consummation of this Agreement and Plan will
not cause it, in the case of Templeton Fund, and Franklin Fund, in the case
of the Trust, to fail to conform to the requirements of Subchapter M of the
Code for federal income taxation as a RIC at the end of its fiscal year.
(g) It has the necessary power and authority to conduct its business,
in the case of Templeton Fund, and Franklin Fund's business, in the case of
the Trust, as such business is now being conducted.
7. COVENANTS OF TEMPLETON FUND AND THE TRUST.
(a) Templeton Fund and the Trust, on behalf of Franklin Fund, each
covenant to operate their respective businesses as presently conducted
between the date hereof and the Closing.
(b) Templeton Fund undertakes that it will not acquire Franklin Fund
Shares for the purpose of making distributions thereof to anyone other than
Templeton Fund's shareholders.
(c) Templeton Fund undertakes that, if this Agreement and Plan is
consummated, it will file an application pursuant to Section 8(f) of the 1940
Act for an order declaring that it has ceased to be an investment company.
(d) Templeton Fund and the Trust each agree that, by the Closing, all
of their federal and other tax returns and reports required by law to be
filed by Templeton Fund or by the Trust, on behalf of Franklin Fund, on or
before such date shall have been filed, and all Federal and other taxes shown
as due on said returns shall have either been paid or adequate liability
reserves shall have been provided for the payment of such taxes.
(e) At the Closing, Templeton Fund will provide the Trust with a copy
of the shareholder ledger accounts, certified by its transfer agent or its
President to the best of its or his knowledge and belief, for all the
shareholders of record of its shares as of 1:00 p.m. Pacific time on the
Closing Date who are to become shareholders of Franklin Fund as a result of
the transfer of assets that is the subject of this Agreement and Plan.
(f) Templeton Fund agrees to mail to each shareholder of record
entitled to vote at the meeting of its shareholders at which action on this
Agreement and Plan is to be considered, in sufficient time to comply with
requirements as to notice thereof, a Combined Prospectus and Proxy Statement
that complies in all material respects with the applicable provisions of
Section 14(a) of the Securities Exchange Act of 1934, as amended, and Section
20(a) of the 1940 Act, and the rules and regulations, respectively,
thereunder.
(g) The Trust will file with the U.S. Securities and Exchange
Commission a registration statement on Form N-14 under the 1933 Act relating
to Franklin Fund Shares issuable hereunder ("Registration Statement"), and
will use its best efforts to provide that the Registration Statement becomes
effective as promptly as practicable. At the time it becomes effective, the
Registration Statement will (i) comply in all material respects with the
applicable provisions of the 1933 Act, and the rules and regulations
promulgated thereunder; and (ii) not contain any untrue statement of material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. At the time the
Registration Statement becomes effective, at the time of Templeton Fund's
shareholders' meeting, and at the Closing Date, the prospectus and statement
of additional information included in the Registration Statement will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
8. CONDITIONS PRECEDENT TO BE FULFILLED BY TEMPLETON FUND AND THE TRUST.
The obligations of Templeton Fund and the Trust to effectuate this
Agreement and Plan hereunder shall be subject to the following respective
conditions:
(a) That: (i) all the representations and warranties of the other
party contained herein shall be true and correct as of the Closing with the
same effect as though made as of and at such date; (ii) the other party shall
have performed all obligations required by this Agreement and Plan to be
performed by it prior to the Closing; and (iii) the other party shall have
delivered to such party a certificate signed by the President and by the
Secretary or equivalent officer to the foregoing effect.
(b) That each party shall have delivered to the other party a copy of
the resolutions approving this Agreement and Plan adopted by its Board of
Trustees certified by its Secretary or equivalent officer.
(c) That the U.S. Securities and Exchange Commission shall not have
issued an unfavorable management report under Section 25(b) of the 1940 Act
or instituted or threatened to institute any proceeding seeking to enjoin
consummation of the Plan of Reorganization under Section 25(c) of the 1940
Act. And, further, no other legal, administrative or other proceeding shall
have been instituted or threatened that would materially affect the financial
condition of either party or would prohibit the transactions contemplated
hereby.
(d) That this Agreement and Plan and the Plan of Reorganization
contemplated hereby shall have been adopted and approved by the appropriate
action of the shareholders of Templeton Fund at an annual or special meeting
or any adjournment thereof.
(e) That Templeton Fund shall have declared a distribution or
distributions prior to the Closing Date that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
all of its net investment income and all of its net realized capital gains,
if any, for the period from the close of its last fiscal year to 1:00 p.m.
Pacific time on the Closing Date; and (ii) any undistributed net investment
income and net realized capital gains from any period to the extent not
otherwise declared for distribution.
(f) That there shall be delivered to Templeton Fund and the Trust an
opinion from Messrs. Stradley, Ronon, Stevens & Young, LLP, counsel to
Templeton Fund and the Trust, to the effect that, provided the acquisition
contemplated hereby is carried out in accordance with this Agreement and Plan
and based upon certificates of the officers of Templeton Fund and the Trust
with regard to matters of fact:
(1) The acquisition by Franklin Fund of substantially all the
assets of Templeton Fund as provided for herein in exchange for Franklin Fund
Shares will qualify as a reorganization within the meaning of Section
368(a)(1)(C) of the Code, and Templeton Fund and Franklin Fund will each be a
party to the respective reorganization within the meaning of Section 368(b)
of the Code;
(2) No gain or loss will be recognized by Templeton Fund upon
the transfer of substantially all of its assets to Franklin Fund in exchange
solely for voting shares of Franklin Fund (Code Sections 361(a) and 357(a)).
No opinion, however, will be expressed as to whether any accrued market
discount will be required to be recognized as ordinary income pursuant to
Section 1276 of the Code;
(3) No gain or loss will be recognized by Franklin Fund upon
the receipt of substantially all of the assets of Templeton Fund in exchange
solely for voting shares of Franklin Fund (Code Section 1032(a));
(4) The basis of the assets of Templeton Fund received by
Franklin Fund will be the same as the basis of such assets to Templeton Fund
immediately prior to the exchange (Code Section 362(b));
(5) The holding period of the assets of Templeton Fund received
by Franklin Fund will include the period during which such assets were held
by Templeton Fund (Code Section 1223(2));
(6) No gain or loss will be recognized to the shareholders of
Templeton Fund upon the exchange of their shares in Templeton Fund for voting
shares of Franklin Fund (Code Section 354(a));
(7) The basis of Franklin Fund Shares received by Templeton
Fund's shareholders shall be the same as the basis of the shares of Templeton
Fund exchanged therefor (Code Section 358(a)(1));
(8) The holding period of Franklin Fund Shares received by
Templeton Fund's shareholders (including fractional shares to which they may
be entitled) will include the holding period of Templeton Fund's shares
surrendered in exchange therefor, provided that Templeton Fund's shares were
held as a capital asset on the date of the exchange (Code Section 1223(1));
and
(9) Franklin Fund will succeed to and take into account as of
the date of the proposed transfer the items of Templeton Fund described in
Section 381(c) of the Code (as defined in Section 1.381(b)-1(b) of the Income
Tax Regulations), subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code and the Income Tax
Regulations thereunder.
(g) That the Trust shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley Ronon Stevens & Young,
LLP, counsel to Templeton Fund, to the effect that, subject in all respects
to the effects of bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, and other laws now or hereafter affecting generally
the enforcement of creditors' rights:
(1) Templeton Fund was created as a business trust under the
laws of the Commonwealth of Massachusetts on July 17, 1989, and is a validly
existing business trust and in good standing under the laws of that
commonwealth;
(2) Templeton Fund is authorized to issue an unlimited number
of shares of beneficial interest, par value $0.01 per share. Assuming that
the initial shares of beneficial interest were issued in accordance with the
1940 Act and the Amended and Restated Declaration of Trust and By-laws of
Templeton Fund, and that all other outstanding shares of Templeton Fund were
sold, issued and paid for in accordance with the terms of Templeton Fund's
prospectus in effect at the time of such sales, each such outstanding share
is fully paid, non-assessable, freely transferable and has full voting rights;
(3) Templeton Fund is an open-end, diversified investment
company of the management type registered as such under the 1940 Act;
(4) Except as disclosed in Templeton Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against Templeton Fund,
the unfavorable outcome of which would materially and adversely affect
Templeton Fund;
(5) All actions required to be taken by Templeton Fund to
authorize this Agreement and Plan and to effect the Plan of Reorganization
contemplated hereby have been duly authorized by all necessary action on the
part of Templeton Fund; and
(6) Neither the execution, delivery, nor performance of this
Agreement and Plan by Templeton Fund violates any provision of its Amended
and Restated Declaration of Trust or By-laws, or the provisions of any
agreement or other instrument known to such counsel to which Templeton Fund
is a party or by which Templeton Fund is otherwise bound; this Agreement and
Plan is the legal, valid and binding obligation of Templeton Fund and is
enforceable against Templeton Fund in accordance with its terms.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of Templeton Fund with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of Templeton Fund.
(h) That Templeton Fund shall have received an opinion in form and
substance satisfactory to it from Messrs. Stradley, Ronon, Stevens & Young,
LLP, counsel to the Trust, to the effect that, subject in all respects to the
effects of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other laws now or hereafter affecting generally the
enforcement of creditors' rights:
(1) The Trust was created as a business trust under the laws of
the State of Delaware on September 14, 1993, and is a validly existing
business trust and in good standing under the laws of that state;
(2) The Trust is authorized to issue an unlimited number of
shares of beneficial interest of Franklin Fund, par value $0.01 per share.
Assuming that the initial shares of beneficial interest of Franklin Fund were
issued in accordance with the 1940 Act, and the Agreement and Declaration of
Trust and By-laws of the Trust, and that all other outstanding shares of
Franklin Fund were sold, issued and paid for in accordance with the terms of
Franklin Fund's prospectus in effect at the time of such sales, each such
outstanding share of Franklin Fund is fully paid, non-assessable, freely
transferable and has full voting rights;
(3) The Trust is an open-end investment company of the
management type registered as such under the 1940 Act;
(4) Except as disclosed in Franklin Fund's currently effective
prospectus, such counsel does not know of any material suit, action, or legal
or administrative proceeding pending or threatened against the Trust, the
unfavorable outcome of which would materially and adversely affect the Trust
or Franklin Fund;
(5) Franklin Fund Shares to be issued pursuant to the terms of
this Agreement and Plan have been duly authorized and, when issued and
delivered as provided in this Agreement and Plan, will have been validly
issued and fully paid and will be non-assessable by the Trust;
(6) All actions required to be taken by the Trust to authorize
this Agreement and Plan and to effect the Plan of Reorganization contemplated
hereby have been duly authorized by all necessary action on the part of the
Trust;
(7) Neither the execution, delivery, nor performance of this
Agreement and Plan by the Trust violates any provision of its Agreement and
Declaration of Trust or By-laws, or the provisions of any agreement or other
instrument known to such counsel to which the Trust is a party or by which
the Trust, on behalf of Franklin Fund, is otherwise bound; this Agreement and
Plan is the legal, valid and binding obligation of the Trust and is
enforceable against the Trust and/or Franklin Fund in accordance with its
terms; and
(8) The registration statement of the Trust, of which the
prospectus, dated September 1, 1998, of Franklin Fund is a part (the
"Prospectus"), is, at the time of the signing of this Agreement and Plan,
effective under the 1933 Act, and, to the best knowledge of such counsel, no
stop order suspending the effectiveness of such registration statement has
been issued, and no proceedings for such purpose have been instituted or are
pending before or threatened by the U.S. Securities and Exchange Commission
under the 1933 Act, and nothing has come to counsel's attention that causes
it to believe that, at the time the Prospectus became effective, or at the
time of the signing of this Agreement and Plan, or at the Closing, such
Prospectus (except for the financial statements and other financial and
statistical data included therein, as to which counsel need not express an
opinion), contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and such counsel knows of no legal or
government proceedings required to be described in the Prospectus, or of any
contract or document of a character required to be described in the
Prospectus that is not described as required.
In giving the opinions set forth above, this counsel may state that it
is relying on certificates of the officers of the Trust with regard to
matters of fact, and certain certifications and written statements of
governmental officials with respect to the good standing of the Trust.
(i) That Templeton Fund shall have received a certificate from the
President and Secretary of the Trust to the effect that the statements
contained in Franklin Fund's Prospectus, at the time the Prospectus became
effective, at the date of the signing of this Agreement and Plan, and at the
Closing, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(j) That the Trust's Registration Statement with respect to Franklin
Fund Shares to be delivered to Templeton Fund's shareholders in accordance
with this Agreement and Plan shall have become effective, and no stop order
suspending the effectiveness of the Registration Statement or any amendment
or supplement thereto, shall have been issued prior to the Closing Date or
shall be in effect at Closing, and no proceedings for the issuance of such an
order shall be pending or threatened on that date.
(k) That Franklin Fund Shares to be delivered hereunder shall be
eligible for sale by the Trust with each state commission or agency with
which such eligibility is required in order to permit Franklin Fund Shares
lawfully to be delivered to each Templeton Fund shareholder.
(l) That, at the Closing, Templeton Fund transfers to the Trust, on
behalf of Franklin Fund, aggregate Net Assets of Templeton Fund comprising at
least 90% in fair market value of the total net assets and 70% of the fair
market value of the total gross assets recorded on the books of Templeton
Fund on the Closing Date.
9. BROKERAGE FEES AND EXPENSES.
(a) Templeton Fund and the Trust each represents and warrants to the
other that there are no broker or finders' fees payable by it in connection
with the transactions provided for herein.
(b) The expenses of entering into and carrying out the provisions of
this Agreement and Plan shall be borne one-quarter by Templeton Fund,
one-quarter by Franklin Fund, one-quarter by Franklin Advisers, Inc., and
one-quarter by Templeton Global Advisors Limited.
10. TERMINATION; POSTPONEMENT; WAIVER; ORDER.
(a) Anything contained in this Agreement and Plan to the contrary
notwithstanding, this Agreement and Plan may be terminated and the Plan of
Reorganization abandoned at any time (whether before or after approval
thereof by the shareholders of Templeton Fund) prior to the Closing or the
Closing may be postponed as follows:
(1) by mutual consent of Templeton Fund and the Trust;
(2) by the Trust if any condition of its obligations set forth
in Section 8 has not been fulfilled or waived; or
(3) by Templeton Fund if any condition of its obligations set
forth in Section 8 has not been fulfilled or waived.
An election by Templeton Fund or the Trust to terminate this Agreement
and Plan and to abandon the Plan of Reorganization shall be exercised,
respectively, by the Board of Trustees of Templeton Fund or the Trust.
(b) If the transactions contemplated by this Agreement and Plan have
not been consummated by January 31, 2000, the Agreement and Plan shall
automatically terminate on that date, unless a later date is agreed to by
both the Trust and Templeton Fund.
(c) In the event of termination of this Agreement and Plan pursuant
to the provisions hereof, the same shall become void and have no further
effect, and neither Templeton Fund nor the Trust, nor their trustees,
officers, agents or shareholders shall have any liability in respect of this
Agreement and Plan.
(d) At any time prior to the Closing, any of the terms or conditions
of this Agreement and Plan may be waived by the party who is entitled to the
benefit thereof by action taken by that party's Board of Trustees if, in the
judgment of such Board of Trustees, such action or waiver will not have a
material adverse effect on the benefits intended under this Agreement and
Plan to its shareholders, on behalf of whom such action is taken.
(e) The respective representations and warranties contained in
Sections 4 to 6 hereof shall expire with and be terminated by the Plan of
Reorganization, and neither Templeton Fund nor the Trust, nor any of their
officers, trustees, agents or shareholders shall have any liability with
respect to such representations or warranties after the Closing. This
provision shall not protect any officer, trustee, agent or shareholder of
Templeton Fund or the Trust against any liability to the entity for which
that officer, trustee, agent or shareholder so acts or to its shareholders to
which that officer, trustee, agent or shareholder would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the U.S. Securities and Exchange
Commission with respect to this Agreement and Plan shall be issued prior to
the Closing and shall impose any terms or conditions that are determined by
action of the Board of Trustees of Templeton Fund or the Trust to be
acceptable, such terms and conditions shall be binding as if a part of this
Agreement and Plan without further vote or approval of the shareholders of
Templeton Fund, unless such terms and conditions shall result in a change in
the method of computing the number of Franklin Fund Shares to be issued to
Templeton Fund in which event, unless such terms and conditions shall have
been included in the proxy solicitation material furnished to the
shareholders of Templeton Fund prior to the meeting at which the transactions
contemplated by this Agreement and Plan shall have been approved, this
Agreement and Plan shall not be consummated and shall terminate unless
Templeton Fund shall promptly call a special meeting of shareholders at which
such conditions so imposed shall be submitted for approval.
11. ENTIRE AGREEMENT AND AMENDMENTS.
This Agreement and Plan embodies the entire agreement between the
parties and there are no agreements, understandings, restrictions, or
warranties between the parties other than those set forth herein or herein
provided for. This Agreement and Plan may be amended only by mutual consent
of the parties in writing. Neither this Agreement and Plan nor any interest
herein may be assigned without the prior written consent of the other party.
12. COUNTERPARTS.
This Agreement and Plan may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all such counterparts
together shall constitute but one instrument.
13. NOTICES.
Any notice, report, or demand required or permitted by any provision of
this Agreement and Plan shall be in writing and shall be deemed to have been
given if delivered or mailed, first class postage prepaid, addressed to
Franklin Real Estate Securities Trust at 777 Mariners Island Boulevard, P. O.
Box 7777, San Mateo, California 94404, Attention: Secretary, or Templeton
Global Real Estate Fund, at 500 East Broward Boulevard, Fort Lauderdale,
Florida 33394, Attention: Secretary, as the case may be.
14. GOVERNING LAW.
This Agreement and Plan shall be governed by and carried out in
accordance with the laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, Franklin Real Estate Securities Trust, on behalf of
Franklin Real Estate Securities Fund, and Templeton Global Real Estate Fund
have each caused this Agreement and Plan to be executed on its behalf by its
duly authorized officers, all as of the date and year first-above written.
FRANKLIN REAL ESTATE SECURITIES TRUST, ON
BEHALF OF FRANKLIN REAL ESTATE SECURITIES FUND
Attest:
_________________________ By:________________________________
Assistant Secretary Deborah R. Gatzek
Vice President and Secretary
TEMPLETON GLOBAL REAL ESTATE FUND
Attest:
_________________________ By:________________________________
Assistant Secretary Deborah R. Gatzek
Vice President
EXHIBIT B
PROSPECTUS
FRANKLIN
REAL ESTATE
SECURITIES FUND
INVESTMENT STRATEGY
GROWTH & INCOME
SEPTEMBER 1, 1998 AS AMENDED JANUARY 1, 1999
Franklin Real Estate Securities Trust
Class A, B & C
Please read this prospectus before investing, and keep it for future
reference. It contains important information, including how the fund invests
and the services available to shareholders.
This prospectus describes the fund's Class A, B and C shares. The fund
currently offers another share class with a different sales charge and
expense structure, which affects performance.
To learn more about the fund and its policies, you may request a copy of the
fund's Statement of Additional Information ("SAI"), dated September 1, 1998,
which we may amend from time to time. We have filed the SAI with the SEC and
have incorporated it by reference into this prospectus.
For a free copy of the SAI or a larger print version of this prospectus, or
to receive a free copy of the prospectus for the fund's other share class,
contact your investment representative or call 1-800/DIAL BEN.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE
U.S. GOVERNMENT. MUTUAL FUND SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
LIKE ALL MUTUAL FUND SHARES, THE SEC HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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
TABLE OF CONTENTS
ABOUT THE FUND
Expense Summary ............................................... 2
Financial Highlights .......................................... 4
How Does the Fund Invest Its Assets? .......................... 5
What Are the Risks of Investing in the Fund? .................. 8
Who Manages the Fund? ......................................... 11
How Taxation Affects the Fund and Its Shareholders ............ 14
How Is the Trust Organized? ................................... 16
ABOUT YOUR ACCOUNT
How Do I Buy Shares? .......................................... 17
May I Exchange Shares for Shares of Another Fund? ............. 26
How Do I Sell Shares? ......................................... 29
What Distributions Might I Receive From the Fund? ............. 32
Transaction Procedures and Special Requirements ............... 33
Services to Help You Manage Your Account ...................... 37
What If I Have Questions About My Account? .................... 40
GLOSSARY
Useful Terms and Definitions .................................. 40
FRANKLIN
REAL ESTATE
SECURITIES FUND
September 1, 1998
as amended January 1, 1999
When reading this prospectus, you will see certain terms beginning with capital
letters. This means the term is explained in our glossary section
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo
CA 94403-7777
1-800/DIAL BEN(R)
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 fund for the fiscal year
ended April 30, 1998. The fund's actual expenses may vary.
CLASS A 1 CLASS B 2 CLASS C 1
- ----------------------------------------------------------------------------
A. SHAREHOLDER TRANSACTION EXPENSES3
Maximum Sales Charge
(as a percentage of Offering Price) 5.75% 4.00% 1.99%
Paid at time of purchase4 5.75% None 1.00%
Paid at redemption5 None 4.00% 0.99%
Exchange Fee (per transaction)6 None None None
B. ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET
ASSETS)
Management Fees7 0.52% 0.52% 0.52%
Rule 12b-1 Fees8 0.25% 1.00% 1.00%
Other Expenses 0.26% 0.26% 0.26%
-----------------------------
Total Fund Operating Expenses7 1.03% 1.78% 1.78%
==============================
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 $10,000 that you invest in the fund.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------
CLASS A $674 9 $884 $1,111 $1,762
CLASS B
Assuming you sold your shares
at the end of the period $581 $860 $1,164 $1,897 10
Assuming you stayed in the fund $181 $560 $964 $1,897 10
CLASS C $377 11 $655 $1,055 $2,174
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.
1. Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II.
2. The fund began offering Class B shares on January 1, 1999. Annual fund
operating expenses are based on the expenses for Class A and C for the fiscal
year ended April 30, 1998. The Rule 12b-1 fees are based on the maximum fees
allowed under Class B's Rule 12b-1 plan.
3. If your transaction is processed through your Securities Dealer, you may
be charged a fee by your Securities Dealer for this service.
4. There is no front-end sales charge if you invest $1 million or more in
Class A shares. Although Class B and C have a lower front-end sales charge
than Class A, their Rule 12b-1 fees are higher. Over time you may pay more
for Class B and C shares. Please see "How Do I Buy Shares? - Choosing a Share
Class."
5. A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more if you sell the shares within one year and to any Class C
purchase if you sell the shares within 18 months. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B purchase if you sell the shares
within six years. A Contingent Deferred Sales Charge may also apply to
purchases by certain retirement plans that qualify to buy Class A shares
without a front-end sales charge. The charge is based on 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 for Class C is different depending on whether the
charge is shown based on the Net Asset Value or the Offering Price, the
dollar amount you would pay is the same. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge" for details.
6. There is a $5 fee for exchanges by Market Timers.
7. For the period shown, the manager had agreed in advance to limit its
management fees. With this reduction, management fees were 0.49% and total
fund operating expenses were 1.00% for Class A, 1.75% for Class B and 1.75%
for Class C.
8. 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 rules of the National
Association of Securities Dealers, Inc.
9. Assumes a Contingent Deferred Sales Charge will not apply.
10. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
11. For the same Class C investment, you would pay projected expenses of $279
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.
FINANCIAL HIGHLIGHTS
This table summarizes the fund's financial history. The information has been
audited by PricewaterhouseCoopers LLP, the fund's independent auditor. The
audit report covering the periods shown below appears in the Trust's Annual
Report to Shareholders for the fiscal year ended April 30, 1998. The Annual
Report to Shareholders also includes more information about the fund's
performance. For a free copy, please call Fund Information.
CLASS A
YEAR ENDED APRIL 30,
1998 19974 1996 1995 19942
- ------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout
the year)
Net asset value, beginning of year $15.44 $12.64 $10.58 $10.92 $10.00
---------------------------------------
Income from investment operations:
Net investment income .63 .49 .43 .39 .06
Net realized and unrealized gains
(losses) 2.14 2.77 2.10 (.45) .86
----------------------------------------
Total from investment operations 2.77 3.26 2.53 (.06) .92
----------------------------------------
Less distributions from:
Net investment income (.48) (.36) (.47) (.28) -
Net realized gains (.07) (.10) - - -
---------------------------------------
Total distributions (.55) (.46) (.47) (.28) -
---------------------------------------
Net asset value, end of year $17.66 $15.44 $12.64 $10.58 $10.92
========================================
Total return+ 17.96% 25.97% 24.25% (.48%) 9.20%
Ratios/supplemental data
Net assets, end of year (000's) $330,030 $153,520 $33,634 $16,694 $5,634
Ratios to average net assets:
Expenses 1.00% .98% .67% .25% .25%1
Expenses excluding waiver and
payments by affiliate 1.03% 1.09% 1.24% 1.40% 2.91%1
Net investment income 3.50% 3.88% 4.38% 4.86% 3.19%1
Portfolio turnover rate 6.10% 6.80% 14.40% 3.74% -
Average commission rate paid++ $.0583 $.0576 $.0575 $ - $ -
CLASS C
YEAR ENDED APRIL 30,
1998 1997 4 1996 3
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year $15.26 $12.56 $10.58
Income from investment operations:
Net investment income .45 .43 .44
Net realized and unrealized gains 2.15 2.68 2.00
-------------------------------
Total from investment operations 2.60 3.11 2.44
-------------------------------
Less distributions from:
Net investment income (.39) (.31) (.46)
Net realized gains (.07) (.10) -
-------------------------------
Total distributions (.46) (.41) (.46)
-------------------------------
Net asset value, end of year $17.40 $15.26 $12.56
===============================
Total return+ 17.07% 24.94% 23.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) $137,048 $58,540 $6,282
Ratios to average net assets:
Expenses 1.75% 1.75% 1.41%
Expenses excluding waiver and payments
by affiliate 1.78% 1.86% 1.98%
Net investment income 2.77% 2.92% 3.65%
Portfolio turnover rate 6.10% 6.80% 14.40%
Average commission rate paid++ $.0583 $.0576 $.0575
+Total return does not reflect sales commissions or the Contingent Deferred
Sales Charges, and is not annualized.
++Relates to purchases and sales of equity securities. Prior to fiscal year
end 1996, disclosure of average commission rate was not required.
1Annualized.
2For the period January 3, 1994 (effective date) to April 30, 1994.
3Effective date of Class C shares was May 1, 1995.
4For the period ending April 30, 1997, per share amounts have been calculated
using the daily average shares outstanding.
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to maximize total return. This goal is
fundamental, which means that it may not be changed without shareholder
approval.
WHAT IS THE FUND'S INVESTMENT STRATEGY?
The fund tries to achieve its investment goal by investing, under normal
market conditions, at least 65% of its total assets in equity securities of
companies operating in the real estate industry. This includes:
o companies qualifying as real estate investment trusts ("REITs") for
federal income tax purposes; and
o companies, such as homebuilders and developers, that have at least 50% of
their assets or revenues attributable to the ownership, construction,
management or sale of residential, commercial or industrial real estate.
The fund may invest up to 35% of its total assets in securities of issuers
engaged in businesses closely related to the real estate industry. This
includes 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 which have significant real estate
holdings (at least 50% of their assets).
WHAT KINDS OF SECURITIES DOES THE FUND BUY?
EQUITY SECURITIES generally entitle the holder to participate in a company's
general operating results. These include common stock; preferred stock;
warrants or rights. The fund anticipates that a substantial portion of its
assets will be invested in equity securities of small or medium
capitalization companies.
REITS. REITs typically invest directly in real estate and/or in mortgages and
loans collateralized by real estate. "Equity" REITs are real estate companies
that own and manage income-producing properties such as apartments, hotels,
shopping centers or office buildings. The income, primarily rent from these
properties, is generally passed on to investors in the form of dividends. These
companies provide experienced property management and generally concentrate on a
specific geographic region or property type. "Mortgage" REITs make loans to
commercial real estate developers and earn income from interest payments.
The fund's primary REIT investments are in equity REITs.
FOREIGN SECURITIES AND DEPOSITARY RECEIPTS. The fund may invest up to 10% of
its total assets in securities of issuers in any foreign country, developed
or developing, and in American, European and Global Depositary Receipts.
Depositary Receipts are certificates typically issued by a bank or trust
company that give their holders the right to receive securities issued by a
foreign or domestic corporation.
CONVERTIBLE SECURITIES. The fund may also invest in convertible securities. A
convertible security generally is a preferred stock or debt security that
pays dividends or interest and may be converted into common stock.
SHORT-TERM MONEY MARKET INSTRUMENTS. The fund may invest cash being held for
liquidity purposes in short-term debt instruments, including U.S. government
securities, high grade commercial paper, repurchase agreements and other
money market equivalents.
Please see the SAI for more details on the types of securities the fund
invests in.
WHAT ARE SOME OF THE FUND'S OTHER INVESTMENT STRATEGIES AND PRACTICES?
TEMPORARY INVESTMENTS. When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, it may invest the fund's
portfolio in a temporary defensive manner. Under such circumstances, the fund
may invest up to 100% of its assets in short-term debt instruments, including
U.S. government securities, high grade commercial paper, repurchase
agreements and other money market equivalents.
REPURCHASE AGREEMENTS. The fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income
on this portion of its assets, the fund may enter into repurchase agreements
with certain banks and broker-dealers. Under a repurchase agreement, the fund
agrees to buy a U.S. government security from one of these issuers and then
to sell the security back to the issuer after a short period of time
(generally, less than seven days) at a higher price. The bank or
broker-dealer must transfer to the fund's custodian securities with an
initial value of at least 102% of the dollar amount invested by the fund in
each repurchase agreement.
SECURITIES LENDING. To generate additional income, the fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors. Such loans may not exceed 10% of the value of the fund's total
assets measured at the time of the most recent loan. For each loan the fund
must receive in return collateral with a value at least equal to 100% of the
current market value of the loaned securities.
DIVERSIFICATION. Diversification involves limiting the amount of money invested
in any one issuer or, on a broader scale, in a particular industry or group of
industries. Non-diversified funds may invest a greater portion of their assets
in the securities of one issuer than diversified funds. Economic, business,
political or other changes can affect all securities of a similar type. A
non-diversified fund may be more sensitive to these changes.
The fund is a non-diversified fund, although it intends to meet certain
diversification requirements for tax purposes.
OTHER POLICIES AND RESTRICTIONS. The fund has a number of additional
investment policies and restrictions that govern its activities. Those that
are identified as "fundamental" may only be changed with shareholder
approval. The others may be changed by the Board alone. For a list of these
restrictions and more information about the fund's investment policies,
including those described above, please see "How Does the Fund Invest Its
Assets?" and "Investment Restrictions" in the SAI.
Generally, the policies and restrictions discussed in this prospectus and in
the SAI apply when the fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security
no longer meets one or more of the fund's policies or restrictions.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
There is no assurance that the fund will meet its investment goal.
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.
REAL ESTATE SECURITIES RISK. The fund generally is subject to the same risks
that affect direct investments in real estate and its performance is closely
tied to conditions affecting the real estate industry. Real estate values
rise and fall in response to a variety of factors, including local, regional
and national economic conditions, the strength of specific industries renting
properties, and other factors affecting supply and demand for properties.
When economic growth is slowing, demand for property decreases and prices may
decline. Rising interest rates, which drive up mortgage and financing costs,
can restrain construction and buying and selling activity and make other
investments more attractive. Property values could decrease because of
overbuilding, increases in property taxes and operating expenses, changes in
zoning laws, environmental regulations or hazards, uninsured casualty or
condemnation losses, or a general decline in neighborhood values.
The value of securities of companies that service the real estate industry
will also be affected by changes affecting the real estate market.
REITS. Changes in the market value of the fund's investments in REIT
securities will also affect its performance. A REIT's performance depends on
the types and locations of the properties it owns and on how well it manages
those properties. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to
pay rent or poor management. A REIT's performance also depends on the
company's ability to finance property purchases and renovations and manage
its cash flows. Mortgage REITs are subject to the risks that the borrower may
be unable to make interest and principal payments on the loan made by the
mortgage REIT and that the value of the property may be less than the amount
of the loan. Because REITs typically are invested in a limited number of
projects or in a particular market segment, they are more susceptible to
adverse developments affecting a single project or market segment than more
broadly diversified investments.
Loss of status as a qualified REIT or changes in the treatment of REITs under
the Code could adversely affect the value of a particular REIT or the market
for REITs as a whole and the fund's performance.
MEDIUM AND SMALLER COMPANIES RISK. Historically, medium-size and smaller
company securities have been more volatile in price than larger company
securities, especially over the short term. Among the reasons for the greater
price volatility are the less certain growth prospects of medium-size and
smaller companies, the lower degree of liquidity in the markets for such
securities and the greater sensitivity of these companies to changing
economic conditions.
In addition, these companies may lack depth of management, they may be unable
to generate funds necessary for growth or development or they may be
developing or marketing new products or services for which markets are not
yet established and may never become established.
Therefore, while medium-size and smaller companies may offer greater
opportunities for capital growth than larger, more established companies,
they also involve greater risks and should be considered speculative.
FOREIGN SECURITIES RISK. While foreign securities may offer significant
opportunities for gain, they also involve additional risks that can increase
the potential for losses in the fund. The political, economic and social
structures of some countries in which the fund invests may be less stable and
more volatile than those in the U.S.
The risks of investing in these countries include the possibility of the
imposition of exchange controls, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, and punitive taxes. In
addition, there may be less publicly available information about a foreign
company or government than about a U.S. company or public entity. Certain
countries' financial markets and services are less developed than those in
the U.S. or other major economies. As a result, they may not have uniform
accounting, auditing and financial reporting standards and may have less
government supervision of financial markets. Foreign securities markets may
have substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
on foreign securities markets are generally higher than in the U.S.
Investments in Depositary Receipts also involve some or all of these risks.
These risks can be significantly greater for investments in emerging markets.
For more information on the risks of investing in foreign securities, please
see the SAI.
MARKET, CURRENCY, AND INTEREST RATE RISK. General market movements in any
country where the fund has investments are likely to affect the value of the
securities which the fund owns in that country and the fund's share price may
also be affected. The fund's investments may be denominated in foreign
currencies so that changes in foreign currency exchange rates will also
affect the value of what the fund owns, and thus the price of its shares. To
the extent the fund invests in debt securities, changes in interest rates in
any country where the fund is invested will affect the value of the fund's
portfolio and, consequently, its share price. Rising interest rates, which
often occur during times of inflation or a growing economy, are likely to
cause the value of a debt security to decrease, having a negative effect on
the value of the fund's shares. Of course, individual and worldwide stock
markets, interest rates and currency valuations have both increased and
decreased, sometimes very dramatically, in the past. These changes are likely
to occur again in the future at unpredictable times.
EURO RISK. On January 1, 1999, the European Monetary Union (EMU) plans to
introduce a new single currency, the euro, which will replace the national
currency for participating member countries. If the fund holds investments in
countries with currencies replaced by the euro, the investment process,
including trading, foreign exchange, payments, settlements, cash accounts,
custody and accounting will be impacted.
Because this change to a single currency is new and untested, the
establishment of the euro may result in market volatility. For the same
reason, it is not possible to predict the impact of the euro on the business
or financial condition of European issuers which the fund may hold in its
portfolio, and their impact on the value of fund shares. To the extent the
fund holds non-U.S. dollar (euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
YEAR 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may not be required to make the same
level of disclosure about Year 2000 readiness as is required in the U.S. The
manager, of course, cannot audit each company and its major suppliers to
verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year 2000
problems, it is likely that the price of its security will also be adversely
affected. A decrease in the value of one or more of the fund's portfolio
holdings will have a similar impact on the price of the fund's shares. Please
see "Year 2000 Problem" under "Who Manages the Fund?" for more information.
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 among
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. Franklin Advisers, Inc. manages the fund's assets and
makes its investment decisions. The manager 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, the manager and its affiliates manage over $208 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 is: Matthew F. Avery since its inception and Douglas Barton
since April 1998.
Matthew F. Avery
Senior Vice President of Franklin Advisers, Inc.
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.
Douglas Barton
Vice President of Franklin Advisers, Inc.
Mr. Barton is a Chartered Financial Analyst and holds a Master of Business
Administration degree from California State University in Hayward and a
Bachelor of Science degree from California State University in Chico. Mr.
Barton joined the Franklin Templeton Group in July 1988.
MANAGEMENT FEES. During the fiscal year ended April 30, 1998, management
fees, before any advance waiver, totaled 0.52% of the average daily net
assets of the fund. Total operating expenses were 1.03% for Class A and 1.78%
for Class C. Under an agreement by the manager to limit its fees, the fund
paid management fees totaling 0.49% and operating expenses totaling 1.00% for
Class A and 1.75% for Class C. The manager may end this arrangement at any
time upon notice to the Board.
PORTFOLIO TRANSACTIONS. The manager tries to obtain the best execution on all
transactions. If the manager 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 the manager, FT Services
provides certain administrative services and facilities for the fund. During
the fiscal year ended April 30, 1998, administration fees totaling 0.14% of
the average daily net assets of the fund were paid to FT Services. These fees
are paid by the manager. They are not a separate expense of the fund. Please
see "Investment Management and Other Services" in the SAI for more
information.
YEAR 2000 PROBLEM. The fund's business operations depend on a worldwide
network of computer systems that contain date fields, including securities
trading systems, securities transfer agent operations and stock market links.
Many of the systems currently use a two digit date field to represent the
date, and unless these systems are changed or modified, they may not be able
to distinguish the Year 1900 from the Year 2000 (commonly referred to as the
Year 2000 problem). In addition, the fact that the Year 2000 is a
non-standard leap year may create difficulties for some systems.
When the Year 2000 arrives, the fund's operations could be adversely affected
if the computer systems used by the manager, its service providers and other
third parties it does business with are not Year 2000 ready. For example, the
fund's portfolio and operational areas could be impacted, including
securities trade processing, interest and dividend payments, securities
pricing, shareholder account services, reporting, custody functions and
others. The fund could experience difficulties in effecting transactions if
any of its foreign subcustodians, or if foreign broker-dealers or foreign
markets are not ready for Year 2000.
The fund's manager and its affiliated service providers are making a
concerted effort to take steps they believe are reasonably designed to
address their Year 2000 problems. Of course, the fund's ability to reduce the
effects of the Year 2000 problem is also very much dependent upon the efforts
of third parties over which the fund and its manager may have no control.
THE RULE 12B-1 PLANS
Each class has a separate distribution or "Rule 12b-1" plan under which the
fund shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell shares of the class. These
expenses may include, among others, distribution or service fees paid to
Securities Dealers or others who have executed a servicing agreement with the
fund, Distributors or its affiliates; a prorated portion of Distributors'
overhead expenses; and the expenses of printing prospectuses and reports used
for sales purposes, and preparing and distributing sales literature and
advertisements.
Payments by the fund under the Class A plan may not exceed 0.25% per year of
Class A'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 A purchases made without a sales charge, Securities
Dealers may not be eligible to receive the Rule 12b-1 fees associated with
the purchase.
Under the Class B plan, the fund pays Distributors up to 0.75% per year of
Class B's average daily net assets to pay Distributors for providing
distribution and related services and bearing certain Class B expenses. All
distribution expenses over this amount will be borne by those who have
incurred them. Securities Dealers are not eligible to receive this portion of
the Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.25% per year of Class B's
average daily net assets under the Class B 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. Securities Dealers may be eligible to receive
this portion of the Rule 12b-1 fees from the date of purchase. After 8 years,
Class B shares convert to Class A shares and Securities Dealers may then
receive the Rule 12b-1 fees applicable to Class A.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to the
initial sale of Class B shares. Further, the expenses relating to the Class B
plan may be used by Distributors to pay third party financing entities that
have provided financing to Distributors in connection with advancing
commission costs to Securities Dealers.
Under the Class C plan, the fund may pay Distributors up to 0.75% per year of
Class C's average daily net assets to pay Distributors or others for
providing distribution and related services and bearing certain Class C
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 C
shares, Securities Dealers may not be eligible to receive this portion of the
Rule 12b-1 fees associated with the purchase.
The fund may also pay a servicing fee of up to 0.25% per year of Class C's
average daily net assets under the Class C 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.
<TABLE>
<CAPTION>
HOW TAXATION AFFECTS THE FUND AND ITS SHAREHOLDERS
<S> <C>
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TAXATION OF THE FUND'S INVESTMENTS. The
fund invests your money in the stocks, HOW DOES THE FUND EARN INCOME AND GAINS?
bonds and other securities that are
described in the section "How Does the The fund earns dividends and interest
Fund Invest Its Assets?" Special tax rules (the fund's "income") on its investments.
may apply in determining the income and When the fund sells a security for a
gains that the fund earns on its price that is higher than it paid, it has
investments. These rules may, in turn, a gain. When the fund sells a security
affect the amount of distributions that for a price that is lower than it paid,
the fund pays to you. These special tax it has a loss. If the fund has held the
rules are discussed in the SAI. security for more than one year, the gain
or loss will be a long-term capital gain
TAXATION OF THE FUND. As a regulated or loss. If the fund has held the
investment company, the fund generally security for one year or less, the gain
pays no federal income tax on the income or loss will be a short-term capital gain
and gains that it distributes to you. or loss. The fund's gains and losses are
netted together, and, if the fund has a
TAXATION OF SHAREHOLDERS net gain (the fund's "gains"), that
gain will generally be distributed
DISTRIBUTIONS. Distributions from the to you.
fund, whether you receive them in cash or
in additional shares, are generally
subject to income tax. The fund will send
you a statement in January of the current WHAT IS A DISTRIBUTION?
year that reflects the amount of ordinary
dividends, capital gain distributions and As a shareholder, you will receive your
non-taxable distributions you received share of the fund's income and gains on
from the fund in the prior year. This its investments in stocks, bonds and
statement will include distributions other securities. The fund's income and
declared in December and paid to you in short-term capital gains are paid to you
January of the current year, but which are as ordinary dividends. The fund's
taxable as if paid on December 31 of the long-term capital gains are paid to you
prior year. The IRS requires you to report as capital gain distributions. If the
these amounts on your income tax return fund pays you an amount in excess of its
for the prior year. income and gains, this excess will
generally be treated as a non-taxable
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distribution. These amounts, taken
distributions received by your qualified together, are what we call the fund's
retirement plan, such as a 401(k) plan or distributions to you.
IRA, are generally tax-deferred; this ------------------------------------------
means that you are not required to report
fund distributions on your income tax return when paid to your plan, but, rather,
when your plan makes payments to you. Special rules apply to payouts from Roth
and Education IRAs.
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive from
the fund.
-------------------------------------------
REDEMPTIONS AND EXCHANGES. If you redeem
your shares or if you exchange your shares WHAT IS A REDEMPTION?
in the fund for shares in another Franklin
Templeton Fund, you will generally have a A redemption is a sale by you to the fund
gain or loss that the IRS requires you to of some or all of your shares in the
report on your income tax return. If you fund. The price per share you receive
exchange fund shares held for 90 days or when you redeem fund shares may be more
less and pay no sales charge, or a reduced or less than the price at which you
sales charge, for the new shares, all or a purchased those shares. An exchange of
portion of the sales charge you paid on shares in the fund for shares of another
the purchase of the shares you exchanged Franklin Templeton Fund is treated as a
is not included in their cost for purposes redemption of fund shares and then a
of computing gain or loss on the exchange. purchase of shares of the other fund.
If you hold your shares for six months or When you redeem or exchange your shares,
less, any loss you have will be treated as you will generally have a gain or loss,
a long-term capital loss to the extent of depending upon whether the amount you
any capital gain distributions received receive for your shares is more or less
by you from the fund. All or a portion of than your cost or other basis in the
any loss on the redemption or exchange of shares.
your shares will be disallowed by the IRS -------------------------------------------
if you purchase other shares in the fund within 30 days before or after your
redemption or exchange.
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends paid from
interest earned on direct obligations of the U.S. government, subject to certain
restrictions. The fund will provide you with information after the end of each
calendar year on the amount of such dividends that may qualify for exemption from
reporting on your individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income tax
withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund shares.
Fund shares held by the estate of a non-U.S. investor may be subject to U.S. estate
tax. You may wish to contact your tax advisor to determine the U.S. and non-U.S. tax
consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive from
the fund, and gains arising from redemptions or exchanges of your fund shares will
generally be subject to state and local income tax. The holding of fund shares may
also be subject to state and local intangibles taxes. You may wish to contact your
tax advisor to determine the state and local tax consequences of your investment in
the fund.
-------------------------------------------
BACKUP WITHHOLDING. When you open an WHAT IS A BACKUP
account, IRS regulations require that you WITHHOLDING?
provide your taxpayer identification
number ("TIN"), certify that it is Backup withholding occurs when the fund
correct, and certify that you are not is required to withhold and pay over to
subject to backup withholding under IRS the IRS 31% of your distributions and
rules. If you fail to provide a correct redemption proceeds. You can avoid backup
TIN or the proper tax certifications, the withholding by providing the fund with
fund is required to withhold 31% of all your TIN, and by completing the tax
the distributions (including ordinary certifications on your shareholder
dividends and capital gain distributions), application that you were asked to sign
and redemption proceeds paid to you. The when you opened your account. However, if
fund is also required to begin backup the IRS instructs the fund to begin
withholding on your account if the IRS backup withholding, it is required to do
instructs the fund to do so. The fund so even if you provided the fund with
reserves the right not to open your your TIN and these tax certifications,
account, or, alternatively, to redeem your and backup withholding will remain in
shares at the current net asset value, place until the fund is instructed by the
less any taxes withheld, if you fail to IRS that it is no longer required.
provide a correct TIN, fail to provide the
proper tax certifications, or the IRS -------------------------------------------
instructs the fund to begin backup
withholding on your account.
THIS TAX DISCUSSION IS FOR GENERAL INFORMATION ONLY. PROSPECTIVE INVESTORS SHOULD
CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL, STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES OF AN INVESTMENT IN THE FUND. A MORE COMPLETE DISCUSSION OF THESE
RULES AND RELATED MATTERS IS CONTAINED IN THE SECTION ENTITLED "ADDITIONAL INORMATION
ON DISTRIBUTIONS AND TAXES" IN THE SAI.
</TABLE>
HOW IS THE TRUST ORGANIZED?
The fund is a 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 22, 1993, and is registered
with the SEC. The fund offers four classes of shares: Franklin Real Estate
Securities Fund - Class A, Franklin Real Estate Securities Fund - Class B,
Franklin Real Estate Securities Fund - Class C and Franklin Real Estate
Securities Fund - Advisor Class. 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. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may be called by the Board to consider the
removal of a Board memeber if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help you communicate with other shareholders about the removal of a Board
member. A special meeting may also be called by the Board in its discretion.
ABOUT YOUR ACCOUNT
HOW DO I BUY SHARES?
OPENING YOUR ACCOUNT
To open your account, please follow the steps below. This will help avoid any
delays in processing your request.
1. Read this prospectus carefully.
2. Determine how much you would like to invest. The fund's minimum
investments are:
o To open a regular, non-retirement
account $1,000
o To open an IRA, IRA Rollover,
Roth IRA, or Education IRA $ 250*
o To open a custodial account for a minor
(an UGMA/UTMA account) $ 100
o To open an account with an automatic
investment plan $ 50**
o To add to an account $ 50***
*For all other retirement accounts, there is no minimum investment
requirement.
**$25 for an Education IRA.
***For all retirement accounts except IRAs, IRA Rollovers, Roth IRAs, or
Education IRAs, there is no minimum to add to an account.
We reserve the right to change the amount of these minimums from time to time
or to waive or lower these minimums for certain purchases. We also reserve
the right to refuse any order to buy shares.
3. Carefully complete and sign the enclosed account application, including
the optional shareholder privileges section. By applying for privileges now,
you can avoid the delay and inconvenience of having to send an additional
application to add privileges later.
PLEASE ALSO INDICATE WHICH CLASS OF SHARES YOU WANT TO BUY. IF YOU DO NOT
SPECIFY A CLASS, WE WILL INVEST YOUR PURCHASE IN CLASS A SHARES. It is
important that we receive a signed application since we will not be able to
process any redemptions from your account until we receive your signed
application.
4. Make your investment using the table below.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL For an initial investment:
Return the application to the fund with your check
made payable to the fund.
For additional investments:
Send a check made payable to the fund. Please
include your account number on the check.
- ------------------------------------------------------------------------------
BY WIRE 1. Call Shareholder Services or, if that number is
busy, call 1-650/312-2000 collect, to receive a
wire control number and wire instructions. You
need a new wire control number every time you
wire money into your account. If you do not have
a currently effective wire control number, we
will return the money to the bank, and we will
not credit the purchase to your account.
2. For an initial investment you must also return
your signed account application to the fund.
IMPORTANT DEADLINES: If we receive your call before
1:00 p.m. Pacific time and the bank receives the
wired funds and reports the receipt of wired funds to
the fund by 3:00 p.m. Pacific time, we will credit
the purchase to your account that day. If we receive
your call after 1:00 p.m. or the bank receives the
wire after 3:00 p.m., we will credit the purchase to
your account the following business day.
- ------------------------------------------------------------------------------
THROUGH YOUR DEALER Call your investment representative
- ------------------------------------------------------------------------------
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to
choose the class that best meets your situation. Your financial
representative can help you decide.
CLASS A* Class B* Class C*
- --------------------------------------------------------------------------------
o Front-end sales o No front-end sales o Front-end sales
charge of 5.75% or charge charge
less of 1%
o Contingent Deferred o Contingent Deferred o Contingent Deferred
Sales Charge of 1% on Sales Charge of 4% or Sales Charge of 1% on
purchases of $1 less on shares you shares you sell
million or more sold sell within six years within 18 months
within one year
o Lower annual expenses o Higher annual o Higher annual
than Class B or C due expenses than Class A expenses than Class A
to lower Rule 12b-1 (same as Class C) due (same as Class B) due
fees to higher Rule 12b-1 to higher Rule 12b-1
fees. Automatic fees. No conversion
conversion to Class A to Class A shares, so
sharesafter eight annual expenses do
years, reducing future not decrease
annual expenses.
o No maximum purchase o Maximum purchase o Maximum purchase
amount amount of $249,999. We amount of $999,999.
invest any investment We invest any
of $250,000 or more in investment of $1
Class A shares, since million or more in
a reduced front-end Class A shares, since
sales charge is there is no front-end
available and Class sales charge and
A's annual expenses Class A's annual
are lower. expenses are lower.
*Before January 1, 1999, Class A shares were designated Class I and Class C
shares were designated Class II. The fund began offering Class B shares on
January 1, 1999. Class B shares are not available to all retirement plans.
Class B shares are only available to IRAs (of any type), Franklin Templeton
Trust Company 403(b) plans, and Franklin Templeton Trust Company qualified
plans with participant or earmarked accounts.
PURCHASE PRICE OF FUND SHARES
For Class A shares, the sales charge you pay depends on the dollar amount you
invest, as shown in the table below. The sales charge for Class C shares is
1% and, unlike Class A, does not vary based on the size of your purchase.
There is no front-end sales charge for Class B shares.
TOTAL SALES CHARGE AMOUNT PAID TO
AS A PERCENTAGE OF DEALER AS A
AMOUNT OF PURCHASE OFFERING NET AMOUNT PERCENTAGE OF
AT OFFERING PRICE PRICE INVESTED OFFERING PRICE
CLASS A
Under $50,000 5.75% 6.10% 5.00%
$50,000 but less than
$100,000 4.50% 4.71% 3.75%
$100,000 but less than
$250,000 3.50% 3.63% 2.80%
$250,000 but less than
$500,000 2.50% 2.56% 2.00%
$500,000 but less than
$1,000,000 2.00% 2.04% 1.60%
$1,000,000 or more* None None None
CLASS B* None None None
CLASS C
Under $1,000,000* 1.00% 1.01% 1.00%
*A Contingent Deferred Sales Charge of 1% may apply to Class A purchases of
$1 million or more and any Class C purchase. A Contingent Deferred Sales
Charge of up to 4% may apply to any Class B 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.
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 A ONLY. To determine if you may pay a
reduced sales charge, the amount of your current Class A 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 A ONLY. You may buy Class A shares at a reduced
sales charge by completing the Letter of Intent section of the account
application. A Letter of Intent is a commitment by you to invest a specified
dollar amount during a 13 month period. The amount you agree to invest
determines the sales charge you pay on Class A shares.
BY COMPLETING THE LETTER OF INTENT SECTION OF THE ACCOUNT APPLICATION, YOU
ACKNOWLEDGE AND AGREE TO THE FOLLOWING:
o You authorize Distributors to reserve 5% of your total intended purchase
in Class A shares registered in your name until you fulfill your 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 A ONLY. If you are a member of a qualified group, you
may buy Class A shares at a reduced sales charge that applies to the group as
a whole. The sales charge is based on the combined dollar value of the group
members' existing investments, plus the amount of the current purchase.
A qualified group is one that:
o Was formed at least six months ago,
o Has a purpose other than buying fund shares at a discount,
o Has more than 10 members,
o Can arrange for meetings between our representatives and group members,
o Agrees to include Franklin Templeton Fund sales and other materials in
publications and mailings to its members at reduced or no cost to
Distributors,
o Agrees to arrange for payroll deduction or other bulk transmission of
investments to the fund, and
o Meets other uniform criteria that allow Distributors to achieve cost
savings in distributing shares.
A qualified group does not include a 403(b) plan that only allows salary
deferral contributions. 403(b) plans that only allow salary deferral
contributions and that purchased Class A shares of the fund at a reduced
sales charge under the group purchase privilege before February 1, 1998,
however, may continue to do so.
SALES CHARGE WAIVERS. If one of the following sales charge waivers applies to
you or your purchase of fund shares, you may buy shares of the fund without a
front-end sales charge or a Contingent Deferred Sales Charge. All of the
sales charge waivers listed below apply to purchases of Class A shares only,
except for items 1 and 2 which also apply to Class B and C purchases.
Certain distributions, payments or redemption proceeds that you receive may
be used to buy shares of the fund without a sales charge if you reinvest them
within 365 days of their payment or redemption date. They include:
1. Dividend and capital gain distributions from any Franklin Templeton Fund.
The distributions generally must be reinvested in the same class of
shares. Certain exceptions apply, however, to Class C shareholders who
chose to reinvest their distributions in Class A shares of the fund
before November 17, 1997, and to Advisor Class or Class Z shareholders
of a Franklin Templeton Fund who may reinvest their distributions in
Class A shares of the fund.
2. Redemption proceeds from the sale of shares of any Franklin Templeton
Fund. The proceeds must be reinvested in the same class of shares,
except proceeds from the sale of Class B shares will be reinvested in
Class A shares.
If you paid a Contingent Deferred Sales Charge when you sold your Class
A or C shares, we will credit your account with the amount of the
Contingent Deferred Sales Charge paid but a new Contingent Deferred
Sales Charge will apply. For Class B shares reinvested in Class A, a new
Contingent Deferred Sales Charge will not apply, although your account
will not be credited with the amount of any Contingent Deferred Sales
Charge paid when you sold your Class B shares. If you own both Class A
and B shares and you later sell your shares, we will sell your Class A
shares first, unless otherwise instructed.
Proceeds immediately placed in a Franklin Bank CD also may be reinvested
without an initial sales charge if you reinvest them within 365 days
from the date the CD matures, including any rollover.
This waiver does not apply to shares you buy and sell under our exchange
program. Shares purchased with the proceeds from a money fund may be
subject to a sales charge.
3. Dividend or capital gain distributions from a real estate investment
trust (REIT) sponsored or advised by Franklin Properties, Inc.
4. Annuity payments received under either an annuity option or from death
benefit proceeds, only if the annuity contract offers as an investment
option the Franklin Valuemark Funds or the Templeton Variable Products
Series Fund. You should contact your tax advisor for information on any
tax consequences that may apply.
5. Redemption proceeds from a repurchase of shares of Franklin Floating Rate
Trust, if the shares were continuously held for at least 12 months.
If you immediately placed your redemption proceeds in a Franklin Bank CD
or a Franklin Templeton money fund, you may reinvest them as described
above. The proceeds must be reinvested within 365 days from the date the
CD matures, including any rollover, or the date you redeem your money
fund shares.
6. Redemption proceeds from the sale of Class A shares of any of the
Templeton Global Strategy Funds if you are a qualified investor.
If you paid a contingent deferred sales charge when you sold your Class
A shares from a Templeton Global Strategy Fund, we will credit your
account with the amount of the contingent deferred sales charge paid but
a new Contingent Deferred Sales Charge will apply.
If you immediately placed your redemption proceeds in a Franklin
Templeton money fund, you may reinvest them as described above. The
proceeds must be reinvested within 365 days from the date they are
redeemed from the money fund.
7. Distributions from an existing retirement plan invested in the Franklin
Templeton Funds
Various individuals and institutions also may buy Class A shares without a
front-end sales charge or Contingent Deferred Sales Charge, including:
1. Trust companies and bank trust departments agreeing to invest in Franklin
Templeton Funds over a 13 month period at least $1 million of assets
held in a fiduciary, agency, advisory, custodial or similar capacity
and over which the trust companies and bank trust departments or other
plan fiduciaries or participants, in the case of certain retirement
plans, have full or shared investment discretion. We will accept orders
for these accounts by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the bank or trust
company, with payment by federal funds received by the close of
business on the next business day following the order.
2. An Eligible Governmental Authority. Please consult your legal and
investment advisors to determine if an investment in the fund is
permissible and suitable for you and the effect, if any, of payments by
the fund on arbitrage rebate calculations.
3. Broker-dealers, registered investment advisors or certified financial
planners who have entered into an agreement with Distributors for
clients participating in comprehensive fee programs. The minimum
initial investment is $250.
4. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributors
5. Registered Securities Dealers and their affiliates, for their investment
accounts only
6. Current employees of Securities Dealers and their affiliates and their
family members, as allowed by the internal policies of their employer
7. 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. The minimum initial
investment is $100.
8. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer
9. Accounts managed by the Franklin Templeton Group
10. Certain unit investment trusts and their holders reinvesting
distributions from the trusts
11. Group annuity separate accounts offered to retirement plans
12. Chilean retirement plans that meet the requirements described under
"Retirement Plans" below
RETIREMENT PLANS. Retirement plans sponsored by an employer (i) with at least
100 employees, or (ii) with retirement plan assets of $1 million or more, or
(iii) that agrees to invest at least $500,000 in the Franklin Templeton Funds
over a 13 month period may buy Class A shares without a front-end sales
charge. Retirement plans that are not Qualified Retirement Plans, SIMPLEs or
SEPs must also meet the requirements described under "Group Purchases - Class
A Only" above to be able to buy Class A shares without a front-end sales
charge. We may enter into a special arrangement with a Securities Dealer,
based on criteria established by the fund, to add together certain small
Qualified Retirement Plan accounts for the purpose of meeting these
requirements.
For retirement plan accounts opened on or after May 1, 1997, a Contingent
Deferred Sales Charge may apply if the retirement plan is transferred out of
the Franklin Templeton Funds or terminated within 365 days of the retirement
plan account's initial purchase in the Franklin Templeton Funds. Please see
"How Do I Sell Shares? - Contingent Deferred Sales Charge" for details.
HOW DO I BUY SHARES IN CONNECTION WITH RETIREMENT PLANS?
Your individual or employer-sponsored retirement plan may invest in the fund.
Plan documents are required for all retirement plans. Franklin Templeton
Trust Company, an affiliate of Distributors and a wholly owned subsidiary of
Resources, can provide the plan documents for you and serve as custodian or
trustee.
Franklin Templeton Trust Company can provide you with brochures containing
important information about its plans. These plans require separate
applications and their policies and procedures may be different than those
described in this prospectus. For more information, including a free
retirement plan brochure or application, please call Retirement Plan Services.
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 B and C purchases and certain Class A 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 A purchases of $1 million or more - up to 1% of the amount invested.
2. Class B purchases - up to 4% of the amount invested.
3. Class C purchases - up to 1% of the purchase price.
4. Class A 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.
5. Class A 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.
6. Class A 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, 3 or 6 above or a payment of up
to 1% for investments described in paragraph 4 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.
FOR INVESTORS OUTSIDE THE U.S.
The distribution of this prospectus and the offering of fund shares may be
limited in many jurisdictions. An investor who wishes to buy shares of the
fund should determine, or have a broker-dealer determine, the applicable laws
and regulations of the relevant jurisdiction. Investors are responsible for
compliance with tax, currency exchange or other regulations applicable to
redemption and purchase transactions in any jurisdiction to which they may be
subject. Investors should consult appropriate tax and legal advisors to
obtain information on the rules applicable to these transactions.
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 A shares, you may exchange into any of our money funds
except Franklin Templeton Money Fund. Franklin Templeton Money Fund is the
only money fund exchange option available to Class B and C shareholders.
Unlike our other money funds, shares of Franklin Templeton Money Fund may not
be purchased directly and no drafts (checks) may be written on Franklin
Templeton Money Fund accounts.
Before making an exchange, please read the prospectus of the fund you are
interested in. This will help you learn about the fund, its investment goal
and policies, and its rules and requirements for exchanges. For example, some
Franklin Templeton Funds do not accept exchanges and others may have
different investment minimums. Some Franklin Templeton Funds do not offer
Class B or C shares.
METHOD STEPS TO FOLLOW
- ------------------------------------------------------------------------------
BY MAIL 1. Send us signed written instructions
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 can exchange shares between most Franklin Templeton Funds, generally
without paying any additional sales charges. If you exchange shares held for
less than six months, however, you may be charged the difference between the
front-end sales charge of the two funds if the difference is more than 0.25%.
If you exchange shares from a money fund, a sales charge may apply no matter
how long you have held the shares.
CONTINGENT DEFERRED SALES CHARGE. We will not impose a Contingent Deferred
Sales Charge when you exchange shares. Any shares subject to a Contingent
Deferred Sales Charge at the time of exchange, however, will remain so in the
new fund. The purchase price for determining a Contingent Deferred Sales
Charge on exchanged shares will be the price you paid for the original shares.
For accounts with shares subject to a Contingent Deferred Sales Charge, we
will first exchange any shares in your account that are not subject to the
charge. If there are not enough of these to meet your exchange request, we
will exchange shares subject to the charge in the order they were purchased.
If you exchange Class A shares into one of our money funds, the time your
shares are held in that fund will not count towards the completion of any
Contingency Period. If you exchange your Class B or C shares for the same
class of shares of Franklin Templeton Money Fund, however, the time your
shares are held in that fund will count towards the completion of any
Contingency Period.
For more information about the Contingent Deferred Sales Charge, please see
"How Do I Sell Shares?"
EXCHANGE RESTRICTIONS
Please be aware that the following restrictions apply to exchanges:
o You must meet the applicable minimum investment amount of the fund you
are exchanging into, or exchange 100% of your fund shares.
o You may only exchange shares within the same class, except as noted
below. If you exchange your Class B shares for the same class of shares of
another Franklin Templeton Fund, the time your shares are held in that
fund will count towards the eight year period for automatic conversion to
Class A shares.
o Generally exchanges may only be made between identically registered
accounts, unless you send written instructions with a signature guarantee.
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 Franklin Templeton 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. 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 A 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 signed written instructions. 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
- 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 $100,000 or less. Institutional
accounts may exceed $100,000 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 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 until your check or draft has cleared, which may
take seven business days or more. A certified or cashier's check may clear in
less time.
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.
FRANKLIN TEMPLETON TRUST COMPANY RETIREMENT PLAN ACCOUNTS
Before you can sell shares in a Franklin Templeton Trust Company retirement
plan, you may need to complete additional forms. For participants under age
591/2, tax penalties may apply. Call Retirement Plan Services at
1-800/527-2020 for details.
CONTINGENT DEFERRED SALES CHARGE
For Class A 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 A 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 C
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 A shares without a front-end sales charge may also be
subject to a Contingent Deferred Sales Charge if the retirement plan is
transferred out of the Franklin Templeton Funds or terminated within 365 days
of the account's initial purchase in the Franklin Templeton Funds.
For Class B shares, there is a Contingent Deferred Sales Charge if you sell
your shares within six years, as described in the table below. The charge is
based on the value of the shares sold or the Net Asset Value at the time of
purchase, whichever is less.
THIS % IS DEDUCTED
IF YOU SELL YOUR CLASS B FROM YOUR PROCEEDS AS A
SHARES WITHIN THIS MANY CONTINGENT DEFERRED
YEARS AFTER BUYING THEM SALES CHARGE
- ------------------------ ------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
For each class, we will first redeem any shares in your account that are not
subject to a Contingent Deferred Sales 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 Account fees
o Sales of Class A shares purchased without a front-end sales charge by
certain retirement plan accounts if (i) the account was opened before May
1, 1997, or (ii) the Securities Dealer of record received a payment from
Distributors of 0.25% or less, or (iii) Distributors did not make any
payment in connection with the purchase, or (iv) the Securities Dealer of
record has entered into a supplemental agreement with Distributors
o Redemptions by the fund when an account falls below the minimum required
account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February
1, 1995
o Redemptions through a systematic withdrawal plan set up on or after
February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12%
annually of your account's Net Asset Value depending on the frequency of
your plan
o Redemptions by Franklin Templeton Trust Company employee benefit plans or
employee benefit plans serviced by ValuSelect(R) (not applicable to Class B)
o Distributions from IRAs due to death or disability or upon periodic
distributions based on life expectancy (for Class B, this applies to all
retirement plan accounts, not only IRAs)
o Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts
o Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee
benefit plans (not applicable to Class B)
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
The fund intends to pay a dividend at least annually representing
substantially all of its net investment income and any net realized capital
gains. The amount of this distribution will vary and there is no guarantee
the fund will pay dividends. The fund does not pay "interest" or guarantee
any fixed rate of return on an investment in its shares.
To receive a distribution, you must be a shareholder on the record date. The
record dates for the fund's distributions will vary. Please keep in mind that
if you invest in the fund shortly before the record date of a distribution,
any distribution will lower the value of the fund's shares by the amount of
the distribution and you will receive some of your investment back in the
form of a taxable distribution. If you would like information on upcoming
record dates for the fund's distributions, please call 1-800/DIAL BEN.
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 each class.
DISTRIBUTION OPTIONS
You may receive your distributions from the fund in any of these ways:
1. BUY ADDITIONAL SHARES OF THE FUND - You may reinvest distributions you
receive from the fund in additional shares of the fund (without a sales
charge or imposition of a Contingent Deferred Sales Charge). 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 shares of another Franklin Templeton Fund (without a
sales charge or imposition of a Contingent Deferred Sales Charge). Many
shareholders find this a convenient way to diversify their investments.
Please note that distributions may only be directed to an existing account.
3. RECEIVE DISTRIBUTIONS IN CASH - You may receive your distributions from
the fund in cash. If you have the money sent to another person or to a
checking or savings account, you may need a signature guarantee. If you send
the money to a checking or savings account, please see "Electronic Fund
Transfers" under "Services to Help You Manage Your Account."
Distributions may be reinvested only in the same class of shares, except as
follows: (i) Class C shareholders who chose to reinvest their distributions
in Class A shares of the fund or another Franklin Templeton Fund before
November 17, 1997, may continue to do so; and (ii) Class B and C shareholders
may reinvest their distributions in shares of any Franklin Templeton money
fund.
PLEASE INDICATE ON YOUR APPLICATION THE DISTRIBUTION OPTION YOU HAVE CHOSEN,
OTHERWISE WE WILL REINVEST YOUR DISTRIBUTIONS IN THE SAME SHARE CLASS OF THE
FUND. 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 Franklin Templeton 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 close of the NYSE, normally
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.
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.
JOINT ACCOUNTS. For accounts with more than one registered owner, the fund
accepts written instructions signed by only one owner for transactions and
account changes that could otherwise be made by phone. For all other
transactions and changes, all registered owners must sign the instructions.
Please keep in mind that if you have previously told us that you do not want
telephone exchange or redemption privileges on your account, then we can only
accept written instructions to exchange or redeem shares if they are signed
by all registered owners on the account.
SIGNATURE GUARANTEES
For our mutual protection, we require a signature guarantee in the following
situations:
1) You wish to sell over $100,000 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 and changes to your account 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. 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.
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. We also will not be liable for
any loss if we follow instructions by phone that we reasonably believe are
genuine or if you are unable to execute a transaction by phone.
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, we cannot accept instructions to change owners on
the account unless ALL owners agree in writing, even if the law in your state
says otherwise. 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 told us that you do not want telephone privileges to apply to
your account.
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 $250, or less than $50
for employee accounts and custodial accounts for minors. 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 $1,000, or $100 for employee accounts and custodial accounts
for minors. These minimums do not apply to IRAs and other retirement plan
accounts or to accounts managed by the Franklin Templeton Group.
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 or savings account to the fund each month to buy additional shares.
If you are interested in this program, please refer to the account
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 calling
Shareholder Services.
AUTOMATIC PAYROLL DEDUCTION - CLASS A ONLY
You may have money transferred from your paycheck to the fund to buy
additional Class A 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 account 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 or savings account. If you choose to
have the money sent to a checking or savings account, please see "Electronic
Fund Transfers" below. Once your plan is established, any distributions paid
by the fund will be automatically reinvested in your account.
You will generally receive your payment by the end of the month in which a
payment is scheduled. When you sell your shares under a systematic withdrawal
plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short
period of time, you may not want to set up a systematic withdrawal plan if
you plan to buy shares on a regular basis. Shares sold under the plan may
also be subject to a Contingent Deferred Sales Charge. Please see "Contingent
Deferred Sales Charge" under "How Do
I Sell Shares?"
You may discontinue a systematic withdrawal plan, change the amount and
schedule of withdrawal payments, or suspend one payment by notifying us by
mail or by phone at least seven business days before the end of the month
preceding a scheduled payment. Please see "How Do I Buy, Sell and Exchange
Shares? - Systematic Withdrawal Plan" in the SAI for more information.
ELECTRONIC FUND TRANSFERS
You may choose to have dividend and capital gain distributions or payments
under a systematic withdrawal plan sent directly to a checking or savings
account. If the 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 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 (within the same class) between identically registered
Franklin Templeton Class A, B or C accounts; and
o request duplicate statements and deposit slips for Franklin Templeton
accounts.
You will need the code number for each class to use TeleFACTS. The code
number is 192 for Class A, 392 for Class B and 292 for Class C.
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 the manager 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.
GLOSSARY
USEFUL TERMS AND DEFINITIONS
BOARD - The Board of Trustees of the Trust
CD - Certificate of deposit
CLASS A, CLASS B, CLASS C AND ADVISOR CLASS - The fund offers four classes of
shares, designated "Class A," "Class B", "Class C," and "Advisor Class." The
four 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 A shares, the 12 month period during which a
Contingent Deferred Sales Charge may apply. The contingency period is six
years for Class B shares and 18 months for Class C shares. The holding period
begins on the day you buy your shares. For example, if you buy shares on the
18th of the month, they will age one month on the 18th day of the next month
and each following month.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - A sales charge of 1% that may apply
if you sell your Class A or C shares within the Contingency Period. For Class
B, the maximum CDSC is 4% and declines to 0% after six years.
DEPOSITARY RECEIPTS - are certificates that give their holders the right to
receive securities (a) of a foreign issuer deposited in a U.S. bank or trust
company (American Depositary Receipts, "ADRs"); or (b) of a foreign or U.S.
issuer deposited in a foreign bank or trust company (Global Depositary
Receipts, "GDRs" or European Depositary Receipts, "EDRs").
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, Templeton Capital Accumulator Fund, Inc., 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
IRA - Individual retirement account or annuity qualified under section 408 of
the Code
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.
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 5.75% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
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
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
SIMPLE (Savings Incentive Match Plan for Employees) - An employer sponsored
salary deferral plan established under section 408(p) of the Code
TELEFACTS(R) - Franklin Templeton's automated customer servicing system
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.
EXHIBIT C
SHAREHOLDER LETTER
Your Fund's Goal: Franklin Real Estate Securities Fund seeks to maximize total
return by investing in securities of companies in the real estate industry,
primarily equity real estate investment trusts (REITs).
Dear Shareholder:
This annual report of Franklin Real Estate Securities Fund covers the period
ended April 30, 1999. Although the real estate industry benefited from low
interest rates during the reporting period, investor apathy toward value stocks,
in general, adversely affected the prices of REITs. Concerns about a slow-down
in acquisition activity caused by difficulty accessing capital markets also
contributed to weak REIT stock prices. Within this environment, Franklin Real
Estate Securities Fund - Class A posted a -8.09% one-year total return as shown
in the Performance Summary on page 7. The fund's
Equity real estate investment trusts (REITs) are real estate companies that own
and manage income-producing properties such as apartments or hotels. The income,
primarily rent from these properties, is generally passed on to investors in the
form of dividends. These companies provide experienced property management teams
and generally concentrate on a specific geographic region and property type.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 14 of
this report.
CONTENTS
Shareholder Letter ..................................................... 1
Performance Summary .................................................... 6
Financial Highlights &
Statement of Investments ............................................... 10
Financial Statements ................................................... 17
Notes to
Financial Statements ................................................... 21
Independent
Auditors' Report ....................................................... 24
Tax Information ........................................................ 25
[PYRAMID GRAPH]
- -PAGE-
benchmark, the Wilshire Real Estate Securities Index(1), posted a -8.29%
cumulative total return for the same period. It is important, however, to
evaluate your investment with a long-term perspective, and as you can see from
the Performance Summary, the fund's Class A shares delivered a cumulative total
return of +84.42% since its inception on January 3, 1994.
As you know, the fund focuses on property types and geographic regions with
strong supply and demand fundamentals, while attempting to identify those
management teams with the ability to add value through intensive property
management and capital markets experience. Following this strategy, we
maintained the majority of the fund's investments in the office, diversified,
hotel, and apartment property sectors, which we felt had the strongest cash-flow
growth and attractive stock valuations.
On April 30, 1999, office REITs represented the fund's largest property
weighting, comprising 20.3% of the fund's total net assets. Believing stocks in
this sector offered strong supply and demand fundamentals and attractive
valuations, we initiated positions in Brandywine Realty Trust, a suburban
Philadelphia office REIT, and TriNet Corporate Realty Trust, a national,
triple-net lease, office REIT.
At the beginning of the reporting period, diversified property stocks
represented only 7.2% of the fund's total net assets. Equities in this sector
have portfolios diversified by both property type and property location. During
the reporting period, we added
U.S. GEOGRAPHIC ALLOCATION
BASED ON TOTAL NET ASSETS
4/30/99
[PIE GRAPH]
<TABLE>
<S> <C>
National 54.9%
Northeast 12.1%
Northwest 8.9%
Southeast 8.1%
Southwest 6.0%
Midwest 5.6%
Cash & Equivalents 4.4%
</TABLE>
1. Source: Standard and Poor's(R) Micropal.
2
- -PAGE-
significantly to our holdings of Security Capital Group Inc. and Glenborough
Realty Trust Inc., placing them among the top 10 positions of the fund. Weakness
in the prices of these stocks provided an excellent opportunity to increase our
exposure to what we consider well-managed, highly diversified companies. At the
close of the reporting period, 20.1% of the fund's total net assets were in the
diversified sector.
The third-largest property sector on April 30, 1999, was hotel stocks (19.1% of
total net assets). Investor concerns about oversupply and new tax legislation
caused prices to fall for many of these stocks. Attempting to take advantage of
this opportunity, we added to our holdings of Starwood Lodging Trust, MeriStar
Hospitality Corp. and Host Marriott Corp. In our opinion, these companies
possess excellent growth prospects and offered compelling valuations at the time
of purchase.
During the year under review, we made some changes to our holdings in the
apartment group. Concerned that excess building might lead to oversupply, we
reduced our exposure to southern-regional apartment companies by selling our
shares of AMLI Residential Properties Trust, Gables Residential Trust, and Post
Properties Inc. However, we established a position in Apartment Investment &
Management Co., a national REIT, and the nation's largest owner and operator of
apartments, with approximately 375,000 units across 49 states. We believe this
company may experience substantial growth over the next several years.
PROPERTY-TYPE ALLOCATION
BASED ON TOTAL NET ASSETS
4/30/99
[BAR GRAPH]
<TABLE>
<S> <C>
Office 20.3%
Diversified Property Type 20.1%
Hotels 19.1%
Apartments 12.7%
Retail-Community Centers 6.2%
Regional Malls 5.3%
Storage 4.0%
Industrial 3.3%
Residential Communities 3.1%
Health Care 1.5%
Cash & Equivalents 4.4%
</TABLE>
3
- -PAGE-
Although low interest rates and record home-buying levels across the country
helped home builder stocks perform well early in the reporting period, they were
trading at what we felt were high valuations compared to other real estate
securities, and we sold all of our positions in this property type, including
Cavalier Homes Inc. and Clayton Homes Inc.
Looking forward, we are optimistic about long-term prospects for REITs and
Franklin Real Estate Securities Fund. The sector continues to develop greater
capitalization and diversity, and due to rising rents, high occupancy rates and
select development opportunities, earnings projections for real estate companies
appear excellent. We believe the fund is well-positioned to benefit from growth
in this market, and shall continue to focus on top quality real estate companies
capable of creating significant cash flow growth and shareholder value.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1999, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although past performance
is not predictive of future results, these insights may help you better
understand our investment and management philosophy.
TOP 10 HOLDINGS
4/30/99
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY NET ASSETS
- -------------------------------------------------------------------------------
<S> <C>
Starwood Lodging Trust
Hotels 4.6%
MeriStar Hospitality Corp.
Equity REIT - Hotels 4.4%
Security Capital Group Inc., B
Diversified Property Type 4.4%
Public Storage Inc.
Equity REIT - Storage 4.0%
Equity Office Properties Trust
Equity REIT - Office 3.9%
Equity Residential
Properties Trust
Equity REIT - Apartments 3.8%
Glenborough Realty Trust Inc.
Equity REIT -
Diversified Property Trust 3.8%
Brandywine Realty Trust
Equity REIT - Office 3.2%
Simon Property Group Inc.
Equity REIT - Retail -
Regional Malls 3.1%
TriNet Corporate Realty Trust
Equity REIT - Office 2.9%
</TABLE>
4
- -PAGE-
We appreciate your participation in Franklin Real Estate Securities Fund and
welcome your comments or suggestions.
Sincerely,
/s/ Matt Avery
Matt Avery
Portfolio Manager
Franklin Real Estate Securities Fund
/s/ Douglas Barton
Douglas Barton
Portfolio Manager
Franklin Real Estate Securities Fund
5
- -PAGE-
PERFORMANCE SUMMARY AS OF 4/30/99
Distributions will vary depending on income earned by the fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the fund's operating expenses. Past distributions are not indicative of future
trends. All total returns include reinvested distributions at net asset value.
PRICE AND DISTRIBUTION INFORMATION (5/1/98 - 4/30/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value -$2.48 $15.18 $17.66
DISTRIBUTIONS
-----------------------------------
Dividend Income $0.7534
Long-Term Capital Gain $0.1965
Short-Term Capital Gain $0.0322
TOTAL $0.9821
CLASS B CHANGE 4/30/99 1/1/99
- --------------------------------------------------------------------------------
Net Asset Value +$0.84 $15.16 $14.32
CLASS C CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
Net Asset Value -$2.43 $14.97 $17.40
DISTRIBUTIONS
-----------------------------------
Dividend Income $0.6312
Long-Term Capital Gain $0.1965
Short-Term Capital Gain $0.0322
TOTAL $0.8599
ADVISOR CLASS CHANGE 4/30/99 4/30/98
- --------------------------------------------------------------------------------
Net Asset Value -$2.49 $15.21 $17.70
DISTRIBUTIONS
-----------------------------------
Dividend Income $0.7948
Long-Term Capital Gain $0.1965
Short-Term Capital Gain $0.0322
TOTAL $1.0235
</TABLE>
Franklin Real Estate Securities Fund paid distributions derived from long-term
capital gains of 19.65 cents ($0.1965) per share in December 1998. The fund
hereby designates such distributions as capital gain dividends per Internal
Revenue Code Section 852 (b)(3).
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to August 3,
1998, fund shares were offered at a lower initial sales charge; thus actual
total returns may differ.(*)
CLASS B:
Subject to no initial sales charge, but subject to a contingent deferred sales
charge (CDSC) declining from 4% to 0% over six years. These shares have higher
annual fees and expenses than Class A shares.(*)
CLASS C (formerly Class II):
Subject to 1% initial sales charge and 1% CDSC for shares redeemed within 18
months of investment. These shares have higher annual fees and expenses than
Class A shares.(*)
ADVISOR CLASS:
No initial sales charge or Rule 12b-1 fees and are available to a limited class
of investors.(*)
(*)The fund's manager has agreed in advance to waive a portion of its management
fees, which reduces operating expenses and increases total return to
shareholders. Without this waiver, total returns would have been lower. The
waiver may be discontinued at any time upon notice to the fund's board of
trustees.
Past performance is not predictive of future results.
6
- -PAGE-
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 1-YEAR 3-YEAR 5-YEAR (01/03/94)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -8.09% +36.58% +68.88% +84.42%
Average Annual Total Return(2) -13.39% +8.78% +9.74% +10.95%
Value of $10,000 Investment(3) $8,661 $12,873 $15,912 $17,382
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) -0.48% +24.25% +25.97% +17.96% -8.09%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS B (1/1/99)
- --------------------------------------------------------------------------------
<S> <C>
Cumulative Total Return(1) +5.87%
Aggregate Total Return(2) +1.87%
Value of $10,000 Investment(3) $10,187
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -8.69% +33.56% +64.56%
Average Annual Total Return(2) -10.48% +9.75% +12.97%
Value of $10,000 Investment(3) $8,952 $13,219 $16,286
</TABLE>
<TABLE>
<CAPTION>
4/30/96 4/30/97 4/30/98 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-Year Total Return(4) +23.21% +24.94% +17.07% -8.69%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
ADVISOR CLASS(5) 1-YEAR 3-YEAR 5-YEAR (01/03/94)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) -7.87% +37.44% +69.95% +85.59%
Average Annual Total Return(2) -7.87% +11.18% +11.19% +12.32%
Value of $10,000 Investment(3) $9,213 $13,744 $16,995 $18,559
</TABLE>
<TABLE>
<CAPTION>
4/30/95 4/30/96 4/30/97 4/30/98 4/30/99
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) -0.48% +24.25% +26.05% +18.35% -7.87%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Since Class B shares have existed for
less than one year, aggregate total return for that class represents total
return since inception, including the maximum sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
5. On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable only to that class.
Since January 2, 1997 (commencement of sales), the cumulative and average annual
total returns of Advisor Class shares were +10.10% and +4.23%, respectively.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
7
- -PAGE-
TOTAL RETURN INDEX COMPARISON
FOR HYPOTHETICAL $10,000 INVESTMENT
The unmanaged indices differ from the fund in composition, do not pay management
fees or expenses and include reinvested dividends. One cannot invest directly in
an index. Total return represents the change in value of an investment over the
periods shown. It includes the current, applicable, maximum sales charge(s),
fund expenses, account fees, and reinvested distributions.
[CLASS A LINE GRAPH]
CLASS A
Total Return Index Comparison
(1/3/94-4/30/99)
The following line graph compares the performance of Franklin Real Estate
Securities Fund, Class A with the Wilshire Real Estate Securities Index* and
the S&P 500(R) Composite Index.*
*Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
Franklin Real Estate
Securities Fund- Wilshire Real Est. Wilshire Real
Date Class A S&P 500 Secs. Index S&P 500 Est.
- ---- --------------------- ------- ------------------ -------- --------------
<S> <C> <C> <C> <C> <C>
1/03/94 $ 9,425 $10,000 $10,000
1/31/94 $ 9,661 $10,340 $10,300 3.40% 3.00%
2/28/94 $10,198 $10,060 $10,721 -2.71% 4.09%
3/31/94 $10,066 $ 9,621 $10,225 -4.36% -4.63%
4/30/94 $10,292 $ 9,744 $10,339 1.28% 1.12%
5/31/94 $10,481 $ 9,904 $10,554 1.64% 2.08%
6/30/94 $10,254 $ 9,661 $10,347 -2.45% -1.97%
7/31/94 $10,245 $ 9,978 $10,370 3.28% 0.23%
8/31/94 $10,264 $10,387 $10,363 4.10% -0.07%
9/30/94 $10,132 $10,134 $10,190 -2.44% -1.67%
10/31/94 $ 9,811 $10,362 $ 9,817 2.25% -3.66%
11/30/94 $ 9,463 $ 9,985 $ 9,433 -3.64% -3.91%
12/31/94 $10,330 $10,133 $10,164 1.48% 7.75%
1/31/95 $ 9,991 $10,395 $ 9,836 2.59% -3.23%
2/28/95 $10,166 $10,800 $10,144 3.90% 3.13%
3/31/95 $10,262 $11,119 $10,203 2.95% 0.58%
4/30/95 $10,243 $11,446 $10,129 2.94% -0.72%
5/31/95 $10,640 $11,904 $10,464 4.00% 3.31%
6/30/95 $10,824 $12,180 $10,647 2.32% 1.74%
7/31/95 $11,066 $12,584 $10,818 3.32% 1.61%
8/31/95 $11,308 $12,616 $10,950 0.25% 1.22%
9/30/95 $11,618 $13,148 $11,151 4.22% 1.84%
10/31/95 $11,385 $13,101 $10,806 -0.36% -3.10%
11/30/95 $11,560 $13,676 $10,918 4.39% 1.04%
12/31/95 $12,193 $13,940 $11,551 1.93% 5.80%
1/31/96 $12,505 $14,414 $11,711 3.40% 1.38%
2/29/96 $12,667 $14,548 $11,943 0.93% 1.98%
3/31/96 $12,687 $14,688 $12,039 0.96% 0.81%
4/30/96 $12,727 $14,904 $12,094 1.47% 0.45%
5/31/96 $13,029 $15,288 $12,363 2.58% 2.23%
6/30/96 $13,160 $15,346 $12,611 0.38% 2.00%
7/31/96 $13,089 $14,668 $12,498 -4.42% -0.89%
8/31/96 $13,704 $14,977 $13,029 2.11% 4.25%
9/30/96 $14,106 $15,821 $13,355 5.63% 2.50%
10/31/96 $14,388 $16,257 $13,717 2.76% 2.71%
11/30/96 $14,841 $17,486 $14,286 7.56% 4.15%
12/31/96 $16,157 $17,140 $15,811 -1.98% 10.67%
1/31/97 $16,364 $18,211 $16,037 6.25% 1.43%
2/28/97 $16,344 $18,353 $16,046 0.78% 0.06%
3/31/97 $16,447 $17,599 $16,101 -4.11% 0.34%
4/30/97 $16,032 $18,650 $15,581 5.97% -3.23%
5/31/97 $16,603 $19,785 $16,045 6.09% 2.98%
6/30/97 $17,340 $20,672 $16,841 4.48% 4.96%
7/31/97 $17,787 $22,317 $17,395 7.96% 3.29%
8/31/97 $17,725 $21,068 $17,266 -5.60% -0.74%
9/30/97 $19,334 $22,222 $18,969 5.48% 9.86%
10/31/97 $18,659 $21,480 $18,163 -3.34% -4.25%
11/30/97 $19,043 $22,474 $18,528 4.63% 2.01%
12/31/97 $19,372 $22,861 $18,941 1.72% 2.23%
1/31/98 $19,169 $23,115 $18,674 1.11% -1.41%
2/28/98 $19,008 $24,781 $18,435 7.21% -1.28%
3/31/98 $19,447 $26,050 $18,798 5.12% 1.97%
4/30/98 $18,912 $26,313 $18,206 1.01% -3.15%
5/31/98 $18,740 $25,861 $18,031 -1.72% -0.96%
6/30/98 $18,537 $26,911 $17,936 4.06% -0.53%
7/31/98 $17,306 $26,623 $16,687 -1.07% -6.96%
8/31/98 $15,614 $22,773 $14,953 -14.46% -10.39%
9/30/98 $16,438 $24,233 $15,791 6.41% 5.60%
10/31/98 $16,331 $26,203 $15,575 8.13% -1.37%
11/30/98 $16,534 $27,791 $15,867 6.06% 1.88%
12/31/98 $16,397 $29,391 $15,640 5.76% -1.43%
1/31/99 $15,870 $30,620 $15,301 4.18% -2.17%
2/28/99 $15,676 $29,668 $15,180 -3.11% -0.79%
3/31/99 $15,653 $30,854 $15,089 4.00% -0.60%
</TABLE>
[CLASS C LINE GRAPH]
CLASS C
Total Return Index Comparison
(5/1/95-4/30/99)
The following line graph compares the performance of Franklin Real Estate
Securities Fund, Class C with the Wilshire Real Estate Securities Index* and
the S&P 500(R) Composite Index.*
*Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
Franklin Real Estate Wilshire
Securities Fund - Real Est. Wilshire Real
Date Class C S&P 500 Sec Index S&P 500 Est.
---- -------------------- ------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
5/01/95 $ 9,897 $10,000 $10,000
5/31/95 $10,262 $10,400 $10,331 4.00% 3.31%
6/30/95 $10,439 $10,641 $10,511 2.32% 1.74%
7/31/95 $10,654 $10,995 $10,680 3.32% 1.61%
8/31/95 $10,888 $11,022 $10,810 0.25% 1.22%
9/30/95 $11,178 $11,487 $11,009 4.22% 1.84%
10/31/95 $10,953 $11,446 $10,668 -0.36% -3.10%
11/30/95 $11,103 $11,948 $10,779 4.39% 1.04%
12/31/95 $11,709 $12,179 $11,404 1.93% 5.80%
1/31/96 $11,991 $12,593 $11,561 3.40% 1.38%
2/29/96 $12,146 $12,710 $11,790 0.93% 1.98%
3/31/96 $12,165 $12,832 $11,886 0.96% 0.81%
4/30/96 $12,194 $13,021 $11,939 1.47% 0.45%
5/31/96 $12,476 $13,357 $12,206 2.58% 2.23%
6/30/96 $12,583 $13,407 $12,450 0.38% 2.00%
7/31/96 $12,515 $12,815 $12,339 -4.42% -0.89%
8/31/96 $13,088 $13,085 $12,863 2.11% 4.25%
9/30/96 $13,466 $13,822 $13,185 5.63% 2.50%
10/31/96 $13,728 $14,203 $13,542 2.76% 2.71%
11/30/96 $14,156 $15,277 $14,104 7.56% 4.15%
12/31/96 $15,395 $14,975 $15,609 -1.98% 10.67%
1/31/97 $15,585 $15,911 $15,832 6.25% 1.43%
2/28/97 $15,555 $16,035 $15,842 0.78% 0.06%
3/31/97 $15,635 $15,376 $15,896 -4.11% 0.34%
4/30/97 $15,236 $16,294 $15,382 5.97% -3.23%
5/31/97 $15,775 $17,286 $15,841 6.09% 2.98%
6/30/97 $16,464 $18,060 $16,626 4.48% 4.96%
7/31/97 $16,873 $19,498 $17,173 7.96% 3.29%
8/31/97 $16,803 $18,406 $17,046 -5.60% -0.74%
9/30/97 $18,321 $19,415 $18,727 5.48% 9.86%
10/31/97 $17,672 $18,766 $17,931 -3.34% -4.25%
11/30/97 $18,021 $19,635 $18,291 4.63% 2.01%
12/31/97 $18,328 $19,973 $18,699 1.72% 2.23%
1/31/98 $18,113 $20,195 $18,436 1.11% -1.41%
2/28/98 $17,959 $21,651 $18,200 7.21% -1.28%
3/31/98 $18,359 $22,759 $18,558 5.12% 1.97%
4/30/98 $17,836 $22,989 $17,974 1.01% -3.15%
5/31/98 $17,672 $22,594 $17,801 -1.72% -0.96%
6/30/98 $17,467 $23,511 $17,707 4.06% -0.53%
7/31/98 $16,229 $23,259 $16,474 -1.07% -6.96%
8/31/98 $14,699 $19,896 $14,763 -14.46% -10.39%
9/30/98 $15,468 $21,171 $15,589 6.41% 5.60%
10/31/98 $15,355 $22,893 $15,376 8.13% -1.37%
11/30/98 $15,530 $24,280 $15,665 6.06% 1.88%
12/31/98 $15,394 $25,678 $15,441 5.76% -1.43%
1/31/99 $14,894 $26,752 $15,106 4.18% 2.17%
2/28/99 $14,698 $25,920 $14,987 -3.11% -0.79%
3/31/99 $14,676 $26,956 $14,897 4.00% -0.60%
4/30/99 $16,286 $28,000 $16,485 3.87% 10.66%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS A
- ------------------------------------------------------------------------------
<S> <C>
1-Year -13.39%
3-Year +8.78%
5-Year +9.74%
Since Inception (01/03/94) +10.95%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
CLASS C
- ------------------------------------------------------------------------------
<S> <C>
1-Year -10.48%
3-Year +9.75%
Since Inception (01/14/95) +12.97%
</TABLE>
(*)Source: Standard and Poor's Micropal.
Past performance is not predictive of future results.
8
- -PAGE-
[ADVISOR CLASS LINE GRAPH]
ADVISOR CLASS(**)
Total Return Index Comparison
(1/3/94-4/30/99)
The following line graph compares the performance of Franklin Real Estate
Securities Fund, Advisor Class with the Wilshire Real Estate Securities Index*
and the S&P 500(R) Composite Index.*
*Source: Standard and Poor's Micropal.
<TABLE>
<CAPTION>
FRANKLIN REAL ESTATE WILSHIRE REAL
SECURITIES FUND - ADVISOR EST. SECS. WILSHIRE REAL
DATE CLASS S&P 500 INDEX S&P 500 EST.
- ------ ------------------------- ------- ------------- ------- ----
<S> <C> <C> <C> <C> <C>
1/3/94 $10,000 $10,000 $10,000
1/31/94 $10,250 $10,340 $10,300 3.40% 3.00%
2/28/94 $10,820 $10,060 $10,721 -2.71% 4.09%
3/31/94 $10,680 $ 9,621 $10,225 -4.36% -4.63%
4/30/94 $10,920 $ 9,744 $10,339 1.28% 1.12%
5/31/94 $11,120 $ 9,904 $10,554 1.64% 2.08%
6/30/94 $10,880 $ 9,661 $10,347 -2.45% -1.97%
7/31/94 $10,870 $ 9,978 $10,370 3.28% 0.23%
8/31/94 $10,890 $10,387 $10,363 4.10% -0.07%
9/30/94 $10,750 $10,134 $10,190 -2.44% -1.67%
10/31/94 $10,410 $10,362 $ 9,817 2.25% -3.66%
11/30/94 $10,040 $ 9,985 $ 9,433 -3.64% -3.91%
12/31/94 $10,960 $10,133 $10,164 1.48% 7.75%
1/31/95 $10,601 $10,395 $ 9,836 2.59% -3.23%
2/28/95 $10,786 $10,800 $10,144 3.90% 3.13%
3/31/95 $10,888 $11,119 $10,203 2.95% -0.58%
4/30/95 $10,868 $11,446 $10,129 2.94% -0.72%
5/31/95 $11,289 $11,904 $10,464 4.00% 3.31%
6/30/95 $11,484 $12,180 $10,647 2.32% 1.74%
7/31/95 $11,741 $12,584 $10,818 3.32% 1.61%
8/31/95 $11,998 $12,616 $10,950 0.25% 1.22%
9/30/95 $12,327 $13,148 $11,151 4.22% 1.84%
10/31/95 $12,080 $13,101 $10,806 -0.36% -3.10%
11/30/95 $12,265 $13,676 $10,918 4.39% 1.04%
12/31/95 $12,937 $13,940 $11,551 1.93% 5.80%
1/31/96 $13,268 $14,414 $11,711 3.40% 1.38%
2/29/96 $13,439 $14,548 $11,943 0.93% 1.98%
3/31/96 $13,461 $14,688 $12,039 0.96% 0.81%
4/30/96 $13,503 $14,904 $12,094 1.47% 0.45%
5/31/96 $13,824 $15,288 $12,363 2.58% 2.23%
6/30/96 $13,963 $15,346 $12,611 0.38% 2.00%
7/31/96 $13,888 $14,668 $12,498 -4.42% -0.89%
8/31/96 $14,540 $14,977 $13,029 2.11% 4.25%
9/30/96 $14,967 $15,821 $13,355 5.63% 2.50%
10/31/96 $15,266 $16,257 $13,717 2.76% 2.71%
11/30/96 $15,747 $17,486 $14,286 7.56% 4.15%
12/31/96 $17,142 $17,140 $15,811 -1.98% 10.67%
1/31/97 $17,363 $18,211 $16,037 6.25% 1.43%
2/28/97 $17,352 $18,353 $16,046 0.78% 0.06%
3/31/97 $17,462 $17,599 $16,101 -4.11% 0.34%
4/30/97 $17,021 $18,650 $15,581 5.97% -3.23%
5/31/97 $17,638 $19,785 $16,045 6.09% 2.98%
6/30/97 $18,420 $20,672 $16,841 4.48% 4.96%
7/31/97 $18,905 $22,317 $17,395 7.96% 3.29%
8/31/97 $18,839 $21,068 $17,266 -5.60% -0.74%
9/30/97 $20,546 $22,222 $18,969 5.48% 9.86%
10/31/97 $19,841 $21,480 $18,163 -3.34% -4.25%
11/30/97 $20,260 $22,474 $18,528 4.63% 2.01%
12/31/97 $20,611 $22,861 $18,941 1.72% 2.23%
1/31/98 $20,407 $23,115 $18,674 1.11% -1.41%
2/28/98 $20,236 $24,781 $18,435 7.21% -1.28%
3/31/98 $20,703 $26,050 $18,798 5.12% 1.97%
4/30/98 $20,145 $26,313 $18,206 1.01% -3.15%
5/31/98 $19,963 $25,861 $18,031 -1.72% -0.96%
6/30/98 $19,746 $26,911 $17,936 4.06% -0.53%
7/31/98 $18,449 $26,623 $16,687 -1.07% -6.96%
8/31/98 $16,651 $22,773 $14,953 -14.46% -10.39%
9/30/98 $17,539 $24,233 $15,791 6.41% 5.60%
10/31/98 $17,413 $26,203 $15,575 8.13% -1.37%
11/30/98 $17,641 $27,791 $15,867 6.06% 1.88%
12/31/98 $17,497 $29,391 $15,640 5.76% -1.43%
1/31/99 $16,948 $30,620 $15,301 4.18% -2.17%
2/28/99 $16,741 $29,668 $15,180 -3.11% -0.79%
3/31/99 $16,728 $30,854 $15,089 4.00% -0.60%
4/30/99 $18,559 $32,049 $16,698 3.87% -10.66%
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
4/30/99
<TABLE>
<CAPTION>
ADVISOR CLASS(**)
- ------------------------------------------------------------------------------
<S> <C>
1-Year -7.87%
3-Year +11.18%
5-Year +11.19%
Since Inception (01/03/94) +12.32%
</TABLE>
(*)Source: Standard and Poor's Micropal.
(**)On January 2, 1997, the fund began selling Advisor Class shares to certain
eligible investors as described in the prospectus. This share class does not
have sales charges or a Rule 12b-1 plan. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
Class A performance, excluding the effect of the Class A sales charge, but
including the effect of Rule 12b-1 fees and other Class A expenses; and (b) for
periods after January 1, 1997, figures reflect actual Advisor Class performance,
including the deduction of all fees and expenses applicable to that class.
Past performance is not predictive of future results.
9
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------
YEAR ENDED APRIL 30,
----------------------------------------------------------------------
1999 1998 1997(1) 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $ 17.66 $ 15.44 $ 12.64 $ 10.58 $ 10.92
----------------------------------------------------------------------
Income from investment operations:
Net investment income .................................. .81 .63 .49 .43 .39
Net realized and unrealized gains (losses) ............. (2.31) 2.14 2.77 2.10 (.45)
----------------------------------------------------------------------
Total from investment operations ........................ (1.50) 2.77 3.26 2.53 (.06)
----------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (.75) (.48) (.36) (.47) (.28)
Net realized gains ..................................... (.23) (.07) (.10) -- --
----------------------------------------------------------------------
Total distributions ..................................... (.98) (.55) (.46) (.47) (.28)
----------------------------------------------------------------------
Net asset value, end of year ............................ $ 15.18 $ 17.66 $ 15.44 $ 12.64 $ 10.58
======================================================================
Total return(+) ......................................... (8.09%) 17.96% 25.97% 24.25% (.48%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $ 278,301 $ 330,030 $ 153,520 $ 33,634 $ 16,694
Ratios to average net assets:
Expenses ............................................... .96% 1.00% .98% .67% .25%
Expenses excluding waiver and payments by affiliate..... .96% 1.03% 1.09% 1.24% 1.40%
Net investment income .................................. 5.15% 3.50% 3.88% 4.38% 4.86%
Portfolio turnover rate ................................. 25.97% 6.10% 6.80% 14.40% 3.74%
</TABLE>
(+) Total return does not reflect sales commissions or the contingent deferred
sales charges, and is not annualized for periods less than one year.
(1) For the period ending April 30, 1997, per share amounts have been calculated
using the daily average shares outstanding.
10
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS B
----------
YEAR ENDED
APRIL 30,
----------
1999(3)
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ...................... $ 14.32
----------
Income from investment operations:
Net investment income .................................... .10
Net realized and unrealized gains ........................ .74
----------
Total from investment operations .......................... .84
----------
Net asset value, end of period ............................ $ 15.16
==========
Total return(+) ........................................... 5.87%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................... $ 1,119
Ratios to average net assets:
Expenses ................................................. 1.57%(2)
Net investment income .................................... 4.54%(2)
Portfolio turnover rate ................................... 25.97%
</TABLE>
(+)Total return does not reflect contingent deferred sales charge, and is not
annualized for periods less than one year.
(2)Annualized.
(3)For the period January 1,1999 (effective date) to April 30,1999.
11
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------
YEAR ENDED APRIL 30,
-------------------------------------------------------------------
1999 1998 1997(1) 1996(4)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ......................... $ 17.40 $ 15.26 $ 12.56 $ 10.58
-------------------------------------------------------------------
Income from investment operations:
Net investment income ..................................... .68 .45 .43 .44
Net realized and unrealized gains (losses) ................ (2.25) 2.15 2.68 2.00
-------------------------------------------------------------------
Total from investment operations ........................... (1.57) 2.60 3.11 2.44
-------------------------------------------------------------------
Less distributions from:
Net investment income ..................................... (.63) (.39) (.31) (.46)
Net realized gains ........................................ (.23) (.07) (.10) --
-------------------------------------------------------------------
Total distributions ........................................ (.86) (.46) (.41) (.46)
-------------------------------------------------------------------
Net asset value, end of year ............................... $ 14.97 $ 17.40 $ 15.26 $ 12.56
===================================================================
Total return(+) ............................................ (8.69%) 17.07% 24.94% 23.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ............................ $ 105,861 $ 137,048 $ 58,540 $ 6,282
Ratios to average net assets:
Expenses .................................................. 1.71% 1.75% 1.75% 1.41%
Expenses excluding waiver and payments by affiliate ....... 1.71% 1.78% 1.86% 1.98%
Net investment income ..................................... 4.40% 2.77% 2.92% 3.65%
Portfolio turnover rate .................................... 25.97% 6.10% 6.80% 14.40%
</TABLE>
(+)Total return does not reflect sales commissions or the contingent deferred
sales charges, and is not annualized for periods less than one year.
(1)For the period ending April 30, 1997, per share amounts have been calculated
using the daily average shares outstanding.
(4)Effective date of Class C shares was May 1, 1995.
12
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
ADVISOR CLASS
-------------------------------------------------
YEAR ENDED APRIL 30,
-------------------------------------------------
1999 1998 1997(1,5)
-------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................................ $ 17.70 $ 15.45 $ 15.30
-------------------------------------------------
Income from investment operations:
Net investment income .................................................... 1.44 .52 .18
Net realized and unrealized gains (losses) ............................... (2.91) 2.31 (.03)
-------------------------------------------------
Total from investment operations .......................................... (1.47) 2.83 .15
-------------------------------------------------
Less distributions from:
Net investment income .................................................... (.79) (.51) --
Net realized gains ....................................................... (.23) (.07) --
-------------------------------------------------
Total distributions ....................................................... (1.02) (.58) --
-------------------------------------------------
Net asset value, end of year .............................................. $ 15.21 $ 17.70 $ 15.45
=================================================
Total return(+) ........................................................... (7.87%) 18.35% .98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ........................................... $ 2,576 $ 8,929 $ 625
Ratios to average net assets:
Expenses ................................................................. .71% .75% .75%(2)
Expenses excluding waiver and payments by affiliate ...................... .71% .78% .86%(2)
Net investment income .................................................... 5.40% 3.97% 3.44%(2)
Portfolio turnover rate ................................................... 25.97% 6.10% 6.80%
</TABLE>
(+)Total return is not annualized for periods less than one year.
(1)For the period ending April 30, 1997, per share amounts have been calculated
using the daily average shares outstanding.
(2)Annualized.
(5)For the period January 2, 1997 (effective date) to April 30, 1997.
See notes to financial statements.
13
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Statement of Investments, April 30, 1999
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 95.6%
EQUITY REIT - APARTMENTS 12.7%
Apartment Investment & Management Co. .......... 200,000 $ 8,012,500
Archstone Communities Trust .................... 487,000 11,048,813
Avalonbay Communities Inc. ..................... 135,000 4,725,000
Camden Property Trust .......................... 255,074 6,886,998
Charles E. Smith Residential Realty Inc. ....... 120,000 3,900,000
Equity Residential Properties Trust ............ 318,000 14,707,500
-----------
49,280,811
-----------
EQUITY REIT - DIVERSIFIED PROPERTY TYPE 14.3%
Crescent Real Estate Equities Co. .............. 183,650 4,109,169
Colonial Properties Trust ...................... 83,100 2,274,863
Duke Realty Investment Inc. .................... 340,000 7,990,000
Glenborough Realty Trust Inc. .................. 854,000 14,678,125
Liberty Property Trust ......................... 380,000 9,167,500
Spieker Properties Inc. ........................ 260,000 10,205,000
Vornado Realty Trust ........................... 180,200 7,027,800
-----------
55,452,457
-----------
EQUITY REIT - HEALTH CARE 1.5%
Omega Healthcare Investors Inc. ................ 225,000 5,934,375
-----------
EQUITY REIT - HOTELS 12.7%
FelCor Lodging Trust Inc. ...................... 425,000 10,173,438
Host Marriott Corp. ............................ 759,709 10,113,626
Innkeepers USA Trust ........................... 410,000 4,228,125
MeriStar Hospitality Corp. ..................... 743,700 17,105,100
Patriot American Hospitality Inc. .............. 831,830 4,211,139
Winston Hotels Inc. ............................ 370,000 3,607,500
-----------
49,438,928
-----------
EQUITY REIT - INDUSTRIAL 3.3%
Cabot Industrial Trust ......................... 245,000 4,991,870
ProLogis Trust ................................. 363,000 7,623,000
-----------
12,614,870
-----------
EQUITY REIT - OFFICE 20.3%
Alexandria Real Estate Equities Inc. ........... 351,900 9,919,181
Arden Realty Inc. .............................. 390,000 9,750,000
Brandywine Realty Trust ........................ 649,300 12,255,538
Equity Office Properties Trust ................. 551,000 15,186,938
Highwoods Properties Inc. ...................... 300,000 7,725,000
Mack-Cali Realty Corp. ......................... 275,000 8,507,813
SL Green Realty Corp. .......................... 194,500 3,865,688
TriNet Corporate Realty Trust .................. 415,000 11,386,563
-----------
78,596,721
-----------
</TABLE>
14
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Statement of Investments, April 30, 1999 (cont.)
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
Equity REIT - Residential Communities 3.1%
Manufactured Home Communities Inc. ................ 170,000 $ 4,303,125
Sun Communities Inc. .............................. 220,000 7,700,000
-----------
12,003,125
-----------
EQUITY REIT - RETAIL - COMMUNITY CENTERS 6.2%
Burnham Pacific Properties Inc. ................... 318,400 3,661,600
Developers Diversified Realty Corp. ............... 230,000 3,636,875
Kimco Realty Corp. ................................ 260,000 10,205,000
Regency Realty Corp. .............................. 307,439 6,648,368
-----------
24,151,843
-----------
EQUITY REIT - RETAIL - REGIONAL MALLS 5.3%
Simon Property Group Inc. ......................... 425,000 12,192,188
Mills Corp. ....................................... 108,900 2,130,356
The Macerich Co. .................................. 235,000 6,007,188
-----------
20,329,732
-----------
EQUITY REIT - STORAGE 4.0%
Public Storage Inc. ............................... 555,400 15,481,775
-----------
(a)DIVERSIFIED PROPERTY TYPE 5.8%
Crescent Operating Inc. ........................... 16,000 63,000
Security Capital Group Inc., B .................... 1,114,400 16,855,300
Security Capital US Realty ........................ 675,000 5,737,500
-----------
22,655,800
-----------
HOTELS 6.4%
(a)Candlewood Hotel Co. Inc. ......................... 385,000 1,371,563
(a)MeriStar Hotels & Resorts Inc. .................... 392,000 1,421,000
(a)Prime Hospitality Corp. ........................... 350,000 4,265,625
Starwood Lodging Trust ............................ 485,000 17,793,438
-----------
24,851,626
-----------
TOTAL LONG TERM INVESTMENTS (COST $399,823,187)... 370,792,063
-----------
</TABLE>
15
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
STATEMENT OF INVESTMENTS, APRIL 30, 1999 (cont.)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(b) REPURCHASE AGREEMENT 4.4%
Joint Repurchase Agreement, 4.862%, 5/03/99, (Maturity Value $17,136,125) (COST $17,129,185) .. $ 17,129,185 $ 17,129,185
Barclays Capital Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
CIBC Oppenheimer Corp.
Deutsche Bank Securities Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson North America LLC
Lehman Brothers Inc.
Paine Webber Inc.
Paribas Corp.
UBS Securities LLC
Collateralized by U.S. Treasury Bills & Notes
--------------
TOTAL INVESTMENTS (COST $416,952,372) 100.0% .................................................. 387,921,248
OTHER ASSETS, LESS LIABILITIES ................................................................ (63,728)
--------------
NET ASSETS 100.0% ............................................................................. $ 387,857,520
==============
</TABLE>
(a)Non-income producing
(b)Investment is through participation in a joint account with other funds
managed by the investment advisor. At April 30, 1999, all repurchase agreements
had been entered into on that date.
See notes to financial statements.
16
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
<TABLE>
<S> <C>
Assets:
Investments in securities:
Cost ................................................ $ 416,952,372
=============
Value ............................................... 387,921,248
Receivables:
Investment securities sold .......................... 1,041,553
Capital shares sold ................................. 1,416,985
Dividends and interest .............................. 494,422
-------------
Total assets .................................... 390,874,208
-------------
Liabilities:
Payables:
Capital shares redeemed ............................. 1,808,052
Affiliates .......................................... 660,428
Shareholders ........................................ 468,112
Other liabilities .................................... 80,096
-------------
Total liabilities ............................... 3,016,688
-------------
Net assets, at value ........................... $ 387,857,520
=============
Net assets consist of:
Undistributed net investment income .................. $ 4,737,048
Net unrealized depreciation .......................... (29,031,124)
Accumulated net realized gain ........................ 1,904,716
Capital shares ....................................... 410,246,880
-------------
Net assets, at value ............................ $ 387,857,520
=============
</TABLE>
See notes to financial statements.
17
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Statements (continued)
STATEMENT OF ASSETS AND LIABILITIES (CONT.)
APRIL 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CLASS A:
Net assets, at value .................................................................................. $278,301,203
============
Shares outstanding .................................................................................... 18,339,216
============
Net asset value per share(*) .......................................................................... $ 15.18
============
Maximum offering price per share (net asset value per share /94.25%) .................................. $ 16.11
============
CLASS B:
Net assets, at value .................................................................................. $ 1,119,462
============
Shares outstanding .................................................................................... 73,863
============
Net asset value and maximum offering price per share(*) ............................................... $ 15.16
============
CLASS C:
Net assets, at value .................................................................................. $105,861,019
============
Shares outstanding .................................................................................... 7,072,878
============
Net asset value per share(*) .......................................................................... $ 14.97
============
Maximum offering price per share (net asset value per share /99.00%) .................................. $ 15.12
============
ADVISOR CLASS:
Net assets, at value .................................................................................. $ 2,575,836
============
Shares outstanding .................................................................................... 169,325
============
Net asset value and maximum offering price per share .................................................. $ 15.21
============
</TABLE>
(*)Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
See notes to financial statements.
18
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Investment income:
Dividends ................................................. $ 24,030,549
Interest .................................................. 1,607,782
------------
Total investment income .............................. 25,638,331
============
Expenses:
Management fees (Note 3) .................................. 2,138,145
Distribution fees (Note 3)
Class A .................................................. 736,186
Class B .................................................. 1,377
Class C .................................................. 1,177,330
Transfer agent fees (Note 3) .............................. 526,370
Custodian fees ............................................ 4,660
Reports to shareholders ................................... 113,385
Registration and filing fees .............................. 151,501
Professional fees ......................................... 23,489
Trustees' fees and expenses ............................... 11,559
Other ..................................................... 5,258
------------
Total expenses ....................................... 4,889,260
------------
Net investment income ............................... 20,749,071
------------
Realized and unrealized gains (losses):
Net realized gain from investments ........................ 2,824,842
Net unrealized depreciation on investments ................ (70,145,582)
------------
Net realized and unrealized loss ........................... (67,320,740)
------------
Net decrease in net assets resulting from operations ....... $(46,571,669)
============
</TABLE>
See notes to financial statements.
19
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Financial Statements (continued)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED APRIL 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income ............................................................ $ 20,749,071 $ 12,086,241
Net realized gain from investments ............................................... 2,824,842 5,825,033
Net unrealized appreciation (depreciation) on investments ........................ (70,145,582) 25,890,441
------------- --------------
Net increase (decrease) in net assets resulting from operations .............. (46,571,669) 43,801,715
Distributions to shareholders from:
Net investment income:
Class A ......................................................................... (14,270,797) (7,706,827)
Class C ......................................................................... (4,896,531) (2,502,034)
Advisor Class ................................................................... (254,676) (143,706)
Net realized gains:
Class A ......................................................................... (4,328,382) (1,048,010)
Class C ......................................................................... (1,771,807) (414,593)
Advisor Class ................................................................... (73,219) (18,349)
--------------------------------------
Total distributions to shareholders ............................................... (25,595,412) (11,833,519)
Capital share transactions: (Note 2)
Class A .......................................................................... (2,604,117) 153,188,550
Class B .......................................................................... 1,039,080 --
Class C .......................................................................... (10,181,802) 69,878,349
Advisor Class .................................................................... (4,236,227) 8,287,762
--------------------------------------
Total capital share transactions .................................................. (15,983,066) 231,354,661
Net increase (decrease) in net assets ........................................ (88,150,147) 263,322,857
Net assets:
Beginning of year ................................................................. 476,007,667 212,684,810
--------------------------------------
End of year ....................................................................... $ 387,857,520 $ 476,007,667
======================================
Undistributed net investment income included in net assets:
End of year ....................................................................... $ 4,737,048 $ 3,385,018
======================================
</TABLE>
See notes to financial statements.
20
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Real Estate Securities Fund (the Fund) is a separate, non-diversified
series of Franklin Real Estate Securities Trust (the Trust), which is an
open-end investment company registered under the Investment Company of 1940. The
Fund seeks total return.
On May 19, 1999, the Board of Trustees for the Franklin Real Estate Securities
Trust approved a proposal to merge Templeton Global Real Estate Fund into the
Franklin Real Estate Securities Trust, subject to shareholder approval.
The following summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute substantially all of its taxable income.
c. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Distributions received by the Fund from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
21
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Notes to Financial Statements (continued)
2. SHARES OF BENEFICIAL INTEREST
The Fund offers four classes of shares: Class A, Class B, Class C and Advisor
Class. Effective January 1, 1999, Class I and Class II were renamed Class A and
Class C, respectively, and the Fund began offering a new class of shares, Class
B. Each class of shares differs by its initial sales load, distribution fees,
voting rights on matters affecting a single class and its exchange privilege.
At April 30, 1999, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold ............................................ 9,225,213 $ 143,312,658 13,583,071 $ 238,264,244
Shares issued in reinvestment of distributions ......... 1,176,516 16,682,975 443,395 7,781,587
Shares redeemed ........................................ (10,753,928) (162,599,750) (5,277,774) (92,857,281)
---------------------------------------------------------------------
Net increase (decrease) ................................ (352,199) $ (2,604,117) 8,748,692 $ 153,188,550
=====================================================================
CLASS B SHARES(*):
Shares sold ............................................ 73,863 $ 1,039,080
Shares issued in reinvestment of distributions ......... -- --
Shares redeemed ........................................ -- --
-------------------------------
Net increase ........................................... 73,863 $ 1,039,080
===============================
CLASS C SHARES:
Shares sold ............................................ 2,404,982 $ 36,953,551 4,882,257 $ 84,464,637
Shares issued in reinvestment of distributions ......... 414,295 5,808,896 147,303 2,554,233
Shares redeemed ........................................ (3,620,490) (52,944,249) (990,554) (17,140,521)
---------------------------------------------------------------------
Net increase (decrease) ................................ (801,213) $ (10,181,802) 4,039,006 $ 69,878,349
=====================================================================
ADVISOR CLASS SHARES:
Shares sold ............................................ 444,802 $ 7,030,867 517,824 $ 9,252,101
Shares issued in reinvestment of distributions ......... 21,805 309,638 9,090 159,714
Shares redeemed ........................................ (801,821) (11,576,732) (62,790) (1,124,053)
---------------------------------------------------------------------
Net increase (decrease) ................................ (335,214) $ (4,236,227) 464,124 $ 8,287,762
=====================================================================
</TABLE>
(*)Effective date of Class B shares was January 1, 1999.
22
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Notes to Financial Statements (continued)
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Fund are also officers and/or directors of
Franklin Advisers, Inc. (Advisers), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors) and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- --------------------------------------------------------------------------------
<S> <C>
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million
</TABLE>
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
The Fund reimburses Distributors, up to .25%, 1.00% and 1.00% per year of the
average daily net assets of Class A, Class B and Class C, respectively, for
costs incurred in marketing the Fund's shares.
Distributors paid net commissions on sales of Fund shares, and received
contingent deferred sales charges for the period of $518,347 and $121,488,
respectively.
The Fund paid transfer agent fees of $526,370, of which $408,456 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1999, the net unrealized depreciation based on the cost of
investments for income tax purposes of $416,952,372 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation .............................. $ 15,432,305
Unrealized depreciation .............................. (44,463,429)
------------
Net unrealized depreciation .......................... $(29,031,124)
============
</TABLE>
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended April 30, 1999 aggregated $108,035,407 and $101,569,322,
respectively.
23
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Independent Auditors' Report
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF
FRANKLIN REAL ESTATE SECURITIES TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Franklin Real Estate Securities
Trust (the "Trust") at April 30, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at April
30, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
June 4, 1999
24
- -PAGE-
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates $1,959,179 as a capital gain dividend for the fiscal year ended April
30, 1999.
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
16.87% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended April 30, 1999.
25
- -PAGE-
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- -PAGE-
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- -PAGE-
This page intentionally left blank.
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN
YOUR PROXY TODAY
Please detach at perforation before mailing.
PROXY PROXY
SPECIAL SHAREHOLDERS' MEETING OF
TEMPLETON GLOBAL REAL ESTATE FUND
SEPTEMBER 16, 1999
The undersigned hereby revokes all previous proxies for his shares and
appoints [_______________], and each of them, proxies of the undersigned with
full power of substitution to vote all shares of Templeton Global Real Estate
Fund (the "Templeton Fund") that the undersigned is entitled to vote at the
Templeton Fund's Special Meeting to be held at 500 East Broward Boulevard,
Fort Lauderdale, FL 33394-3091 at 10:00 a.m., Eastern time on September 16,
1999, including any adjournment thereof, upon such business as may properly
be brought before the Meeting.
IMPORTANT: PLEASE SEND IN YOUR PROXY TODAY.
YOU ARE URGED TO DATE AND SIGN THE ATTACHED PROXY AND RETURN IT PROMPTLY.
THIS WILL SAVE THE EXPENSE OF FOLLOW-UP LETTERS TO SHAREHOLDERS WHO HAVE NOT
RESPONDED.
Note: Please sign exactly as
your name appears on the
proxy. If signing for
estates, trusts or
corporations, title or
capacity should be stated.
If shares are held jointly,
each holder must sign.
_______________________________
Signature
_______________________________
Signature
_______________________________
Date
(Please see reverse side)
EVERY SHAREHOLDER'S VOTE IS IMPORTANT
PLEASE SIGN, DATE AND RETURN YOUR
PROXY TODAY
Please detach at perforation before mailing.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES OF TEMPLETON
FUND. IT WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS
PROXY SHALL BE VOTED IN FAVOR OF PROPOSAL 1, REGARDING THE REORGANIZATION OF
THE TEMPLETON FUND PURSUANT TO THE AGREEMENT AND PLAN OF REORGANIZATION WITH
FRANKLIN REAL ESTATE SECURITIES TRUST, ON BEHALF OF ITS SERIES, FRANKLIN REAL
ESTATE SECURITIES FUND. IF ANY OTHER MATTERS PROPERLY COME BEFORE THE
MEETING ABOUT WHICH THE PROXYHOLDERS WERE NOT AWARE PRIOR TO THE TIME OF THE
SOLICITATION, AUTHORIZATION IS GIVEN THE PROXYHOLDERS TO VOTE IN ACCORDANCE
WITH THE VIEWS OF MANAGEMENT ON SUCH MATTERS. MANAGEMENT IS NOT AWARE OF ANY
SUCH MATTERS.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR PROPOSAL 1.
FOR AGAINST ABSTAIN
1. To approve an Agreement and
Plan of Reorganization between |_| |_| |_|
Templeton Global Real Estate
Fund ("Templeton Fund") and
Franklin Real Estate
Securities Trust, on behalf of
its series, Franklin Real
Estate Securities Fund
("Franklin Fund"), that
provides for the acquisition
of substantially all of the
assets of Templeton Fund in
exchange for Class A and Class
C shares of Franklin Fund, the
distribution of such shares to
the shareholders of Templeton
Fund, and the dissolution of
Templeton Fund (the
"Reorganization").
GRANT WITHHOLD
2. To grant the proxyholders the
authority to vote upon any |_| |_|
other business which may
legally come before the
Special Meeting or any
adjournment thereof.
IMPORTANT: PLEASE SIGN AND MAIL IN YOUR PROXY. . . TODAY
PLEASE SIGN AND PROMPTLY RETURN IN THE ACCOMPANYING ENVELOPE. NO POSTAGE
REQUIRED IF MAILED IN THE U.S.
Part B
STATEMENT OF ADDITIONAL INFORMATION
FOR
FRANKLIN REAL ESTATE SECURITIES FUND
DATED JULY [__], 1999
Acquisition of the Assets of
TEMPLETON GLOBAL REAL ESTATE FUND
By and in exchange for shares of the
FRANKLIN REAL ESTATE SECURITIES FUND,
a series of Franklin Real Estate Securities Trust
This Statement of Additional Information (SAI) relates specifically to
the proposed delivery of substantially all of the assets of Templeton Global
Real Estate Fund for Class A shares and Class C shares of Franklin Real
Estate Securities Fund.
This SAI consists of this Cover Page and the following documents. Each
of these documents is attached to and is legally considered to be a part of
this SAI:
1. Statement of Additional Information of Franklin Real Estate
Securities Fund dated September 1, 1998, as supplemented
April 1, 1999.
2. Annual Report of Templeton Global Real Estate Fund for the
fiscal year ended August 31, 1998.
3. SemiAnnual Report of Templeton Global Real Estate Fund for
the six months ended February 28, 1999.
4. Projected after Transaction financials.
This SAI is not a Prospectus; you should read this SAI in conjunction
with the Prospectus/Proxy Statement dated July [__], 1999, relating to the
above-referenced transaction. You can request a copy of the Prospectus/Proxy
Statement by calling 1-800/DIAL BEN or by writing to Franklin Real Estate
Securities Fund, 777 Mariners Island Boulevard, P.O. Box 7777, San Mateo, CA
94403-7777.
o 192 *SA1
- --------------------------------------------------------------------------------
SHARE CLASS REDESIGNATION
EFFECTIVE JANUARY 1, 1999
Class A - Formerly Class I
Class B - New Share Class
Class C - Formerly Class II
- --------------------------------------------------------------------------------
SUPPLEMENT DATED APRIL 1, 1999
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN REAL ESTATE SECURITIES FUND
DATED SEPTEMBER 1, 1998
The Statement of Additional Information is amended as follows:
I. As of January 1, 1999, the fund offers four classes of shares: Class A,
Class B, Class C and Advisor Class. Before January 1, 1999, Class A shares
were designated Class I and Class C shares were designated Class II. All
references in the Statement of Additional Information to Class I shares are
replaced with Class A, and all references to Class II shares are replaced
with Class C.
II. The first sentence of the second paragraph on the cover is revised to read:
This SAI describes the fund's Class A, B and C shares.
III. The following is added to the "Officers and Trustees" section:
As of November 25, 1998, the officers and Board members, as a group, owned
of record and beneficially the following shares of the fund: approximately
163 Class A shares, or less than 1% of the total outstanding Class A shares
of the fund.
IV. The first sentence in the section "Additional Information on Exchanging
Shares," found under "How Do I Buy, Sell and Exchange Shares?", is replaced
with the following:
If you request the exchange of the total value of your account, declared
but unpaid income dividends and capital gain distributions will be
reinvested in the fund and exchanged into the new fund at Net Asset Value
when paid.
V. The following is added to the section "Additional Information on Selling
Shares," found under "How Do I Buy, Sell and Exchange Shares?":
The contingent deferred sales charge will generally be waived for
redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the Securities Dealer of record waived
its commission in connection with the purchase.
VI. In the section "The Rule 12b-1 Plans," found under "The Fund's
Underwriter,"
(a) the first sentence is replaced with the following:
Each class has a separate distribution or "Rule 12b-1" plan that was
adopted pursuant to Rule 12b-1 of the 1940 Act.
(b) the following paragraphs are added after the section "The Class I
Plan":
THE CLASS B PLAN. Under the Class B plan, the fund pays Distributors up to
0.75% per year of the class's average daily net assets, payable quarterly,
to pay Distributors or others for providing distribution and related
services and bearing certain expenses. All distribution expenses over this
amount will be borne by those who have incurred them. The fund may also pay
a servicing fee of up to 0.25% per year of the class's average daily net
assets, payable quarterly. This fee may be used to pay Securities Dealers
or others for, among other things, helping to establish and maintain
customer accounts and records, helping with requests to buy and sell
shares, receiving and answering correspondence, monitoring dividend
payments from the fund on behalf of customers, and similar servicing and
account maintenance activities.
The expenses relating to the Class B plan are also used to pay Distributors
for advancing the commission costs to Securities Dealers with respect to
the initial sale of Class B shares. Further, the expenses relating to the
Class B plan may be used by Distributors to pay third party financing
entities that have provided financing to Distributors in connection with
advancing commission costs to Securities Dealers.
(c) and the section "The Class I and Class II Plans" is renamed "The Class
A, B and C Plans."
VII. Under "Miscellaneous Information", the following is added:
The Information Services & Technology division of Resources established a
Year 2000 Project Team in 1996. This team has already begun making
necessary software changes to help the computer systems that service the
fund and its shareholders to be Year 2000 compliant. After completing these
modifications, comprehensive tests are conducted in one of Resources' U.S.
test labs to verify their effectiveness. Resources continues to seek
reasonable assurances from all major hardware, software or data-services
suppliers that they will be Year 2000 compliant on a timely basis.
Resources is also beginning to develop a contingency plan, including
identification of those mission critical systems for which it is practical
to develop a contingency plan. However, in an operation as complex and
geographically distributed as Resources' business, the alternatives to use
of normal systems, especially mission critical systems, or supplies of
electricity or long distance voice and data lines are limited.
As of November 25, 1998, the principal shareholders of the fund, beneficial
or of record, were as follows:
SHARE
NAME AND ADDRESS AMOUNT PERCENTAGE
- -------------------------------------------------------------------------------
ADVISOR CLASS
FT Fund Allocator 17,510.546 5.25%
Conservative Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway 3rd Flr.
San Mateo, CA 94404-2470
FT Fund Allocator 38,456.481 11.53%
Moderate Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway 3rd Flr.
San Mateo, CA 94404-2470
FT Fund Allocator 54,949.185 16.48%
Growth Target Fund
C/O Fund Accounting Dept.
Kimberley Monasterio
1810 Gateway 3rd Flr.
San Mateo, CA 94404-2470
VIII.In the "Useful Terms and Definitions" section, the definitions of "Class
I, Class II and Advisor Class" and "Offering Price" are replaced with the
following:
CLASS A, CLASS B, CLASS C AND ADVISOR CLASS - The fund offers four classes
of shares, designated "Class A," "Class B," "Class C" and "Advisor Class."
The four classes have proportionate interests in the fund's portfolio. They
differ, however, primarily in their sales charge and expense structures.
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 5.75% for Class A and 1% for Class C. There is no
front-end sales charge for Class B. We calculate the offering price to two
decimal places using standard rounding criteria.
Please keep this supplement for future reference.
FRANKLIN REAL ESTATE SECURITIES FUND
FRANKLIN REAL ESTATE SECURITIES TRUST
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SEPTEMBER 1, 1998
SAN MATEO, CA 94403-7777
1-800/DIAL BEN(R)
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
How Does the Fund Invest Its Assets? ................................ 2
What Are the Risk s of Investing
in the Fund? ....................................................... 9
Investment Restrictions ............................................. 13
Officers and Trustees ............................................... 15
Investment Management
and Other Services ................................................. 18
How Does the Fund Buy
Securities for Its Portfolio? ...................................... 20
How Do I Buy, Sell and Exchange Shares? ............................. 21
How Are Fund Shares Valued? ......................................... 24
Additional Information on
Distributions and Taxes ............................................ 25
The Fund's Underwriter .............................................. 29
How Does the Fund
Measure Performance? ............................................... 30
Miscellaneous Information ........................................... 33
Financial Statements ................................................ 34
Useful Terms and Definitions ........................................ 34
Appendix
Description of Ratings ............................................. 35
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When reading this SAI, you will see certain terms beginning with capital
letters. This means the term is explained under "Useful Terms and
Definitions."
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The fund is a non-diversified series of Franklin Real Estate Securities Trust
(the "Trust"), an open-end management investment company. The Prospectus,
dated September 1, 1998, which we may amend 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.
This SAI describes the fund's Class I and Class II shares. The fund currently
offers another share class with a different sales charge and expense
structure, which affects performance. To receive more information about the
fund's other share class, 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.
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MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
O ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
O ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
O ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
- ------------------------------------------------------------------------------
HOW DOES THE FUND INVEST ITS ASSETS?
WHAT IS THE FUND'S GOAL?
The investment goal of the fund is to maximize total return. This goal is
fundamental, which means that it may not be changed without shareholder
approval.
The following gives more detailed information about the fund's investment
policies and the types of securities that it may buy. Please read this
information together with the section "How Does the Fund Invest Its Assets?"
in the Prospectus.
MORE INFORMATION ABOUT THE
KINDS OF SECURITIES THE FUND BUYS
EQUITY SECURITIES. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner
of an equity security may participate in a company's success through the
receipt of dividends which are distributions of earnings by the company to
its owners. Equity security owners may also participate in a company's
success or lack of success through increases or decreases in the value of the
company's shares as traded in the public trading market for such shares.
Equity securities generally take the form of common stock or preferred stock.
Preferred stockholders typically receive greater dividends but may receive
less appreciation than common stockholders and may have greater voting rights
as well. Equity securities may also include warrants or rights. Warrants or
rights give the holder the right to purchase a common stock at a given time
for a specified price.
REITS. 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.
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.
DEBT SECURITIES. Debt securities represent an obligation of the issuer to
repay a loan of money to it, and generally, provide for the payment of
interest. These include bonds, notes and debentures; commercial paper;
convertible securities; and bankers' acceptances. A company typically meets
its payment obligations associated with its outstanding debt securities
before it declares and pays any dividend to holders of its equity securities.
Bonds, notes, debentures and commercial paper differ in the length of the
issuer's payment schedule, with bonds carrying the longest repayment schedule
and commercial paper the shortest.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the
financial soundness of the issuer. Generally, a lower rating indicates higher
risk. The fund may buy debt securities which are rated B or better by Moody's
or S&P or unrated debt which it determines to be of comparable quality. At
present, the fund does not intend to invest more than 5% of its total assets
in non-investment grade securities (rated lower than BBB by S&P or Baa by
Moody's). Please see the Appendix for a description of these ratings.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods
of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in the fund's Net Asset Value.
DEPOSITARY RECEIPTS. Many securities of foreign issuers are represented by
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"),
and Global Depositary Receipts ("GDRs") (collectively "Depositary Receipts").
ADRs evidence ownership of, and represent the right to receive, securities of
foreign issuers deposited in a domestic bank or trust company or a foreign
correspondent bank. EDRs and GDRs are typically issued by foreign banks or
trust companies, although they also may be issued by U.S. banks or trust
companies, and evidence ownership of underlying securities issued by either a
foreign or a U.S. corporation. Generally, Depositary Receipts in registered
form are designed for use in the U.S. securities market and Depositary
Receipts in bearer form are designed for use in securities markets outside
the U.S.
Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the U.S. on
exchanges or over-the-counter. While ADRs do not eliminate all the risk
associated with foreign investments, by investing in ADRs rather than
directly in the stock of foreign issuers, the fund will avoid currency risks
during the settlement period for either purchases or sales. In general, there
is a large, liquid market in the U.S. for ADRs quoted on a national
securities exchange or on NASDAQ. The information available for ADRs is
subject to the accounting, auditing and financial reporting standards of the
U.S. market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers may be
subject. EDRs and GDRs may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Depositary Receipts may be issued under sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of Depositary Receipts. In unsponsored programs, the
issuer may not be directly involved in the creation of the program. Although
regulatory requirements with respect to sponsored and unsponsored programs
are generally similar, in some cases it may be easier to obtain financial
information from an issuer that has participated in the creation of a
sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between this information and the market value of the
Depositary Receipts.
CONVERTIBLE SECURITIES. The fund may invest in convertible securities. A
convertible security is generally a preferred stock or debt security that may
be converted within a specified period of time into a certain amount of
common stock or other equity securities of the same or a different issuer.
Convertible securities include non-convertible debt securities with warrants
or stock or stock index options attached ("synthetic convertible
securities"). A convertible security entitles the holder to receive interest
paid or accrued on debt securities or dividends paid or accrued on preferred
stock until the security matures or is redeemed, converted or exchanged.
Convertible securities generally offer income yields that are higher than the
dividend yield, if any, of the underlying common stock, but lower than the
yield of similar non-convertible debt securities. 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.
When a convertible security's conversion price is significantly above the
price of the underlying stock, the convertible security takes on the risk
characteristics of a debt security. At such times, the price of a convertible
security will vary with changes in the credit quality of the issuer and
inversely with changes in interest rates. When a convertible security's
conversion price is at or below the price of the underlying stock, a
convertible security will behave like a common stock. At such times, the
price of the convertible security will be influenced by the fluctuations in
the price of the underlying security and will vary based on the activities of
the issuing company and changes in general market and economic conditions.
Because of the hybrid nature of convertible securities, investors should
recognize that convertible securities are likely to perform quite differently
than broadly-based measures of the stock and bond markets.
The fund's investment in convertible securities, particularly securities
convertible into securities of an issuer other than the issuer of the
convertible security, may be illiquid. The prices of these securities may be
volatile and the fund may not be able to sell particular securities in a
timely fashion or at fair prices, which could result in losses to the fund.
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. Although the fund
intends to acquire liquid securities, there can be no assurances that this
will be achieved.
The holder of a convertible security generally may choose at any time to
exchange the convertible security for a specified number of shares of the
underlying stock. The fund may at times, however, invest in securities that
are convertible other than at the fund's option. Such securities may, for
example, have a mandatory conversion feature whereby the securities convert
automatically into common stock or other equity securities at a specified
date and a specified conversion ratio, or they may be convertible at the
option of the issuer. Because the conversion is not at the fund's option, the
fund may be required to convert the security into the underlying common stock
or other equity security at a time when the value of the underlying common
stock or other security has declined substantially. When a convertible
security is "converted," i.e. exchanged for shares of the underlying
security, the issuer often issues new stock to the holder of the convertible
security, but, in certain cases, the holder may receive cash instead of
common stock.
Convertible securities are usually issued either by an operating company or
by an investment bank. If a convertible security is issued by an investment
bank, the security is an obligation of and is convertible through the issuing
investment bank. Convertible securities rank senior to common stock in the
company's capital structure, but are generally subordinate to other types of
fixed-income securities issued by the company. Consequently, convertible
securities are subordinated to all debt obligations in the event of
insolvency and the credit rating of a company's convertible issue is
generally lower than the rating of the company's conventional debt issues
since the convertible is normally a "junior" security. 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. An issuer's
failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. The market for
convertible securities includes a larger proportion of small-to-medium size
companies than the broad stock market (as measured by such indices as the
Standard & Poor's 500 Composite Stock Index). Companies which issue
convertible securities are often lower in credit quality.
The fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stocks ("PERCS").
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; 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.
SYNTHETIC CONVERTIBLE SECURITIES. The fund may invest a portion of its assets
in "synthetic" convertible securities. A synthetic convertible security is
created by combining separate securities which together possess the two
principal characteristics of a convertible security, i.e., fixed income and
the right to acquire the underlying equity security. This combination is
achieved, for example, by investing in non-convertible debt securities and in
warrants or stock or stock index call options which grant the holder the
right to purchase a specified quantity of securities within a specified
period of time at a specified price or to receive cash in the case of stock
index options. Although Advisers typically expects to create synthetic
convertible securities whose components represent one issuer, the fund may
combine components representing distinct issuers, or combine a fixed income
security with a call option on a stock index when Advisers determines that
such a combination would better promote the fund's investment objectives. The
component parts of a synthetic convertible security may be purchased
simultaneously or separately.
Synthetic convertible securities differ from other convertible securities in
several respects. The value of a synthetic convertible security is the sum of
the values of its fixed-income component and its convertible component. Thus,
the market price of a synthetic convertible security may react differently
when compared to other convertible securities to changes in the financial
condition of the issuer or market or general economic conditions. For
example, the holder of a synthetic convertible security faces the risk that
the price of the stock, or the level of the market index underlying the
convertible component may decline even though the price of a convertible
security has not changed.
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 - 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). 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.
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. During the period between purchase and settlement, no payment is made
by the buyer to the issuer and no interest accrues to the buyer. 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.
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.
REPURCHASE AGREEMENTS. Repurchase agreements are contracts under which the
buyer of a security simultaneously commits to resell the security to the
seller at an agreed upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. Advisers will
monitor the value of such securities daily to determine that the value equals
or exceeds the repurchase price. Repurchase agreements may involve risks in
the event of default or insolvency of the seller, including possible delays
or restrictions upon the fund's ability to dispose of the underlying
securities. The fund will enter into repurchase agreements only with parties
who meet creditworthiness standards approved by the fund's Board, i.e., banks
or broker-dealers which have been determined by Advisers to present no
serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
LOANS OF PORTFOLIO SECURITIES. The fund may lend to banks and broker-dealers
portfolio securities with an aggregate market value of up to 10% of its total
assets. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily marked-to-market basis) to
the current market value of the securities loaned. The fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. The fund may terminate the loans at any
time and obtain the return of the securities loaned within five business
days. The fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to have voting rights with respect to the
securities. However, as with other extensions of credit, there are risks of
delay in recovery or even loss of rights in collateral should the borrower
fail.
BORROWING. 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.
OPTIONS, FUTURES AND OPTIONS ON 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."
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.
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.
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 RISKS OF INVESTING IN THE FUND?
FOREIGN SECURITIES RISK. 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. The
settlement practices of some of the countries in which the fund invests may
be cumbersome and result in delays that may affect portfolio liquidity. The
fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to
foreign investments in foreign courts than with respect to domestic issuers
in U.S. courts. 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.
Some of the countries in which the fund may invest are considered developing
or emerging markets. Investments in these markets are subject to all of the
risks of foreign investing generally, and have additional and heightened
risks due to a lack of legal, business and social frameworks to support
securities markets.
Emerging markets involve additional significant risks, including political
and social uncertainty (for example, regional conflicts and risk of war),
currency exchange rate volatility, pervasiveness of corruption and crime,
delays in settling portfolio transactions and risk of loss arising out of the
system of share registration and custody. All of these factors make
developing market equity securities' prices generally more volatile than
securities issued in developed markets.
REAL ESTATE RISK. 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.
CONVERTIBLE SECURITIES RISK. A convertible security has risk characteristics
of both equity and debt securities. Its value may rise and fall with the
market value of the underlying stock or, like a debt security, vary with
changes in interest rates and the credit quality of the issuer. A convertible
security tends to perform more like a stock when the underlying stock price
is high (because it is assumed it will be converted) and more like a debt
security when the underlying stock price is low (because it is assumed it
will not be converted). Because its value can be influenced by many different
factors, a convertible security is not as sensitive to interest rate changes
as a similar non-convertible debt security, and generally has less potential
for gain or loss than the underlying stock.
CREDIT AND ISSUER RISK. The fund's investments in debt securities involve
credit risk. This is the risk that the issuer of a debt security will be
unable to make principal and interest payments in a timely manner and the
debt security will go into default.
HIGH YIELD SECURITIES RISK. 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.
RISKS OF OPTIONS, FUTURES AND OPTIONS ON 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.
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.
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.
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.
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. See "Additional
Information on Distributions and Taxes" in this SAI for more information.
DERIVATIVE SECURITIES RISK. Derivative investments are those whose values are
dependent upon the performance of one or more other securities or investments
or indices; in contrast to common stock, for example, whose value is
dependent upon the operations of the issuer. Option transactions, foreign
currency exchange transactions and futures contracts are considered
derivative investments. To the extent the fund enters into these
transactions, their success will depend upon Advisers' ability to predict
pertinent market movements.
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 OFFICES PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS WITH THE TRUST DURING THE PAST FIVE YEARS
Frank H. Abbott, III (77)
1045 Sansome Street
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); director
or trustee, as the case may be, of 27 of the investment companies in the
Franklin Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold
Mines Consolidated (gold mining) and Vacu-Dry Co. (food processing).
Harris J. Ashton (66)
191 Clapboard Ridge Road
Greenwich, CT 06830
Trustee
Director, RBC Holdings, Inc. (a bank holding company) and Bar-S Foods (a meat
packing company); director or trustee, as the case may be, of 49 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers).
*Harmon E. Burns (53)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Trustee
Executive Vice President and Director, Franklin Resources, Inc., Franklin
Templeton Distributors, Inc. and Franklin Templeton Services, Inc.; Executive
Vice President, Franklin Advisers, Inc.; Director, Franklin/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
53 of the investment companies in the Franklin Templeton Group of Funds.
Robert F. Carlson (70)
2120 Lambeth Way
Carmichael, CA 95608
Trustee
Member and past President, Board of Administration, California Public
Employees Retirement Systems (CALPERS); former member and past Chairman of
the Board, Sutter Community Hospitals, Sacramento, CA; former member,
Corporate Board, Blue Shield of California; former Chief Counsel, California
Department of Transportation; and director or trustee, as the case may be, of
nine of the investment companies in the Franklin Templeton Group of Funds.
S. Joseph Fortunato (66)
Park Avenue at Morris County
P.O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; director or trustee,
as the case may be, of 51 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
*Charles B. Johnson (65)
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the
Board and
Trustee
President, Chief Executive Officer and Director, Franklin Resources, Inc.;
Chairman of the Board and Director, Franklin Advisers, Inc., Franklin
Advisory Services, Inc., Franklin Investment Advisory Services, Inc. and
Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton Investor
Services, Inc. and Franklin Templeton Services, Inc.; officer and/or director
or trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 50 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, General Host Corporation
(nursery and craft centers).
*Rupert H. Johnson, Jr. (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and
Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers,
Inc.; 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 of the other subsidiaries of Franklin Resources, Inc. and of
53 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (69)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Miller & LaHaye, which is the General Partner of Peregrine
Ventures II (venture capital firm); Chairman of the Board and Director,
Quarterdeck Corporation (software firm); Director, Digital Transmission
Systems, Inc. (wireless communications); director or trustee, as the case may
be, of 27 of the investment companies in the Franklin Templeton Group of
Funds; and formerly, Director, Fischer Imaging Corporation (medical imaging
systems) and General Partner, Peregrine Associates, which was the General
Partner of Peregrine Ventures (venture capital firm).
Gordon S. Macklin (70)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Director, Fund American Enterprises Holdings, Inc., MCI Communications
Corporation, MedImmune, Inc. (biotechnology), Spacehab, Inc. (aerospace
services) and Real 3D (software); director or trustee, as the case may be, of
49 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chairman, White River Corporation (financial services) and
Hambrecht and Quist Group (investment banking), and President, National
Association of Securities Dealers, Inc.
Martin L. Flanagan (38)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Chief
Financial Officer
Senior Vice President and Chief Financial Officer, Franklin Resources, Inc.;
Executive Vice President and Director, Templeton Worldwide, Inc.; Executive
Vice President, Chief Operating Officer and Director, Templeton Investment
Counsel, Inc.; Executive Vice President and Chief Financial Officer, Franklin
Advisers, Inc.; Chief Financial Officer, Franklin Advisory Services, Inc. and
Franklin Investment Advisory Services, Inc.; President and Director, Franklin
Templeton Services, Inc.; Senior Vice President and Chief Financial Officer,
Franklin/Templeton Investor Services, Inc.; officer and/or director of some
of the other subsidiaries of Franklin Resources, Inc.; and officer and/or
director or trustee, as the case may be, of 53 of the investment companies in
the Franklin Templeton Group of Funds.
Deborah R. Gatzek (49)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
and Secretary
Senior Vice President and General Counsel, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Services, Inc. and Franklin Templeton
Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Vice
President, Franklin Advisory Services, Inc.; Vice President, Chief Legal
Officer and Chief Operating Officer, Franklin Investment Advisory Services,
Inc.; and officer of 53 of the investment companies in the Franklin Templeton
Group of Funds.
Charles E. Johnson (42)
500 East Broward Blvd.
Fort Lauderdale, FL 33394-3091
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc.; 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 other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or
trustee, as the case may be, of 34 of the investment companies in the
Franklin Templeton Group of Funds.
Diomedes Loo-Tam (59)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and
Principal
Accounting
Officer
Senior Vice President, Franklin Templeton Services, Inc.; and officer of 32
of the investment companies in the Franklin Templeton Group of Funds.
Edward V. McVey (61)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 28 of the investment companies in the
Franklin Templeton Group of Funds.
The table above shows the officers and Board members who are affiliated with
Distributors and Advisers. As of June 1, 1998, nonaffiliated members of the
Board are paid $600 per quarter plus $200 per meeting attended. Before June
1, 1998, the nonaffiliated Board members were not paid fees by the Trust. 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 fees
payable to nonaffiliated Board members by the Trust are subject to reductions
resulting from fee caps limiting the amount of fees payable to Board members
who serve on other boards within the Franklin Templeton Group of Funds. The
following table provides the total fees paid to 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 WHICH
NAME GROUP OF FUNDS*** EACH SERVES****
- ---------------------------------------------------------------
Frank H. Abbott, III $165,937 27
Harris J. Ashton 344,642 49
Robert F. Carlson* 17,680 9
S. Joseph Fortunato 361,562 51
David W. Garbellano** 91,317 N/A
Frank W. T. LaHaye 141,433 27
Gordon S. Macklin 337,292 49
*Elected to the Board, January 15, 1998.
**Deceased, September 27, 1997.
***For the calendar year ended December 31, 1997.
****We base the number of boards on the number of registered investment
companies in the Franklin Templeton Group of Funds. This number does not
include the total number of series or funds within each investment company
for which the Board members are responsible. The Franklin Templeton Group of
Funds currently includes 54 registered investment companies, with
approximately 170 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 June 2, 1998, the officers and Board members, as a group, owned of
record and beneficially the following shares of the fund: approximately 163
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, 1998, 1997 and 1996, management fees,
before any advance waiver, totaled $1,896,157, $619,802 and $169,354,
respectively. Under an agreement by Advisers to limit its fees, the fund paid
management fees totaling $1,774,540, $510,202 and $14,092, respectively.
MANAGEMENT AGREEMENT. The management agreement is in effect until April 30,
1999. 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 on 60 days' written notice to
Advisers, or by Advisers on 60 days' written notice to the fund, 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. During the fiscal years ended April 30, 1998 and 1997,
administration fees totaling $525,070 and $123,986, respectively, were paid
to FT Services. 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.
AUDITOR. Coopers & Lybrand L.L.P., 333 Market Street, San Francisco,
California 94105, is the fund's independent auditor. During the fiscal year
ended April 30, 1998, the auditor's 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, 1998.
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 may improve execution and
reduce transaction costs to the fund.
During the fiscal years ended April 30, 1998, 1997 and 1996, the fund paid
brokerage commissions totaling $385,342, $287,728 and $46,628, respectively.
As of April 30, 1998, 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.
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.
Distributors routinely sponsors due diligence meetings for registered
representatives during which they receive updates on various Franklin
Templeton Funds and are afforded the opportunity to speak with portfolio
managers. Invitation to these meetings is not conditioned on selling a
specific number of shares. Those who have shown an interest in the Franklin
Templeton Funds, however, are more likely to be considered. To the extent
permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by
Distributors.
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 the amount of your total
purchases, less redemptions, equals 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 the amount of your total purchases, less
redemptions, exceeds 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
amount of your total purchases, less redemptions, is 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 goal 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 seventh day following the sale. The funds you are
seeking to exchange into may delay issuing shares pursuant to an exchange
until that seventh day. The sale of fund shares to complete an exchange will
be effected at Net Asset Value at the close of business on the day the
request for exchange is received in proper form. Please see "May I Exchange
Shares for Shares of Another Fund?" in the Prospectus.
ADDITIONAL INFORMATION ON SELLING SHARES
SYSTEMATIC WITHDRAWAL PLAN. There are no service charges for establishing or
maintaining a systematic withdrawal plan. Payments under the plan will be
made from the redemption of an equivalent amount of shares in your account,
generally on the 25th day of the month in which a payment is scheduled. If
the 25th falls on a weekend or holiday, we will process the redemption on the
next business day.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust
the shares in your account if payments exceed distributions received from the
fund. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be
closed and the remaining balance in your account will be sent to you. Because
the amount withdrawn under the plan may be more than your actual yield or
income, part of the payment may be a return of your investment.
The fund may discontinue a systematic withdrawal plan by notifying you in
writing and will automatically discontinue a systematic withdrawal plan if
all shares in your account are withdrawn or if the fund receives notification
of the shareholder's death or incapacity.
THROUGH YOUR SECURITIES DEALER. If you sell shares through your Securities
Dealer, it is your dealer's responsibility to transmit the order to the fund
in a timely fashion. Any loss to you resulting from your dealer's failure to
do so must be settled between you and your Securities Dealer.
REDEMPTIONS IN KIND. The fund has committed itself to pay in cash (by check)
all requests for redemption by any shareholder of record, limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the
value of the fund's net assets at the beginning of the 90-day period. This
commitment is irrevocable without the prior approval of the SEC. In the case
of redemption requests in excess of these amounts, the Board reserves the
right to make payments in whole or in part in securities or other assets of
the fund, in case of an emergency, or if the payment of such a redemption in
cash would be detrimental to the existing shareholders of the fund. In these
circumstances, the securities distributed would be valued at the price used
to compute the fund's net assets and you may incur brokerage fees in
converting the securities to cash. The fund does not intend to redeem
illiquid securities in kind. If this happens, however, you may not be able to
recover your investment in a timely manner.
GENERAL INFORMATION
If dividend checks are returned to the fund marked "unable to forward" by the
postal service, we will consider this a request by you to change your
dividend option to reinvest all distributions. The proceeds will be
reinvested in additional shares at Net Asset Value until we receive new
instructions.
Distribution or redemption checks sent to you do not earn interest or any
other income during the time the checks remain uncashed. Neither the fund nor
its affiliates will be liable for any loss caused by your failure to cash
such checks. The fund is not responsible for tracking down uncashed checks,
unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take
certain steps to try to find you free of charge. If these attempts are
unsuccessful, however, we may deduct the costs of any additional efforts to
find you from your account. These costs may include a percentage of the
account when a search company charges a percentage fee in exchange for its
location services.
All checks, drafts, wires and other payment mediums used to buy or sell
shares of the fund must be denominated in U.S. dollars. We may, in our sole
discretion, either (a) reject any order to buy or sell shares denominated in
any other currency or (b) honor the transaction or make adjustments to your
account for the transaction as of a date and with a foreign currency exchange
factor determined by the drawee bank.
SPECIAL SERVICES. Investor Services may pay certain financial institutions
that maintain omnibus accounts with the fund on behalf of numerous beneficial
owners for recordkeeping operations performed with respect to such owners.
For each beneficial owner in the omnibus account, the fund may reimburse
Investor Services an amount not to exceed the per account fee that the fund
normally pays Investor Services. These financial institutions may also charge
a fee for their services directly to their clients.
Certain shareholder servicing agents may be authorized to accept your
transaction request.
HOW ARE FUND SHARES VALUED?
We calculate the Net Asset Value per share as of the close of the NYSE,
normally 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 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 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 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 use a pricing service, bank or Securities Dealer to
perform any of the above described functions.
ADDITIONAL INFORMATION
ON DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
DISTRIBUTIONS OF NET INVESTMENT INCOME. The fund receives income generally in
the form of dividends, interest, original issue, market and acquisition
discount, and other income derived from its investments. This income, less
expenses incurred in the operation of the fund, constitute its net investment
income from which dividends may be paid to you. Any distributions by the fund
from such income will be taxable to you as ordinary income, whether you take
them in cash or in additional shares.
DISTRIBUTIONS OF CAPITAL GAINS. The fund may derive capital gains and losses
in connection with sales or other dispositions of its portfolio securities.
Distributions derived from the excess of net short-term capital gain over net
long-term capital loss will be taxable to you as ordinary income.
Distributions paid from long-term capital gains realized by the fund will be
taxable to you as long-term capital gain, regardless of how long you have
held your shares in the fund. Any net short-term or long-term capital gains
realized by the fund (net of any capital loss carryovers) generally will be
distributed once each year, and may be distributed more frequently, if
necessary, in order to reduce or eliminate federal excise or income taxes on
the fund.
Gains from securities sold by the fund that are held for more than one year
will be taxable at a maximum rate of 20% for individual investors in the 28%
or higher federal income tax brackets; at a maximum rate of 10% for
individual investors in the 15% federal income tax bracket. Gains from
securities sold by the fund prior to January 1, 1998, are taxable at
different rates depending on the length of time the fund held such assets.
For "qualified 5-year gains," the maximum capital gains tax rate is 18% for
individuals in the 28% or higher federal income tax brackets; 8% for
individuals in the 15% federal income tax bracket. For individuals in the 15%
bracket, qualified 5-year gains are net gains on securities held for more
than 5 years which are sold after December 31, 2000. For individuals who are
subject to tax at higher rates, qualified 5-year gains are net gains on
securities which are purchased after December 31, 2000 and are held for more
than 5 years. Taxpayers subject to tax at the higher rates may also make an
election for shares held on January 1, 2001 to recognize gain on their shares
in order to qualify such shares as qualified 5-year property.
Additional information on reporting capital gains distributions on your
personal income tax returns is available in Franklin Templeton's Tax
Information Handbook. Please call Fund Information to request a copy.
Questions concerning each investor's personal tax reporting should be
addressed to the investor's personal tax advisor.
CERTAIN DISTRIBUTIONS PAID IN JANUARY. Distributions which are declared in
October, November or December and paid to you in January of the following
year, will be treated for tax purposes as if they had been received by you on
December 31 of the year in which they were declared. The fund will report
this income to you on your Form 1099-DIV for the year in which these
distributions were declared.
INFORMATION ON THE TAX CHARACTER OF DISTRIBUTIONS. The fund will inform you
of the amount and character of your distributions at the time they are paid,
and will advise you of the tax status for federal income tax purposes of such
distributions shortly after the close of each calendar year. If you have not
held fund shares for a full year, you may have designated and distributed to
you as ordinary income or capital gain a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the fund.
TAXES
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY. The fund has elected
to be treated as a regulated investment company under Subchapter M of the
Code, has qualified as such for its most recent fiscal year, and intends to
so qualify during the current fiscal year. The Board reserves the right not
to maintain the qualification of the fund as a regulated investment company
if it determines such course of action to be beneficial to you. In such case,
the fund will be subject to federal, and possibly state, corporate taxes on
its taxable income and gains, and distributions to you will be taxed as
ordinary dividend income to the extent of the fund's available earnings and
profits.
In order to qualify as a regulated investment company for tax purposes, the
fund must meet certain specific requirements, including:
o The fund must maintain a diversified portfolio of securities, wherein no
security (other than U.S. government securities and securities of other
regulated investment companies) can exceed 25% of the fund's total assets,
and, with respect to 50% of the fund's total assets, no investment (other
than cash and cash items, U.S. government securities and securities of
other regulated investment companies) can exceed 5% of the fund's total
assets or 10% of the outstanding voting securities of the issuer;
o The fund must derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, and gains from the
sale or disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities, or currencies; and
o The fund must distribute to its shareholders at least 90% of its
investment company taxable income (i.e., net investment income plus net
short-term capital gains) and net tax-exempt income for each of its fiscal
years.
EXCISE TAX DISTRIBUTION REQUIREMENTS. The Code requires the fund to
distribute at least 98% of its taxable ordinary income earned during the
calendar year and 98% of its capital gain net income earned during the twelve
month period ending October 31 (in addition to undistributed amounts from the
prior year) to you by December 31 of each year in order to avoid federal
excise taxes. The fund intends to declare and pay sufficient dividends in
December (or in January that are treated by you as received in December) but
does not guarantee and can give no assurances that its distributions will be
sufficient to eliminate all such taxes.
REDEMPTION OF FUND SHARES. Redemptions and exchanges of fund shares are
taxable transactions for federal and state income tax purposes. The tax law
requires that you recognize a gain or loss in an amount equal to the
difference between your tax basis and the amount you received in exchange for
your shares, subject to the rules described below. If you hold your shares as
a capital asset, the gain or loss that you realize will be capital gain or
loss, and will be long-term for federal income tax purposes if you have held
your shares for more than one year at the time of redemption or exchange. Any
loss incurred on the redemption or exchange of shares held for six months or
less will be treated as a long-term capital loss to the extent of any
long-term capital gains distributed to you by the fund on those shares.
All or a portion of any loss that you realize upon the redemption of your
fund shares will be disallowed to the extent that you purchase other shares
in the fund (through reinvestment of dividends or otherwise) within 30 days
before or after your share redemption. Any loss disallowed under these rules
will be added to your tax basis in the new shares you purchase.
DEFERRAL OF BASIS. All or a portion of the sales charge that you paid for
your shares in the fund will be excluded from your tax basis in any of the
shares sold within 90 days of their purchase (for the purpose of determining
gain or loss upon the sale of such shares) if you reinvest the sales proceeds
in the fund or in another of the Franklin Templeton Funds, and the sales
charge that would otherwise apply to your reinvestment is reduced or
eliminated. The portion of the sales charge excluded from your tax basis in
the shares sold will equal the amount that the sales charge is reduced on
your reinvestment. Any portion of the sales charge excluded from your tax
basis in the shares sold will be added to the tax basis of the shares you
acquire from your reinvestment.
U.S. GOVERNMENT OBLIGATIONS. Many states grant tax-free status to dividends
paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that
must be met by the fund. Investments in GNMA/FNMA securities, bankers'
acceptances, commercial paper and repurchase agreements collateralized by
U.S. government securities do not generally qualify for tax-free treatment.
At the end of each calendar year, the fund will provide you with the
percentage of any dividends paid that may qualify for tax-free treatment on
your personal income tax return. You should consult with your own tax advisor
to determine the application of your state and local laws to these
distributions. Because the rules on exclusion of this income are different
for corporations, corporate shareholders should consult with their corporate
tax advisors about whether any of their distributions may be exempt from
corporate income or franchise taxes.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS. As a corporate shareholder,
you should note that only a small percentage of the dividends paid by the
fund for the most recent fiscal year qualified for the dividends-received
deduction. You will be permitted in some circumstances to deduct these
qualified dividends, thereby reducing the tax that you would otherwise be
required to pay on these dividends. The dividends-received deduction will be
available only with respect to dividends designated by the fund as eligible
for such treatment. Dividends so designated by the fund must be attributable
to dividends earned by the fund from U.S. corporations that were not
debt-financed.
The amount that the fund may designate as eligible for the dividends-received
deduction will be reduced or eliminated if the shares on which the dividends
were earned by the fund were debt-financed or held by the fund for less than
a 46 day period during a 90 day period beginning 45 days before the
ex-dividend date of the corporate stock. Similarly, if your fund shares are
debt-financed or held by you for less than this same 46 day period, then the
dividends-received deduction may also be reduced or eliminated. Even if
designated as dividends eligible for the dividends-received deduction, all
dividends (including the deducted portion) must be included in your
alternative minimum taxable income calculation.
INVESTMENT IN COMPLEX SECURITIES. The fund's investment in options, futures
and options on futures are subject to many complex and special tax rules.
Over-the-counter 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. Certain other options, futures and
forward contracts entered into by the fund are 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 on
other dates as prescribed by the Code), and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain 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. Even though marked-to-market, gains and
losses realized on foreign currency and foreign security investments will
generally be treated as ordinary income. The effect of section 1256 mark-to-
market rules may be to accelerate income or to convert what otherwise would
have been long-term capital gains into short-term capital gains or short-term
capital losses into long-term capital losses within the fund. The
acceleration of income on section 1256 positions may require the fund to
accrue taxable income without the corresponding receipt of cash. In order to
generate cash to satisfy the distribution requirements of the Code, the fund
may be required to dispose of portfolio securities that it otherwise would
have continued to hold or to use cash flows from other sources such as the
sale of fund shares. In these ways, any or all of these rules may affect the
amount, character and timing of income distributed to you by the fund.
When the fund holds an option or 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, possibly resulting in deferral of
losses, adjustments in the holding periods and conversion of short-term
capital losses into long-term capital losses. The fund may make certain tax
elections 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.
When the fund enters into "constructive sale transactions," the fund must
recognize gain (but not loss) on any constructive sale of an appreciated
financial position in stock, a partnership interest or certain debt
instruments. The fund will generally be treated as making a constructive sale
when it: 1) enters into a short sale on the same property, 2) enters into an
offsetting notional principal contract, or 3) enters into a futures or
forward contract to deliver the same or substantially similar property. Other
transactions (including certain financial instruments called collars) will be
treated as constructive sales as provided in Treasury regulations to be
published. There are also certain exceptions that apply for transactions that
are closed before the end of the 30th day after the close of the taxable year.
Distributions paid to you by the fund of ordinary income and short-term
capital gains arising from the fund's investments, including investments in
options, futures and options on futures will be taxable to you as ordinary
income. The fund will monitor its transactions in such options and contracts
and may make certain other tax elections in order to mitigate the effect of
the above rules.
INVESTMENTS IN FOREIGN CURRENCIES AND FOREIGN SECURITIES. Each fund is
authorized to invest in foreign currency denominated securities. Such
investments, if made, will have the following additional tax consequences:
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a fund accrues income
(including dividends), or accrues expenses which are denominated in a foreign
currency, and the time a fund actually collects such income or pays such
expenses generally are treated as ordinary income or loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward contracts, gain or loss
attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of its
disposition are also treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of a fund's net investment company taxable income, which,
in turn, will affect the amount of income to be distributed to you by such
fund.
If a fund's section 988 losses exceed the fund's other net investment company
taxable income during a taxable year, such fund generally will not be able to
make ordinary dividend distributions to you for that year, or distributions
made before the losses were realized will be recharacterized as return of
capital distributions for federal income tax purposes, rather than as an
ordinary dividend or capital gain distribution. If a distribution is treated
as a return of capital, your tax basis in your fund shares will be reduced by
a like amount (to the extent of such basis), and any excess of the
distribution over your tax basis in your fund shares will be treated as
capital gain to you.
CONVERSION TRANSACTIONS. Gains realized by a fund from transactions that are
deemed to be "conversion transactions" under the Code, and that would
otherwise produce capital gain may be recharacterized as ordinary income to
the extent that such gain does not exceed an amount defined as the
"applicable imputed income amount". A conversion transaction is any
transaction in which substantially all of the fund's expected return is
attributable to the time value of the fund's net investment in such
transaction, and any one of the following criteria are met:
1) there is an acquisition of property with a substantially
contemporaneous agreement to sell the same or substantially identical
property in the future;
2) the transaction is an applicable straddle;
3) the transaction was marketed or sold to the fund on the basis that it
would have the economic characteristics of a loan but would be taxed as
capital gain; or
4) the transaction is specified in Treasury regulations to be promulgated
in the future.
The applicable imputed income amount, which represents the deemed return on
the conversion transaction based upon the time value of money, is computed
using a yield equal to 120 percent of the applicable federal rate, reduced by
any prior recharacterizations under this provision or the provisions of
section 263(g) of the Code dealing with capitalized carrying costs.
STRIPPED PREFERRED STOCK. Occasionally, the fund may purchase "stripped
preferred stock" that is subject to special tax treatment. Stripped preferred
stock is defined as certain preferred stock issues where ownership of the
stock has been separated from the right to receive dividends that have not
yet become payable. The stock must have a fixed redemption price, must not
participate substantially in the growth of the issuer, and must be limited
and preferred as to dividends. The difference between the redemption price
and purchase price is taken into fund income over the term of the instrument
as if it were original issue discount. The amount that must be included in
each period generally depends on the original yield to maturity, adjusted for
any prepayments of principal.
INVESTMENTS IN ORIGINAL ISSUE DISCOUNT (OID) AND MARKET DISCOUNT (MD) BONDS.
The fund's investments in zero coupon bonds, bonds issued or acquired at a
discount, delayed interest bonds, or bonds that provide for payment of
interest-in-kind (PIK) may cause the fund to recognize income and make
distributions to you prior to its receipt of cash payments. Zero coupon and
delayed interest bonds are normally issued at a discount and are therefore
generally subject to tax reporting as OID obligations. The fund is required
to accrue as income a portion of the discount at which these securities were
issued, and to distribute such income each year (as ordinary dividends) in
order to maintain its qualification as a regulated investment company and to
avoid income reporting and excise taxes at the fund level. PIK bonds are
subject to similar tax rules concerning the amount, character and timing of
income required to be accrued by the fund. Bonds acquired in the secondary
market for a price less than their stated redemption price, or revised issue
price in the case of a bond having OID, are said to have been acquired with
market discount. For these bonds, the fund may elect to accrue market
discount on a current basis, in which case the fund will be required to
distribute any such accrued discount. If the fund does not elect to accrue
market discount into income currently, gain recognized on sale will be
recharacterized as ordinary income instead of capital gain to the extent of
any accumulated market discount on the obligation.
DEFAULTED OBLIGATIONS. The fund may be required to accrue income on defaulted
obligations and to distribute such income to you even though it is not
currently receiving interest or principal payments on such obligations. In
order to generate cash to satisfy these distribution requirements, 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.
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, 1998, 1997 and 1996, were
$4,195,843, $2,915,643 and $503,536, respectively. After allowances to
dealers, Distributors retained $390,184, $276,391 and $50,862 in net
underwriting discounts and commissions and received $14,796, $6,832 and $487
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, 1998, Distributors had eligible
expenditures of $743,400 and $1,214,006 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 $536,984 and
$817,231 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 the periods indicated below
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 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 Class I for the one-year period ended
April 30, 1998, and for the period from inception (January 3, 1994) through
April 30, 1998 was 11.19% and 15.89%, respectively. The average annual total
return for Class II for the one-year period ended April 30, 1998, and for the
period from inception (May 1, 1995) through April 30, 1998, was 14.94% and
21.29%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of each period at the end of each period
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, is based
on the actual return for a specified period rather than on the average return
over the periods indicated above. The cumulative total return for Class I for
the one-year period ended April 30, 1998, and for the period from inception
(January 3, 1994) through April 30, 1998 was 11.19% and 89.12%, respectively.
The cumulative total return for Class II for the one-year period ended April
30, 1998, and for the period from inception (May 1, 1995) through April 30,
1998, was 14.94% and 78.36%, respectively.
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, 1998, was 3.32% for Class I and 2.74%
for Class II.
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-d + 1 ) - 1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum Offering Price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Current yield, which is calculated according to a formula prescribed by the
SEC, is not indicative of the amounts which were or will be paid to
shareholders. Amounts paid to shareholders are reflected in the quoted
current distribution rate. The current distribution rate is usually computed
by annualizing the dividends paid per share by a class during a certain
period and dividing that amount by the current maximum Offering Price. The
current distribution rate differs from the current yield computation because
it may include distributions to shareholders from sources other than
dividends and interest, such as premium income from option writing and
short-term capital gains, and is calculated over a different period of time.
The current distribution rate for each class for the 30-day period ended
April 30, 1998, was 2.38% for Class I and 2.02% 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 goals 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 goal, 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 50 years
and now services more than 3 million shareholder accounts. In 1992, Franklin,
a leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton, a pioneer in
international investing. The Mutual Series team, known for its value-driven
approach to domestic equity investing, became part of the organization four
years later. Together, the Franklin Templeton Group has over $236 billion in
assets under management for more than 6 million U.S. based mutual fund
shareholder and other accounts. The Franklin Templeton Group of Funds offers
119 U.S. based open-end investment companies to the public. The fund may
identify itself by its NASDAQ symbol or CUSIP number.
Currently, there are more mutual funds than there are stocks listed on the
NYSE. While many of them have similar investment goals, no two are exactly
alike. As noted in the Prospectus, shares of the fund are generally sold
through Securities Dealers. Investment representatives of such Securities
Dealers are experienced professionals who can offer advice on the type of
investment suitable to your unique goals and needs, as well as the types of
risks associated with such investment.
As of June 2, 1998, the principal shareholders of the fund, beneficial or of
record, were as follows:
SHARE PER-
NAME AND ADDRESS AMOUNT CENTAGE
ADVISOR CLASS
Franklin Templeton Fund 34,026.683 6%
Allocator Series -
Franklin Templeton
Conservative Target Fund
c/o 1810 Gateway
San Mateo, CA 94404
Franklin Templeton Fund 58,983.404 11%
Allocator Series -
Franklin Templeton
Moderate Target Fund
c/o 1810 Gateway
San Mateo, CA 94404
Franklin Templeton Fund 74,386.821 14%
Allocator Series -
Franklin Templeton
Growth Target Fund
c/o 1810 Gateway
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 and
statements must be sent to a compliance officer; (iii) all brokerage accounts
must be disclosed on an annual basis; and (iv) access persons involved in
preparing and making investment decisions must, in addition to (i), (ii) and
(iii) above, file annual reports of their securities holdings each January
and inform the compliance officer (or other designated personnel) if they own
a security that is being considered for a fund or other client transaction or
if they are recommending a security in which they have an ownership interest
for purchase or sale by a fund or other client.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to
Shareholders of the Trust, for the fiscal year ended April 30, 1998,
including the auditor's 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, Templeton Capital Accumulator Fund, Inc., 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 5.75% for Class I and 1% for Class II. We calculate
the offering price to two decimal places using standard rounding criteria.
PROSPECTUS - The prospectus for the fund's Class I and Class II shares dated
September 1, 1998, which we may amend 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.
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 high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large, fluctuation of protective elements may be of greater
amplitude, or there may be other elements present that make the long-term
risks appear somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium-grade obligations. They are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and, in fact,
have speculative characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of
interest and principal payments is very moderate and, thereby, not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations that are speculative to a high
degree. These issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong and, in the majority of
instances, differ from AAA issues only in a small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - Bonds rated C are typically subordinated debt to senior debt that is
assigned an actual or implied CCC- rating. The C rating 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.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
COMMERCIAL PAPER RATINGS
MOODY'S
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually their promissory obligations not having an original maturity
in excess of nine months. Moody's employs the following designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
P-1 (PRIME-1): Superior capacity for repayment.
P-2 (PRIME-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment
is very strong. A "plus" (+) designation indicates an even stronger
likelihood of timely payment.
A-2: Capacity for timely payment on issues with this designation is strong.
The relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher designations.
Annual
Report
April 30, 1998
Franklin Real Estate Securities Fund
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective, and to expect that mixed in with the good
years can be some bad years. It's important to remember that all securities
markets move both up and down, as do mutual fund share prices. We appreciate
your past support and look forward to serving your investment needs in the years
ahead.
Matt Avery
Portfolio Manager
Franklin Real Estate
Securities Fund
Contents
Shareholder Letter
Shareholder Letter ........................................... 1
Performance Summary
Class I ..................................................... 5
Class II .................................................... 8
Advisor Class ............................................... 11
Financial Highlights &
Statement of Investments ..................................... 14
Financial Statements ......................................... 20
Notes to
Financial Statements ......................................... 23
Independent
Auditors' Report ............................................. 27
Tax Designation .............................................. 28
Equity real estate investment trusts (REITs) are real estate companies that own
and manage income-producing properties such as apartments or hotels. The income,
primarily rent from these properties, is generally passed on to investors in the
form of dividends. These companies provide experienced property management teams
and generally concentrate on a specific geo-graphic region and property type.
You will find a complete listing of the fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 17 of
this report.
Your Fund's Objective: Franklin Real Estate Securities Fund seeks to maximize
total return by investing in securities of companies in the real estate
industry, primarily equity real estate investment trusts (REITs).
Dear Shareholder:
We are pleased to bring you this annual report of Franklin Real Estate
Securities Fund, which covers the fiscal year ended April 30, 1998.
Although the U.S. real estate industry benefited from strong demand for
residential and commercial space, the performance of real estate stocks was
mixed during this period. Many real estate companies reported strong increases
in cash flow from operations, and stock prices of many home builders and larger,
growth-oriented REITs appreciated significantly during most of 1997. In 1998,
homebuilding stocks continued to appreciate, but stock prices of REITs lagged,
in part, due to proposed changes in the tax treatment of "paired-share" REITs.
These unique REITs, which combine a property and operating company within the
same entity for tax purposes, comprise only a small proportion of all REITs and,
at the end of the reporting period, about 7% of the fund's total net assets.
However, concerns about the possibility of these tax changes impacted investor
sentiment toward the entire REIT sector. Within this environment, the fund's
Class I shares provided a +17.96% one-year cumulative total return, as discussed
in the Performance Summary on page 5. This outperformed the fund's benchmark,
the unmanaged Wilshire Real Estate Securities Index, which produced a +16.85%
total return for the same period.
GRAPHIC MATERIAL 1 OMITTED - SEE APPENDIX AT END OF DOCUMENT
As we have discussed in prior shareholder reports, the fund focuses on property
types and geographic regions with strong supply and demand fundamentals, while
attempting to identify management teams capable of adding value through
intensive property management and capital markets experience. Accordingly, we
maintained the majority of the fund's investments in hotel, apartment, office
and industrial companies where we anticipate the strongest cash flow growth and
attractive stock valuations.
At the end of the reporting period, the hotel sector was the fund's largest
property-type weighting, representing 18.8% of total net assets. Two of the
fund's largest positions, Starwood Lodging Trust and Patriot American
Hospitality, Inc., are hotel REITs with the unique "paired-share" tax structure
mentioned previously. Although their stocks weakened during the period, due
partly to expected changes in their future tax structure, in our opinion, these
two companies retained their excellent growth prospects and compelling
valuations under any REIT structure.
The apartment sector, the fund's second largest property-type weighting (15.2%
of total net assets on April 30, 1998) experienced rapid consolidation during
the reporting period. In fact, over half the fund's apartment companies
announced or completed mergers, which we believe should lower overall operating
and financing costs. While supply and demand fundamentals were near equilibrium
in this sector, we believed that valuations were attractive relative to other
sectors and that these companies should experience steady cash flow growth in
the future.
In the office and industrial sectors, we added several new positions, including
AMB Property Corp., Mack-Cali Realty Corp., and Cabot Industrial Trust. These
firms' existing properties, coupled with their attractive acquisition
opportunities, appeared to offer excellent long-term growth potential. During
the reporting period, we sold our holdings in Weeks Corp., an industrial REIT,
which we believed was vulnerable to new construction in the Atlanta market. As a
result, the office sector represented 12.2% of total net assets, while the
industrial sector represented 11.9% on April 30, 1998. The fund's home building
and manufactured homes sectors appreciated significantly over the past year due
to lower interest rates and record levels of home buying nationwide.
Consequently, the valuations of home builder stocks approached historically high
levels, leading us to sell the fund's positions in NVR Inc., Beazer Homes, and
U.S. Home Corp.
REITs continue to increase in capitalization and diversity and, given the
combination of strong growth and favorable valuations for these stocks, we are
excited about prospects for investment in REITs. We will continue to focus on
top quality real estate companies that are creating significant cash flow growth
and shareholder value. A variety of U.S. corporations are forming new REITS,
and, with our experienced team of equity and credit analysts who can assist in
evaluating their merits, we are well-positioned to take advantage of this
growing market.
GRAPHIC MATERIAL 2 OMITTED - SEE APPENDIX AT END OF DOCUMENT
GRAPHIC MATERIAL 3 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Of course, there are special risks involved with investing in a non-diversified
fund concentrating in real estate securities, such as declines in the value of
real estate and increased susceptibility to adverse economic or regulatory
developments. These risks are discussed in the fund's prospectus.
Please remember, this discussion reflects our views, opinions and portfolio
holdings as of April 30, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the fund's portfolio composition. Although historic
performance is no guarantee of future results, these insights may help you
understand our investment and management philosophy.
We appreciate your participation in Franklin Real Estate Securities Fund and
welcome your comments or suggestions. Sincerely,
Matt Avery
Portfolio Manager
Franklin Real Estate Securities Fund
Performance Summary
Class I
Franklin Real Estate Securities Fund - Class I provided a +17.96% one-year
cumulative total return for the period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, and does not include the initial sales charge. We
always maintain a long-term perspective when managing the fund, and encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 7, the fund's Class I shares delivered a +100.65% cumulative
total return since inception on January 3, 1994.
The fund's share price, as measured by net asset value, increased $2.22, from
$15.44 on April 30, 1997, to $17.66 on April 30, 1998. During the reporting
period, shareholders received per-share distributions totaling 44.1 cents
($0.4410) in dividend income and 10.9 cents ($0.1090) in capital gains, of which
7.69 cents ($0.0769) represented short-term gains and 3.21 cents ($0.0321)
represented long-term gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the fund's operating expenses.
The graph on page 6 compares the performance of Franklin Real Estate Securities
Fund - Class I since inception with that of the unmanaged Standard & Poor's(R)
500 (S&P 500(R)) Stock Index and the Wilshire Real Estate Securities Index.
The S&P 500 is a domestic broad market index consisting of 500 widely held
common stocks in a variety of industries, whereas the Wilshire index represents
publicly traded real estate securities, including both REITs and Real Estate
Operating Companies. Of course, such unmanaged indices have inherent performance
differentials over any fund. They do not pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never 100%
invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes the maximum initial sales charge, all
fund expenses and account fees. If operating expenses such as the fund's had
been applied to the indices, their performance would have been lower. Please
remember that an index is simply a measure of performance, and one cannot invest
in it directly.
GRAPHIC MATERIAL 4 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class I
Periods ended 4/30/98
Since
Inception
1-Year 3-Year (1/3/94)
Cumulative Total Return1 17.96% 84.63% 100.65%
Average Annual Total Return2 12.64% 20.80% 16.25%
Value of $10,000 Investment3 $11,264 $17,630 $19,165
4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return4 -0.48% 24.25% 25.97% 17.96%
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the maximum 4.5% initial
sales charge.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include the sales charge.
4. One-year total return represents the change in value of an investment over
the periods ended on the specified dates and does not include the sales charge.
All calculations assume reinvestment of dividends and capital gains, if any, at
net asset value. Since markets can go down as well as up, investment return and
principal value will fluctuate with market conditions, and you may have a gain
or loss when you sell your shares. Past expense reductions by the fund's manager
increased total returns.
Franklin Real Estate Securities Fund - Class I paid distributions derived from
long-term capital gains of 3.21 cents ($0.0321) per share in December 1997. The
fund hereby designates such distributions as capital gain dividends per Section
852(b)(3) of the Internal Revenue Code.
Class II
Franklin Real Estate Securities Fund - Class II provided a +17.07% one-year
cumulative total return for the period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
dividends and capital gains, and does not include sales charges. We always
maintain a long-term perspective when managing the fund, and encourage
shareholders to view their investments in a similar manner. As you can see from
the table on page 10, the fund's Class II shares delivered a +80.21% cumulative
total return since inception on May 1, 1995.
The fund's share price, as measured by net asset value, increased $2.14, from
$15.26 on April 30, 1997, to $17.40 on April 30, 1998. During the reporting
period, shareholders received per-share distributions totaling 35.42 cents
($0.3542) in dividend income and 10.9 cents ($0.1090) in capital gains, of which
7.69 cents ($0.0769) represented short-term gains and 3.21 cents ($0.0321)
represented long-term gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the fund's operating expenses.
The graph on page 10 compares the performance of Franklin Real Estate Securities
Fund - Class II since inception with that of the unmanaged Standard & Poor's 500
(S&P 500) Stock Index and the Wilshire Real Estate Securities Index. The S&P 500
is a domestic broad market index consisting of 500 widely held common stocks in
a variety of industries, whereas the Wilshire index represents publicly traded
real estate securities, including both REITs and Real Estate Operating
Companies. Of course, such unmanaged indices have inherent performance
differentials over any fund. They do not pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never 100%
invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes sales charges, all fund expenses and
account fees. If operating expenses such as the fund's had been applied to the
indices, their performance would have been lower. Please remember that an index
is simply a measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 5 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Class II
Periods ended 4/30/98 Since
Inception
1-Year (5/1/95)
Cumulative Total Return1 17.07% 80.21%
Average Annual Total Return2 14.94% 21.29%
Value of $10,000 Investment3 $11,494 $17,836
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and 1.0% contingent deferred sales charge applicable to shares redeemed
within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated and include sales charges.
All calculations assume reinvestment of dividends and capital gains, if any.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares. Past expense reductions by the fund's manager increased total
return.
Franklin Real Estate Securities Fund - Class II paid distributions derived from
long-term capital gains of 3.21 cents ($0.0321) per share in December 1997. The
fund hereby designates such distributions as capital gain dividends per Section
852(b)(3) of the Internal Revenue Code.
Advisor Class
Franklin Real Estate Securities Fund - Advisor Class provided a +18.35% one-year
cumulative total return for the period ended April 30, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
dividends and capital gains.
The fund's share price, as measured by net asset value, increased $2.25, from
$15.45 on April 30, 1997, to $17.70 on April 30, 1998. During the reporting
period, shareholders received per-share distributions totaling 47.22 cents
($0.4722) in dividend income and 10.9 cents ($0.1090) in capital gains, of which
7.69 cents ($0.0769) represented short-term gains and 3.21 cents ($0.0321)
represented long-term gains. Distributions will vary depending on income earned
by the fund and any profits realized from the sale of securities in the
portfolio, as well as the level of the fund's operating expenses.
The graph on page 12 compares the performance of Franklin Real Estate Securities
Fund - Advisor Class since inception with that of the unmanaged Standard &
Poor's 500 (S&P 500) Stock Index and the Wilshire Real Estate Securities Index.
The S&P 500 is a domestic broad market index consisting of 500 widely held
common stocks in a variety of industries, whereas the Wilshire index represents
publicly traded real estate securities, including both REITs and Real Estate
Operating Companies. Of course, such unmanaged indices have inherent performance
differentials over any fund. They do not pay management fees to cover salaries
of securities analysts or portfolio managers, or pay commissions or market
spreads to buy and sell securities. Unlike an index, mutual funds are never 100%
invested because they need cash on hand to redeem shares. In addition, the
performance shown for the fund includes all fund expenses and account fees. If
operating expenses such as the fund's had been applied to the indices, their
performance would have been lower. Please remember that an index is simply a
measure of performance, and one cannot invest in it directly.
GRAPHIC MATERIAL 6 OMITTED - SEE APPENDIX AT END OF DOCUMENT
Advisor Class
Periods ended 4/30/98
Since
Inception
of The Fund
1-Year* 3-Year* (1/3/94)*
Cumulative Total Return1 18.35% 85.36% 101.45%
Average Annual Total Return1 18.35% 22.84% 17.60%
Value of $10,000 Investment2 $11,835 $18,536 $20,145
4/30/95 4/30/96 4/30/97 4/30/98
One-Year Total Return*,3 -0.48% 24.25% 26.05% 18.35%
*Effective January 2, 1997, the fund began selling Advisor Class shares to
certain eligible investors as described in the prospectus. This share class does
not have sales charges or Rule 12b-1 plans. Performance quotations have been
calculated as follows: (a) For periods prior to January 2, 1997, figures reflect
the fund's Class I performance, excluding the effect of the Class I sales
charge, but including the effect of Class I expenses, including Rule 12b-1 fees;
and (b) for periods after January 1, 1997, figures reflect actual Advisor Class
performance, including the deduction of all fees and expenses applicable only to
that class. Since January 2, 1997 (commencement of sales), the cumulative total
return of Advisor Class shares was 19.51%.
1. Cumulative total return represents the change in value of an investment over
the periods indicated. Average annual total return represents the average annual
change in value of an investment over the indicated periods.
2. These figures represent the value of a hypothetical $10,000 investment in the
fund over the periods indicated.
3. One-year total return represents the change in value of an investment over
the periods ended on the specified dates.
All calculations assume reinvestment of dividends and capital gains, if any.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, and you may have a gain or loss when you
sell your shares. Past expense reductions by the fund's manager increased total
return.
Franklin Real Estate Securities Fund - Advisor Class paid distributions derived
from long-term capital gains of 3.21 cents ($0.0321) per share in December 1997.
The fund hereby designates such distributions as capital gain dividends per
Section 852(b)(3) of the Internal Revenue Code.
Franklin Real Estate Securities Trust
Franklin Real Estate Securities Fund
Financial Highlights
<TABLE>
<CAPTION>
Class I
-----------------------------------------------------------------------
Year Ended April 30,
-----------------------------------------------------------------------
1998 19975 1996 1995 19942
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year.......... $15.44 $12.64 $10.58 $10.92 $10.00
-----------------------------------------------------------------------
Income from investment operations:
Net investment income...................... .63 .49 .43 .39 .06
Net realized and unrealized gains (losses). 2.14 2.77 2.10 (.45) .86
-----------------------------------------------------------------------
Total from investment operations............ 2.77 3.26 2.53 (.06) .92
-----------------------------------------------------------------------
Less distributions from:
Net investment income...................... (.48) (.36) (.47) (.28) -
Net realized gains......................... (.07) (.10) - - -
-----------------------------------------------------------------------
Total distributions......................... (.55) (.46) (.47) (.28) -
-----------------------------------------------------------------------
Net asset value, end of year................ $17.66 $15.44 $12.64 $10.58 $10.92
=======================================================================
Total return+............................... 17.96% 25.97% 24.25% (.48%) 9.20%
Ratios/supplemental data
Net assets, end of year (000's)............. $330,030 $153,520 $33,634 $16,694 $5,634
Ratios to average net assets:
Expenses................................... 1.00% .98% .67% .25% .25%1
Expenses excluding waiver and
payments by affiliate...................... 1.03% 1.09% 1.24% 1.40% 2.91%1
Net investment income...................... 3.50% 3.88% 4.38% 4.86% 3.19%1
Portfolio turnover rate..................... 6.10% 6.80% 14.40% 3.74% -
Average commission rate paid++.............. $.0583 $.0576 $.0575 $ - $ -
</TABLE>
+Total return does not reflect sales commissions or the contingent deferred
sales charges, and is not annualized. Prior to May 1, 1994, dividends from net
investment income were reinvested at the offering price.
++Relates to purchases and sales of equity securities. Prior to fiscal year end
1996, disclosure of average commission rate was not required.
1Annualized.
2For the period January 3, 1994 (effective date) to April 30, 1994.
5For the period ending April 30, 1997, per share amounts have been calculated
using the daily average shares outstanding.
<TABLE>
<CAPTION>
Class II
------------------------------------------
Year Ended April 30,
------------------------------------------
1998 19975 19963
------------------------------------------
<S> <C> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of year........................ $15.26 $12.56 $10.58
------------------------------------------
Income from investment operations:
Net investment income.................................... .45 .43 .44
Net realized and unrealized gains........................ 2.15 2.68 2.00
------------------------------------------
Total from investment operations.......................... 2.60 3.11 2.44
------------------------------------------
Less distributions from:
Net investment income.................................... (.39) (.31) (.46)
Net realized gains....................................... (.07) (.10) -
------------------------------------------
Total distributions....................................... (.46) (.41) (.46)
------------------------------------------
Net asset value, end of year.............................. $17.40 $15.26 $12.56
==========================================
Total return+............................................. 17.07% 24.94% 23.21%
Ratios/supplemental data
Net assets, end of year (000's)........................... $137,048 $58,540 $6,282
Ratios to average net assets:
Expenses................................................. 1.75% 1.75% 1.41%
Expenses excluding waiver and payments by affiliate...... 1.78% 1.86% 1.98%
Net investment income.................................... 2.77% 2.92% 3.65%
Portfolio turnover rate................................... 6.10% 6.80% 14.40%
Average commission rate paid++............................ $.0583 $.0576 $.0575
</TABLE>
+Total return does not reflect sales commissions or the contingent deferred
sales charges, and is not annualized.
++Relates to purchases and sales of equity securities.
3Effective date of Class II shares was May 1, 1995.
5For the period ending April 30, 1997, per share amounts have been calculated
using the daily average shares outstanding.
<TABLE>
<CAPTION>
Advisor Class
-----------------------------------
Year Ended April 30,
-----------------------------------
1998 19974,5
-----------------------------------
<S> <C> <C>
Per share operating performance
(for a share outstanding throughout the year)
Net asset value, beginning of period ......................... $15.45 $15.30
-----------------------------------
Income from investment operations:
Net investment income........................................ .52 .18
Net realized and unrealized gains (losses)................... 2.31 (.03)
-----------------------------------
Total from investment operations.............................. 2.83 .15
-----------------------------------
Less distributions from:
Net investment income........................................ (.51) -
Net realized gains........................................... (.07) -
-----------------------------------
Total distributions........................................... (.58) -
-----------------------------------
Net asset value, end of year.................................. $17.70 $15.45
===================================
Total return+................................................. 18.35% .98%
Ratios/supplemental data
Net assets, end of year (000's)............................... $8,929 $625
Ratios to average net assets:
Expenses..................................................... .75% .75%1
Expenses excluding waiver and payments by affiliate.......... .78% .86%1
Net investment income........................................ 3.97% 3.44%1
Portfolio turnover rate....................................... 6.10% 6.80%
Average commission rate paid++................................ $.0583 $.0576
</TABLE>
+Total return does not reflect sales commissions or the contingent deferred
sales charges, and is not annualized.
++Relates to purchases and sales of equity securities.
1Annualized.
4For the period January 2, 1997 (effective date) to April 30, 1997.
5For the period ending April 30, 1997, per share amounts have been calculated
using the daily average shares outstanding.
<TABLE>
<CAPTION>
Statement of Investments, April 30, 1998
SHARES VALUE
<S> <C> <C>
a Common Stocks 91.3%
Equity REIT - Apartments 15.2%
Amli Residential Properties Trust ................................... 145,000 $ 3,325,938
Bay Apartment Communities, Inc. ..................................... 110,000 4,070,000
Camden Property Trust ............................................... 340,074 9,968,412
Equity Residential Properties Trust ................................. 275,000 13,509,375
Gables Residential Trust ............................................ 160,000 4,360,000
Irvine Apartment Communities, Inc. .................................. 150,000 4,584,375
Post Properties, Inc. ............................................... 240,000 9,795,000
Security Capital Atlantic, Inc. ..................................... 350,000 7,721,875
Security Capital Pacific Trust ...................................... 300,000 6,712,500
Smith, Charles E. Residential Realty, Inc. .......................... 125,000 3,875,000
Summit Properties, Inc. ............................................. 205,300 4,195,819
---------------
72,118,294
---------------
Equity REIT - Health Care 3.3%
Alexandria Real Estate Equities, Inc. ............................... 75,000 2,470,313
Health Care Property Investors, Inc. ................................ 114,300 3,857,625
Nationwide Health Properties, Inc. .................................. 180,000 4,230,000
Omega Healthcare Investors, Inc. .................................... 135,000 4,691,250
---------------
15,249,188
---------------
Equity REIT - Hotels 12.4%
FelCor Suite Hotels, Inc. ........................................... 425,000 14,875,000
Innkeepers USA Trust ................................................ 410,000 6,201,250
Patriot American Hospitality, Inc. .................................. 575,000 14,518,750
Starwood Lodging Trust .............................................. 375,000 18,820,313
Winston Hotels, Inc. ................................................ 370,000 4,601,875
---------------
59,017,188
---------------
Equity REIT - Industrial 11.9%
AMB Property Corp. .................................................. 160,000 3,680,000
Cabot Industrial Trust .............................................. 225,000 5,090,625
Duke Realty Investment, Inc. ........................................ 410,000 9,763,125
Liberty Property Trust .............................................. 380,000 9,713,750
Meridian Industrial Trust, Inc. ..................................... 330,000 7,631,250
Security Capital Industrial Trust ................................... 420,000 10,263,750
Spieker Properties, Inc. ............................................ 260,000 10,302,500
---------------
56,445,000
---------------
Equity REIT - Mixed Property Type 4.4%
Colonial Properties Trust ........................................... 283,300 8,410,469
Glenborough Realty Trust, Inc. ...................................... 475,000 12,735,938
---------------
21,146,407
---------------
Equity REIT - Office 12.2%
Arden Realty Group, Inc. ............................................ 425,000 11,926,563
Crescent Real Estate Equities, Co. .................................. 400,000 13,650,000
Equity Office Properties Trust ...................................... 340,000 9,668,750
Highwoods Properties, Inc. .......................................... 310,000 10,540,000
Mack-Cali Realty Corp. .............................................. 275,000 $ 10,329,688
SL Green Realty Corp. ............................................... 43,000 1,032,000
Tower Realty Trust, Inc. ............................................ 30,500 720,563
---------------
57,867,564
---------------
Equity REIT - Residential Communities 2.5%
Manufactured Home Communities, Inc. ................................. 170,000 4,292,500
Sun Communities, Inc. ............................................... 220,000 7,700,000
---------------
11,992,500
---------------
Equity REIT - Retail - Community Centers 7.5%
Burnham Pacific Properties, Inc. .................................... 382,500 5,402,813
Developers Diversified Realty Corp. ................................. 140,000 5,556,250
Kimco Realty Corp. .................................................. 270,000 10,006,875
c Pacific Retail Trust ................................................ 640,499 8,326,487
Vornado Realty Trust ................................................ 161,000 6,450,063
---------------
35,742,488
---------------
Equity REIT - Retail - Regional Malls 5.9%
Simon DeBartolo Group, Inc. ......................................... 375,000 12,351,563
The Macerich Co. .................................................... 295,000 8,278,438
The Mills Corp. ..................................................... 290,000 7,231,875
---------------
27,861,876
---------------
Equity REIT - Storage 5.6%
Public Storage, Inc. ................................................ 372,000 11,439,000
Storage Trust Realty ................................................ 440,000 10,670,000
Storage USA, Inc. ................................................... 140,000 5,302,500
---------------
27,411,500
---------------
Home Builders 1.2%
Cavalier Homes, Inc. ................................................ 104,000 1,248,000
Clayton Homes, Inc. ................................................. 150,000 3,009,375
a Southern Energy Homes, Inc. ............................................ 120,000 1,327,500
---------------
5,584,875
---------------
Hotels 6.4%
a Candlewood Hotel Co., Inc. .......................................... 385,000 2,887,500
a CapStar Hotel Co. ................................................... 392,000 12,593,000
a Host Marriott Corp. ................................................. 500,000 9,718,750
a Prime Hospitality Corp. ............................................. 250,000 5,171,875
---------------
30,371,125
---------------
Miscellaneous ....................................................... 310,523
---------------
Mixed Property Type 2.8%
a Crescent Operating, Inc. ............................................ 16,000 $ 350,000
a Security Capital Group, Inc. ........................................ 175,000 5,293,750
a Security Capital Group Warrants ..................................... 50,909 143,182
Security Capital US Realty .......................................... 300,000 3,930,000
Trammell Crow Co. ................................................... 82,900 2,196,850
Vail Resorts, Inc. .................................................. 54,100 1,582,425
---------------
13,496,207
---------------
Total Long Term Investments (Cost $393,500,277)...................... 434,614,735
---------------
PRINCIPAL
AMOUNT
-----------
b Repurchase Agreement 8.8%
Joint Repurchase Agreement, 5.487%, 5/01/98,
(Maturity Value $41,920,093) (Cost $41,913,704)...........................$41,913,704 41,913,704
BancAmerica Robertson Stephens
Barclays Capital Group, Inc.
Bear, Stearns & Co., Inc.
BT Alex Brown, Inc.
Chase Securities, Inc.
Donaldson, Lufkin & Jenrette Securities Corp.
Dresdner Kleinwort Benson, North America, L.L.C.
Greenwich Capital Markets, Inc.
Lehman Brothers, Inc.
Paribas Corp.
SBC Warburg Dillon Read, Inc.
UBS Securities, L.L.C.
Collateralized by U.S. Treasury Bills & Notes
Total Investments (Cost $435,413,981) 100.1% ........................ 476,528,439
Other Assets, less Liabilities (.1%) ................................ (520,772)
---------------
Net Assets 100.0% ................................................... $476,007,667
===============
</TABLE>
PORTFOLIO ABBREVIATIONS:
L.L.C. - Limited Liability Corp.
REIT - Real Estate Investment Trust
aNon-income producing.
bInvestment is through participation in a joint account with other funds managed
by the investment advisor. At April 30, 1998, all repurchase agreements had been
entered into on that date.
cSee Note 6 regarding restricted securities.
Financial Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
April 30, 1998
Assets:
<S> <C>
Investments in securities, at value (cost $435,413,981)........................ $476,528,439
Cash........................................................................... 58,840
Receivables:
Investment securities sold.................................................... 379,301
Capital shares sold........................................................... 1,988,039
Dividends and interest........................................................ 983,613
Other assets................................................................... 900
---------------
Total assets.............................................................. 479,939,132
---------------
Liabilities:
Payables:
Investment securities purchased............................................... 1,773,405
Capital shares redeemed....................................................... 991,039
Affiliates.................................................................... 970,555
Shareholders.................................................................. 130,087
Other liabilities.............................................................. 66,379
---------------
Total liabilities......................................................... 3,931,465
---------------
Net assets, at value.................................................... $476,007,667
===============
Net assets consist of:
Undistributed net investment income............................................ $ 3,385,018
Net unrealized appreciation.................................................... 41,114,458
Accumulated net realized gain.................................................. 5,278,245
Capital shares................................................................. 426,229,946
---------------
Net assets, at value.................................................... $476,007,667
===============
Class I:
Net asset value per share ($330,030,476 O 18,691,415 shares outstanding)*...... $17.66
---------------
Maximum offering price per share ($17.66 O 95.50%)............................. $18.49
---------------
Class II:
Net asset value per share ($137,048,075 O 7,874,091 shares outstanding)*....... $17.40
---------------
Maximum offering price per share ($17.40 O 99.00%)............................. $17.58
---------------
Advisor Class:
Net asset value and maximum offering price per share
($8,929,116 O 504,539 shares outstanding)...................................... $17.70
---------------
</TABLE>
*Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
<TABLE>
<CAPTION>
Statement of Operations
for the year ended April 30, 1998
<S> <C> <C>
Investment income:
Dividends ............................................................ $14,357,684
Interest ............................................................. 2,133,921
-------------
Total investment income ......................................... $16,491,605
Expenses:
Management fees (Note 3) ............................................. 1,896,157
Distribution fees (Note 3)
Class I ............................................................. 650,043
Class II ............................................................ 1,014,134
Transfer agent fees (Note 3) ......................................... 658,077
Custodian fees ....................................................... 5,598
Reports to shareholders .............................................. 88,628
Registration and filing fees ......................................... 167,336
Professional fees .................................................... 24,233
Other ................................................................ 22,775
-------------
Total expenses .................................................. 4,526,981
Expenses waived/paid by affiliate (Note 3) ...................... (121,617)
--------------
Net expenses ................................................... 4,405,364
--------------
Net investment income ......................................... 12,086,241
--------------
Realized and unrealized gains:
Net realized gain from investments ................................... 5,825,033
Net unrealized appreciation on investments ........................... 25,890,441
--------------
Net realized and unrealized gain ...................................... 31,715,474
--------------
Net increase in net assets resulting from operations .................. $43,801,715
==============
</TABLE>
Statement of Changes in Net Assets
for the years ended April 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income................................................$ 12,086,241 $ 3,809,230
Net realized gain from investments................................... 5,825,033 1,537,098
Net unrealized appreciation on investments........................... 25,890,441 11,595,001
----------------------------------
Net increase in net assets resulting from operations............. 43,801,715 16,941,329
Distributions to shareholders from:
Net investment income:
Class I.............................................................. (7,706,827) (1,977,490)
Class II............................................................. (2,502,034) (553,996)
Advisor Class........................................................ (143,706) -
Net realized gains:
Class I.............................................................. (1,048,010) (549,503)
Class II............................................................. (414,593) (176,830)
Advisor Class........................................................ (18,349) -
----------------------------------
Total distributions to shareholders....................................(11,833,519) (3,257,819)
Capital share transactions (Note 2)
Class I.............................................................. 153,188,550 109,014,691
Class II............................................................. 69,878,349 49,442,137
Advisor Class........................................................ 8,287,762 628,137
----------------------------------
Total capital share transactions...................................... 231,354,661 159,084,965
----------------------------------
Net increase in net assets....................................... 263,322,857 172,768,475
Net assets:
Beginning of year..................................................... 212,684,810 39,916,335
----------------------------------
End of year...........................................................$476,007,667 $212,684,810
==================================
Undistributed net investment income included in net assets:
End of year...........................................................$ 3,385,018 $ 1,651,344
==================================
</TABLE>
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Franklin Real Estate Securities Fund (the Fund) is a separate, non-diversified
series of Franklin Real Estate Securities Trust (the Trust), which is an
open-end investment company registered under the Investment Company of 1940. The
Fund seeks total return.
The following summarizes the Fund's significant accounting policies.
a. Security Valuation:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Restricted securities and securities for
which market quotations are not readily available are valued at fair value as
determined by management in accordance with procedures established by the Board
of Trustees.
b. Income Taxes:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and
distribute all of its taxable income.
c. Security Transactions, Investment Income, Expenses and Distributions:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Interest income and estimated expenses are accrued daily. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
Distributions received by the Fund from securities may be a return of capital
(ROC). Such distributions reduce the cost basis of the securities, and any
distributions in excess of the cost basis are recognized as capital gains.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
d. Accounting Estimates:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. SHARES OF BENEFICIAL INTEREST
The Fund offers three classes of shares: Class I, Class II and Advisor Class.
The shares have the same rights except for their initial sales load,
distribution fees, voting rights on matters affecting a single class and the
exchange privilege of each class.
At April 30, 1998, there were an unlimited number of shares authorized ($.01 par
value). Transactions in the Fund's shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
April 30, 1998 April 30, 1997
---------------------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Class I
Shares sold ................................ 13,583,071 $238,264,244 10,056,249 $151,008,579
Shares issued in reinvestment of distributions 443,395 7,781,587 149,042 2,193,888
Shares redeemed ............................ (5,277,774) (92,857,281) (2,923,144) (44,187,776)
---------------------------------------------------------------
Net increase ............................... 8,748,692 $153,188,550 7,282,147 $109,014,691
===============================================================
Shares Amount Shares Amount
---------------------------------------------------------------
Class II
Shares sold ................................ 4,882,257 $ 84,464,637 3,439,134 $ 51,025,015
Shares issued in reinvestment of distributions 147,303 2,554,233 42,697 622,945
Shares redeemed ............................ (990,554) (17,140,521) (147,017) (2,205,823)
---------------------------------------------------------------
Net increase ............................... 4,039,006 $ 69,878,349 3,334,814 $ 49,442,137
===============================================================
Period Ended
April 30, 1997*
---------------------------------------------------------------
Shares Amount Shares Amount
---------------------------------------------------------------
Advisor Class
Shares sold ................................ 517,824 $ 9,252,101 57,886 $ 909,753
Shares issued in reinvestment of distributions 9,090 159,714 - -
Shares redeemed ............................ (62,790) (1,124,053) (17,471) (281,616)
---------------------------------------------------------------
Net increase ............................... 464,124 $ 8,287,762 40,415 $ 628,137
===============================================================
</TABLE>
*Effective date of Advisor Class shares was January 2, 1997.
3. TRANSACTIONS WITH AFFILIATES
Certain officers and trustees of the Fund are also officers and/or trustees of
Franklin Advisers, Inc. (Advisers), Franklin Templeton Services, Inc. (FT
Services), Franklin/Templeton Distributors, Inc. (Distributors) and
Franklin/Templeton Investor Services, Inc. (Investor Services), the Fund's
investment manager, administrative manager, principal underwriter and transfer
agent, respectively.
The Fund pays an investment management fee to Advisers based on the average net
assets of the Fund as follows: Annualized
Fee Rate Average Daily Net Assets
.625% First $100 million
.500% Over $100 million, up to and including $250 million
.450% Over $250 million
Under an agreement with Advisers, FT Services provides administrative services
to the Fund. The fee is paid by Advisers based on average daily net assets, and
is not an additional expense of the Fund.
Advisers agreed in advance to waive management fees for the Fund, as noted in
the Statement of Operations.
The Fund reimburses Distributors up to .25% and 1.00% per year of the average
daily net assets of Class I and Class II, respectively, for costs incurred in
marketing the Fund's shares.
Distributors paid net commissions on sales of Fund shares, and received
contingent deferred sales charges for the period of $697,812 and $14,796,
respectively.
The Fund paid transfer agent fees of $658,077, of which $379,391 was paid to
Investor Services.
4. INCOME TAXES
At April 30, 1998, the net unrealized appreciation based on the cost of
investments for income tax purposes of $435,413,981 was as follows:
Unrealized appreciation..................... 43,087,248
Unrealized depreciation..................... (1,972,790)
---------------
Net unrealized appreciation................. $ 41,114,458
===============
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended April 30, 1998 aggregated $227,754,179 and $20,365,347,
respectively.
6. RESTRICTED SECURITIES
The Fund may purchase securities through a private offering that generally
cannot be sold to the public without prior registration under the Securities Act
of 1933. The costs of registering such securities are paid by the issuer. At
April 30, 1998, the Fund held the following restricted securities representing
1.7% of the Fund's net assets:
Shares Issuer Acquisition Date Cost Value
640,499 Pacific Retail Trust 8/30/96 $7,615,379 $8,326,487
7. LENDING OF PORTFOLIO SECURITIES
The Fund loans securities to certain brokers for which it receives cash
collateral against the loaned securities in an amount equal to at least 102% of
the market value of the loaned securities. Net interest income from the
investment of the cash collateral received was $326,628 for the year ended April
30, 1998. At April 30, 1998, there were no loaned securities outstanding.
Independent Auditors' Report
To the Shareholders and Board of Trustees
of Franklin Real Estate Securities Trust:
We have audited the accompanying statement of assets and liabilities of the
Franklin Real Estate Securities Trust, including the statement of investments,
as of April 30, 1998, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of April
30, 1998, by correspondence with the custodians and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Franklin Real Estate Securities Trust as of April 30, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
June 3, 1998
Tax Information
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates the following amounts as capital gain dividends for the fiscal year
ended April 30, 1998:
28% Rate Gain .............................. $2,927,726
25% Rate Gain .............................. 61,850
20% Rate Gain .............................. 2,328,526
Total ...................................... $5,318,102
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
.15% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended April 30, 1998.
Franklin Real Estate Securities Fund
Annual Report
April 30, 1998
APPENDIX
DESCRIPTION OF GRAPHIC MATERIAL OMITTED FROM EDGAR FILING (PURSUANT TO ITEM
304 (a) OF REGULATION S - T)
[PIE CHART]
GRAPHIC MATERIAL (1)
This chart shows in pie format the U.S. geographic allocation of holdings of
Franklin Real Estate Securities Fund, based on total net assets as of April
30, 1998.
National 39.4%
Southeast 17.0%
Southwest 12.3%
Northwest 8.6%
Northeast 8.3%
Midwest 5.7%
Cash & Equivalents 8.7%
[SECTOR BREAKDOWN]
GRAPHIC MATERIAL (2)
This chart shows in bar format the property-type allocation of holdings of
Franklin Real Estate Securities Fund, based on total net assets as of April
30, 1998.
Hotels 18.8%
Apartments 15.2%
Office 12.2%
Industrial 11.9%
Retail Community Centers 7.5%
Retail Regional Malls 5.9%
Storage 5.6%
Health Care 3.3%
Residential Communities 2.5%
Home Builders 1.2%
Other/Mix 7.2%
Cash & Equivalents 8.7%
[TOP HOLDINGS]
GRAPHIC MATERIAL (3)
This chart lists the top ten holdings, including industry, of Franklin Real
Estate Securities Fund, based on total net assets as of April 30, 1998.
Starwood Lodging Trust, Hotels 4.0%
FelCor Suite Hotels, Inc., Hotels 3.1%
Patriot American Hospitality, Inc., Hotels 3.1%
Crescent Real Estate Equities Co., Office 2.9%
Equity Residential Properties Trust, Apartments 2.8%
Glenborough Realty Trust, Inc., Mix 2.7%
CapStar Hotel Co., Hotels 2.6%
Simon DeBartolo Group, Inc., Retail - Regional Malls 2.6%
Arden Realty Group, Inc., Office 2.5%
Public Storage, Inc., Storage 2.4%
[INDEX CHARTS]
GRAPHIC MATERIAL (4)
The following line graph compares the performance of Franklin Real Estate
Securities Fund's Class I shares with the Standard & Poor's 500 Stock Index
(S&P 500) and the Wilshire Real Estate Securities Index based on a $10,000
investment from 1/3/94 to 4/30/98.
FRANKLIN REAL WILSHIRE
DATE ESTATE S&P 500 REAL S&P 500 Wilshire
SECURITIES FUND - EST. SECS. Real Est.
CLASS I INDEX
- --------------------------------------------------------------------------------
1/3/94 $9,551 $10,000 $10,000
1/31/94 $9,790 $10,340 $10,300 3.40% 3.00%
2/28/94 $10,334 $10,060 $10,721 -2.71% 4.09%
3/31/94 $10,201 $9,621 $10,225 -4.36% -4.63%
4/30/94 $10,430 $9,744 $10,339 1.28% 1.12%
5/31/94 $10,621 $9,904 $10,554 1.64% 2.08%
6/30/94 $10,392 $9,661 $10,347 -2.45% -1.97%
7/31/94 $10,382 $9,978 $10,370 3.28% 0.23%
8/31/94 $10,401 $10,387 $10,363 4.10% -0.07%
9/30/94 $10,267 $10,134 $10,190 -2.44% -1.67%
10/31/94 $9,943 $10,362 $9,817 2.25% -3.66%
11/30/94 $9,589 $9,985 $9,433 -3.64% -3.91%
12/31/94 $10,468 $10,133 $10,164 1.48% 7.75%
1/31/95 $10,125 $10,395 $9,836 2.59% -3.23%
2/28/95 $10,302 $10,800 $10,144 3.90% 3.13%
3/31/95 $10,400 $11,119 $10,203 2.95% 0.58%
4/30/95 $10,380 $11,446 $10,129 2.94% -0.72%
5/31/95 $10,782 $11,904 $10,464 4.00% 3.31%
6/30/95 $10,969 $12,180 $10,647 2.32% 1.74%
7/31/95 $11,214 $12,584 $10,818 3.32% 1.61%
8/31/95 $11,459 $12,616 $10,950 0.25% 1.22%
9/30/95 $11,773 $13,148 $11,151 4.22% 1.84%
10/31/95 $11,538 $13,101 $10,806 -0.36% -3.10%
11/30/95 $11,714 $13,676 $10,918 4.39% 1.04%
12/31/95 $12,356 $13,940 $11,551 1.93% 5.80%
1/31/96 $12,673 $14,414 $11,711 3.40% 1.38%
2/29/96 $12,836 $14,548 $11,943 0.93% 1.98%
3/31/96 $12,856 $14,688 $12,039 0.96% 0.81%
4/30/96 $12,897 $14,904 $12,094 1.47% 0.45%
5/31/96 $13,203 $15,288 $12,363 2.58% 2.23%
6/30/96 $13,336 $15,346 $12,611 0.38% 2.00%
7/31/96 $13,264 $14,668 $12,498 -4.42% -0.89%
8/31/96 $13,887 $14,977 $13,029 2.11% 4.25%
9/30/96 $14,295 $15,821 $13,355 5.63% 2.50%
10/31/96 $14,581 $16,257 $13,717 2.76% 2.71%
11/30/96 $15,040 $17,486 $14,286 7.56% 4.15%
12/31/96 $16,373 $17,140 $15,811 -1.98% 10.67%
1/31/97 $16,583 $18,211 $16,037 6.25% 1.43%
2/28/97 $16,562 $18,353 $16,046 0.78% 0.06%
3/31/97 $16,667 $17,599 $16,101 -4.11% 0.34%
4/30/97 $16,246 $18,650 $15,581 5.97% -3.23%
5/31/97 $16,825 $19,785 $16,045 6.09% 2.98%
6/30/97 $17,572 $20,672 $16,841 4.48% 4.96%
7/31/97 $18,025 $22,317 $17,395 7.96% 3.29%
8/31/97 $17,962 $21,068 $17,266 -5.60% -0.74%
9/30/97 $19,593 $22,222 $18,969 5.48% 9.86%
10/31/97 $18,909 $21,480 $18,163 -3.34% -4.25%
11/30/97 $19,298 $22,474 $18,528 4.63% 2.01%
12/31/97 $19,631 $22,861 $18,941 1.72% 2.23%
1/31/98 $19,425 $23,115 $18,674 1.11% -1.41%
2/28/98 $19,262 $24,781 $18,435 7.21% -1.28%
3/31/98 $19,707 $26,050 $18,798 5.12% 1.97%
4/30/98 $19,165 $26,313 $18,206 1.01% -3.15%
[INDEX CHARTS]
GRAPHIC MATERIAL (5)
The following line graph compares the performance of Franklin Real Estate
Securities Fund's Class II shares with the Standard & Poor's 500 Stock Index
(S&P 500) and the Wilshire Real Estate Securities Index based on a $10,000
investment from 5/1/95 to 4/30/98.
FRANKLIN REAL WILSHIRE
DATE ESTATE S&P 500 REAL S&P 500 Wilshire
SECURITIES FUND - EST. SEC. Real Est.
CLASS II INDEX
- --------------------------------------------------------------------------------
5/1/95 $9,897 $10,000 $10,000
5/31/95 $10,262 $10,400 $10,331 4.00% 3.31%
6/30/95 $10,439 $10,641 $10,511 2.32% 1.74%
7/31/95 $10,654 $10,995 $10,680 3.32% 1.61%
8/31/95 $10,888 $11,022 $10,810 0.25% 1.22%
9/30/95 $11,178 $11,487 $11,009 4.22% 1.84%
10/31/95 $10,953 $11,446 $10,668 -0.36% -3.10%
11/30/95 $11,103 $11,948 $10,779 4.39% 1.04%
12/31/95 $11,709 $12,179 $11,404 1.93% 5.80%
1/31/96 $11,991 $12,593 $11,561 3.40% 1.38%
2/29/96 $12,146 $12,710 $11,790 0.93% 1.98%
3/31/96 $12,165 $12,832 $11,886 0.96% 0.81%
4/30/96 $12,194 $13,021 $11,939 1.47% 0.45%
5/31/96 $12,476 $13,357 $12,206 2.58% 2.23%
6/30/96 $12,583 $13,407 $12,450 0.38% 2.00%
7/31/96 $12,515 $12,815 $12,339 -4.42% -0.89%
8/31/96 $13,088 $13,085 $12,863 2.11% 4.25%
9/30/96 $13,466 $13,822 $13,185 5.63% 2.50%
10/31/96 $13,728 $14,203 $13,542 2.76% 2.71%
11/30/96 $14,156 $15,277 $14,104 7.56% 4.15%
12/31/96 $15,395 $14,975 $15,609 -1.98% 10.67%
1/31/97 $15,585 $15,911 $15,832 6.25% 1.43%
2/28/97 $15,555 $16,035 $15,842 0.78% 0.06%
3/31/97 $15,635 $15,376 $15,896 -4.11% 0.34%
4/30/97 $15,236 $16,294 $15,382 5.97% -3.23%
5/31/97 $15,775 $17,286 $15,841 6.09% 2.98%
6/30/97 $16,464 $18,060 $16,626 4.48% 4.96%
7/31/97 $16,873 $19,498 $17,173 7.96% 3.29%
8/31/97 $16,803 $18,406 $17,046 -5.60% -0.74%
9/30/97 $18,321 $19,415 $18,727 5.48% 9.86%
10/31/97 $17,672 $18,766 $17,931 -3.34% -4.25%
11/30/97 $18,021 $19,635 $18,291 4.63% 2.01%
12/31/97 $18,328 $19,973 $18,699 1.72% 2.23%
1/31/98 $18,113 $20,195 $18,436 1.11% -1.41%
2/28/98 $17,959 $21,651 $18,200 7.21% -1.28%
3/31/98 $18,359 $22,759 $18,558 5.12% 1.97%
4/30/98 $17,836 $22,989 $17,974 1.01% -3.15%
[INDEX CHARTS]
GRAPHIC MATERIAL (6)
The following line graph compares the performance of Franklin Real Estate
Securities Fund's Advisor Class shares with the Standard & Poor's 500 Stock
Index (S&P 500) and the Wilshire Real Estate Securities Index based on a
$10,000 investment from 1/3/94 to 4/30/98.
FRANKLIN REAL
ESTATE WILSHIRE
DATE SECURITIES FUND - S&P 500 REAL S&P 500 Wilshire
ADVISOR CLASS EST. SECS. Real Est.
INDEX
- --------------------------------------------------------------------------------
1/3/94 $10,000 $10,000 $10,000
1/31/94 $10,250 $10,340 $10,300 3.40% 3.00%
2/28/94 $10,820 $10,060 $10,721 -2.71% 4.09%
3/31/94 $10,680 $9,621 $10,225 -4.36% -4.63%
4/30/94 $10,920 $9,744 $10,339 1.28% 1.12%
5/31/94 $11,120 $9,904 $10,554 1.64% 2.08%
6/30/94 $10,880 $9,661 $10,347 -2.45% -1.97%
7/31/94 $10,870 $9,978 $10,370 3.28% 0.23%
8/31/94 $10,890 $10,387 $10,363 4.10% -0.07%
9/30/94 $10,750 $10,134 $10,190 -2.44% -1.67%
10/31/94 $10,410 $10,362 $9,817 2.25% -3.66%
11/30/94 $10,040 $9,985 $9,433 -3.64% -3.91%
12/31/94 $10,960 $10,133 $10,164 1.48% 7.75%
1/31/95 $10,601 $10,395 $9,836 2.59% -3.23%
2/28/95 $10,786 $10,800 $10,144 3.90% 3.13%
3/31/95 $10,888 $11,119 $10,203 2.95% 0.58%
4/30/95 $10,868 $11,446 $10,129 2.94% -0.72%
5/31/95 $11,289 $11,904 $10,464 4.00% 3.31%
6/30/95 $11,484 $12,180 $10,647 2.32% 1.74%
7/31/95 $11,741 $12,584 $10,818 3.32% 1.61%
8/31/95 $11,998 $12,616 $10,950 0.25% 1.22%
9/30/95 $12,327 $13,148 $11,151 4.22% 1.84%
10/31/95 $12,080 $13,101 $10,806 -0.36% -3.10%
11/30/95 $12,265 $13,676 $10,918 4.39% 1.04%
12/31/95 $12,937 $13,940 $11,551 1.93% 5.80%
1/31/96 $13,268 $14,414 $11,711 3.40% 1.38%
2/29/96 $13,439 $14,548 $11,943 0.93% 1.98%
3/31/96 $13,461 $14,688 $12,039 0.96% 0.81%
4/30/96 $13,503 $14,904 $12,094 1.47% 0.45%
5/31/96 $13,824 $15,288 $12,363 2.58% 2.23%
6/30/96 $13,963 $15,346 $12,611 0.38% 2.00%
7/31/96 $13,888 $14,668 $12,498 -4.42% -0.89%
8/31/96 $14,540 $14,977 $13,029 2.11% 4.25%
9/30/96 $14,967 $15,821 $13,355 5.63% 2.50%
10/31/96 $15,266 $16,257 $13,717 2.76% 2.71%
11/30/96 $15,747 $17,486 $14,286 7.56% 4.15%
12/31/96 $17,142 $17,140 $15,811 -1.98% 10.67%
1/31/97 $17,363 $18,211 $16,037 6.25% 1.43%
2/28/97 $17,352 $18,353 $16,046 0.78% 0.06%
3/31/97 $17,462 $17,599 $16,101 -4.11% 0.34%
4/30/97 $17,021 $18,650 $15,581 5.97% -3.23%
5/31/97 $17,638 $19,785 $16,045 6.09% 2.98%
6/30/97 $18,420 $20,672 $16,841 4.48% 4.96%
7/31/97 $18,905 $22,317 $17,395 7.96% 3.29%
8/31/97 $18,839 $21,068 $17,266 -5.60% -0.74%
9/30/97 $20,546 $22,222 $18,969 5.48% 9.86%
10/31/97 $19,841 $21,480 $18,163 -3.34% -4.25%
11/30/97 $20,260 $22,474 $18,528 4.63% 2.01%
12/31/97 $20,611 $22,861 $18,941 1.72% 2.23%
1/31/98 $20,407 $23,115 $18,674 1.11% -1.41%
2/28/98 $20,236 $24,781 $18,435 7.21% -1.28%
3/31/98 $20,703 $26,050 $18,798 5.12% 1.97%
4/30/98 $20,145 $26,313 $18,206 1.01% -3.15%
ANNUAL REPORT
AUGUST 31, 1998
TEMPLETON GLOBAL REAL ESTATE FUND
[PHOTO]
[LOGO] FRANKLIN TEMPLETON
PAGE
[FRANKLIN TEMPLETON 50-YEAR LOGO]
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently he devotes all of his time and efforts to the John
Templeton Foundation. A major portion of his assets remain invested in the
Templeton funds which are managed by many of the investment professionals he
selected and trained.
[PHOTO OF JEFFREY A. EVERETT]
JEFFREY A. EVERETT, CFA
Portfolio Manager
Templeton Global Real Estate Fund
PAGE
SHAREHOLDER LETTER
Your Fund's Objective: Templeton Global Real Estate Fund seeks long-term capital
growth, with current income as a secondary objective, by investing primarily in
securities of issuers throughout the world which are principally engaged in or
related to the real estate industry or which own significant real estate assets.
Dear Shareholder:
This annual report for Templeton Global Real Estate Fund covers the fiscal year
ended August 31, 1998. During this period, global equity markets experienced
extreme volatility, and many stocks dropped appreciably in value. Real estate
stocks were no exception, and Templeton Global Real Estate Fund-Class I produced
a one-year cumulative total return of -19.94%, as discussed in the Performance
Summary on page 6.
The universe of real estate stocks has continued to grow and develop as an asset
class, yielding an increasing number of opportunities for the Fund. Over the
past eight years, we have witnessed the equity market capitalization of U.S.
Real Estate Investment Trusts increase from about $9 billion to over $134
billion.(1) The European listed real estate market has also
1. Source: National Association of Real Estate Investment Trusts.
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 16 of
this report.
CONTENTS
<TABLE>
<S> <C>
Shareholder Letter ............ 1
Performance Summaries
Class I .................... 6
Class II ................... 10
Financial Highlights &
Statement of Investments ...... 14
Financial Statements .......... 20
Notes to Financial
Statements .................... 23
Independent Auditor's Report .. 27
Tax Designation ............... 28
</TABLE>
[PYRAMID GRAPH]
PAGE
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
8/31/98
<TABLE>
<S> <C>
UNITED STATES 50.0%
EUROPE 18.9%
ASIA 12.3%
CANADA 6.4%
LATIN AMERICA 4.1%
OTHER 3.8%
SHORT-TERM
INVESTMENTS &
OTHER NET ASSETS 4.5%
</TABLE>
grown. Although as of August 31, 1998, the publicly traded European real estate
market makes up only 3% of the total estimated European real estate market, this
percentage could double by 2002. However, such rapid growth and increasing
liquidity does not come without dislocations, which can cause wide swings in
market performance.
In contrast to the past several years, when a strong U.S. real estate market
helped make the performance of many real estate investment trusts (REITs)(2)
resemble that of "growth" stocks, prices of the Fund's U.S. REITs generally
declined during the period under review. However, we believe that the industry
has begun a period of consolidation, during which time a few companies will
establish themselves as leaders. Although we did not purchase additional REITs
during this reporting period, we maintained our positions in several, including
Crescent Real Estate Equities Company. Management of the firm has purchased
property allowing it significant leeway in establishing rent levels. It also has
established a dominant position in the market, and, in our opinion, could
deliver value as an industry consolidator. We also continued to hold stock in
regional companies, such as Summit Properties Inc. and Highwood Properties Inc.,
which we believe have the potential to command premium stock prices during this
consolidation phase.
As the U.S. market matured, the European real estate market entered a period of
expansive growth. Historically, there have been few publicly traded European
real estate companies, and their stocks have typically had limited liquidity. In
our opinion, however, this situation
2. A REIT is a company that owns and manages large real estate investments,
providing investors with potential benefits from owning real estate on a scale
that most individuals could not achieve.
2
PAGE
should change as large financial and industrial institutions realize the
benefits of more liquid real estate holdings and spin off their real estate
assets into separate, publicly traded companies. We also believe rental income
may grow as a result of increased demand for office space from companies
requiring a presence in cities across the continent. Furthermore, unprecedented
low interest rates necessary for admission to the European Monetary Union should
provide many European real estate companies access to inexpensive capital for
growth and expansion.
In our opinion, the general price declines in European real estate stocks during
the reporting period reflected a lack of understanding by investors that this
asset class can provide strong defensive characteristics for a portfolio. We
therefore maintained existing holdings such as Union du Credit Bail Immobilier
Unibail, which owns premier office properties in Paris. We also attempted to
identify undervalued companies that could benefit from imminent economic changes
in Europe, and added positions to the Fund in companies with assets in the
central business districts of several major European cities. One such purchase
was Prima Inmobiliaria SA, which owns and acquires office and industrial
buildings in Madrid and Barcelona. As of August 31, 1998, our European holdings
comprised 18.9% of total net assets, up from 13.6% one year earlier.
An extremely difficult macroeconomic environment in Asia during the reporting
period caused property prices there to decline dramatically. In Hong Kong,
prices of real estate and real estate stocks plunged, as
TOP 10 HOLDINGS
8/31/98
<TABLE>
<CAPTION>
COMPANY % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- --------------------------------------------
<S> <C>
Revenue Property Ltd.
Real Estate, Canada 4.9%
Equity Residential Properties
Real Estate, U.S. 4.6%
Rouse Co.
Real Estate, U.S. 4.3%
CBL & Associates Properties Inc.
Real Estate, U.S. 3.8%
LTC Properties Inc.
Real Estate, U.S. 3.6%
General Growth Properties
Real Estate, U.S. 3.6%
Weeks Corp.
Real Estate, U.S. 3.6%
Highwood Properties Inc., REIT,
Real Estate, U.S. 3.1%
Union du Credit Bail
Immobilier Unibail
Real Estate, France 3.0%
Crescent Real Estate
Equities Co.
Real Estate, U.S. 2.5%
</TABLE>
3
PAGE
developers who had been enjoying huge profit margins saw demand for their
properties shrink. Adding to the pressure on Hong Kong property stocks was the
fact that these stocks comprise a significant portion of Hong Kong's Hang Seng
Index, (3) and many investors purchase them as proxies for the entire market
rather than for their value as real estate stocks. This can cause their prices
to decline due to technical factors affecting the broader Hong Kong market
rather than as a result of stock-specific fundamentals. Of course, we focus on
stock-specific fundamentals and shall seek, as always, to acquire stock in
companies we believe have strong balance sheets and management for a fraction of
what we consider to be their potential value. Even under our worst-case
scenario, we believe companies such as Cheung Kong Holdings Ltd. and New World
Development Co. Ltd. should weather this period and may eventually outperform
other stocks.
Looking forward, we're confident about the future of real estate stocks. The
road may not always be smooth, but, in our opinion, many of today's undervalued
stocks have the potential to create value over the long term.
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of August 31, 1998, the end of the reporting period. However, market
and economic conditions are changing constantly, which can be expected to affect
our strategies and the Fund's portfolio composition. Although historical
performance is no guarantee of future results, these insights may help you
better understand our investment and management philosophy.
3. An index is an unmanaged group of securities that is used to measure market
performance. One cannot invest directly in an index.
4
PAGE
Also, there are special risks involved with global investing related to market,
currency, economic, social, political and other factors. Emerging markets
involve similar but heightened risks, in addition to those associated with their
relatively small size and lesser liquidity. Investing in any emerging market
means accepting a certain amount of volatility and, in some cases, severe market
corrections. Since the Fund concentrates on the real estate industry, its share
price may experience greater volatility than those of more broadly diversified
investments. While short-term volatility can be disconcerting, declines of as
much as 40% to 50% are not unusual in emerging markets. For example, the Hong
Kong equity market has increased 785% in the last 15 years, but has suffered six
declines of more than 20% during that time. (4) The special risks associated
with these types of investments, as well as other considerations, are discussed
in the Fund's prospectus.
We thank you for your participation in Templeton Global Real Estate Fund and
look forward to serving you in the future. Please feel free to contact us with
any questions or comments you may have.
Sincerely,
/s/JEFFREY A. EVERETT
Jeffrey A. Everett, CFA
Portfolio Manager
Templeton Global Real Estate Fund, Inc.
4. Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended June 30, 1998. Market returns are measured in Hong Kong dollars.
5
PAGE
PERFORMANCE SUMMARY
CLASS I
Templeton Global Real Estate Fund - Class I produced a cumulative total return
of -19.94% for the one-year period ended August 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include the initial sales charge. While we
expect market volatility in the short term, we have always maintained a
long-term perspective when managing the Fund, and we encourage shareholders to
view their investments in a similar manner. As you can see from the table on
page 9, the Fund's Class I shares delivered a cumulative total return of
slightly more than 65% since inception on September 12, 1989.
The Fund's share price, as measured by net asset value, decreased $3.63, from
$16.33 on August 31, 1997, to $12.70 on August 31, 1998. During the reporting
period, shareholders received per-share distributions of 33 cents ($0.33) in
income dividends and 13 cents ($0.13) in long-term capital gains. Distributions
will vary depending on income earned by the Fund and any profits realized from
the sale of securities in the portfolio, as well as the level of the Fund's
operating expenses.
The graph on page 8 compares the performance of the Fund's Class I shares since
their inception and the unmanaged Morgan Stanley Capital International(R) (MSCI)
World Index, which includes approximately 1,500
Past performance is not predictive of future results.
6
PAGE
companies representing the stock markets of 23 countries, including the U.S.,
Canada, the United Kingdom, and Japan. It also shows the Fund's performance
versus the Consumer Price Index (CPI), a commonly used measure of inflation.
Please remember, the Fund's performance differs from that of an index because an
index is not managed according to any investment strategy, does not contain cash
(the Fund generally carries a certain percentage of cash at any given time), and
includes no initial sales charge or management or operating expenses. Of course,
one cannot invest directly in an index, nor is an index representative of the
Fund's portfolio.
Past performance is not predictive of future results.
7
PAGE
CLASS I
Total Return Index Comparison
$10,000 Investment (9/12/89 - 8/31/98)
[LINE GRAPH]
The following line graph compares the performance of Templeton Global Real
Estate Fund's Class I shares to that of the Morgan Stanley Capital International
World Index and to the Consumer Price Index, based on a $10,000 investment from
9/12/89 to 8/31/98.
<TABLE>
<CAPTION>
MSCI
Templeton Global Real World
Estate Fund - Class I* Index CPI
<S> <C> <C> <C>
9/12/89 $9,425 $10,000 $10,000
Sep-89 $9,425 $10,418 $10,019
Oct-89 $9,369 $10,072 $10,068
Nov-89 $9,369 $10,476 $10,091
Dec-89 $9,435 $10,814 $10,106
Jan-90 $9,102 $10,311 $10,210
Feb-90 $9,093 $9,870 $10,258
Mar-90 $9,150 $9,276 $10,315
Apr-90 $8,827 $9,144 $10,331
May-90 $9,368 $10,109 $10,355
Jun-90 $9,549 $10,038 $10,411
Jul-90 $9,596 $10,131 $10,451
Aug-90 $8,437 $9,185 $10,547
Sep-90 $7,800 $8,218 $10,635
Oct-90 $7,767 $8,987 $10,699
Nov-90 $7,905 $8,841 $10,723
Dec-90 $8,200 $9,028 $10,723
Jan-91 $8,984 $9,360 $10,787
Feb-91 $9,567 $10,228 $10,803
Mar-91 $10,009 $9,928 $10,819
Apr-91 $10,281 $10,007 $10,835
May-91 $10,381 $10,236 $10,866
Jun-91 $10,029 $9,605 $10,899
Jul-91 $10,230 $10,061 $10,915
Aug-91 $10,110 $10,030 $10,947
Sep-91 $10,311 $10,295 $10,996
Oct-91 $10,139 $10,464 $11,011
Nov-91 $10,003 $10,010 $11,043
Dec-91 $11,022 $10,740 $11,052
Jan-92 $11,423 $10,543 $11,068
Feb-92 $11,296 $10,363 $11,108
Mar-92 $11,127 $9,877 $11,164
Apr-92 $11,264 $10,016 $11,180
May-92 $11,634 $10,416 $11,195
Jun-92 $11,433 $10,069 $11,236
Jul-92 $11,264 $10,096 $11,260
Aug-92 $10,969 $10,344 $11,292
Sep-92 $11,085 $10,251 $11,323
Oct-92 $11,197 $9,975 $11,364
Nov-92 $11,143 $10,156 $11,379
Dec-92 $11,479 $10,240 $11,372
Jan-93 $11,905 $10,276 $11,428
Feb-93 $12,352 $10,521 $11,468
Mar-93 $13,029 $11,133 $11,509
Apr-93 $13,149 $11,651 $11,540
May-93 $13,302 $11,922 $11,556
Jun-93 $13,193 $11,823 $11,572
Jul-93 $13,313 $12,069 $11,572
Aug-93 $13,825 $12,624 $11,604
Sep-93 $14,033 $12,393 $11,628
Oct-93 $14,437 $12,736 $11,677
Nov-93 $14,448 $12,018 $11,685
Dec-93 $15,265 $12,608 $11,684
Jan-94 $15,842 $13,442 $11,717
Feb-94 $15,708 $13,270 $11,757
Mar-94 $14,943 $12,700 $11,798
Apr-94 $14,921 $13,095 $11,813
May-94 $15,010 $13,131 $11,821
Jun-94 $14,410 $13,097 $11,861
Jul-94 $14,921 $13,348 $11,892
Aug-94 $15,154 $13,752 $11,941
Sep-94 $14,965 $13,393 $11,973
Oct-94 $14,666 $13,776 $11,982
Nov-94 $14,152 $13,182 $11,997
Dec-94 $14,090 $13,312 $11,997
Jan-95 $13,639 $13,115 $12,045
Feb-95 $13,808 $13,308 $12,093
Mar-95 $13,706 $13,952 $12,133
Apr-95 $13,819 $14,441 $12,173
May-95 $14,473 $14,567 $12,197
Jun-95 $14,586 $14,566 $12,221
Jul-95 $14,902 $15,298 $12,221
Aug-95 $14,891 $14,959 $12,254
Sep-95 $15,094 $15,398 $12,277
Oct-95 $14,673 $15,159 $12,317
Nov-95 $14,685 $15,688 $12,308
Dec-95 $14,936 $16,150 $12,300
Jan-96 $15,365 $16,444 $12,373
Feb-96 $15,435 $16,547 $12,413
Mar-96 $15,331 $16,826 $12,477
Apr-96 $15,551 $17,224 $12,525
May-96 $15,830 $17,242 $12,549
Jun-96 $15,784 $17,333 $12,557
Jul-96 $15,400 $16,724 $12,581
Aug-96 $16,004 $16,919 $12,605
Sep-96 $16,376 $17,585 $12,645
Oct-96 $16,658 $17,710 $12,685
Nov-96 $17,178 $18,706 $12,709
Dec-96 $17,992 $18,410 $12,709
Jan-97 $18,327 $18,634 $12,749
Feb-97 $18,315 $18,852 $12,787
Mar-97 $18,123 $18,483 $12,819
Apr-97 $17,729 $19,090 $12,834
May-97 $18,662 $20,272 $12,826
Jun-97 $19,080 $21,285 $12,842
Jul-97 $19,906 $22,269 $12,857
Aug-97 $19,535 $20,783 $12,882
Sep-97 $20,540 $21,915 $12,914
Oct-97 $18,651 $20,765 $12,946
Nov-97 $18,784 $21,136 $12,938
Dec-97 $18,940 $21,397 $12,923
Jan-98 $18,768 $21,997 $12,946
Feb-98 $19,654 $23,488 $12,972
Mar-98 $20,073 $24,483 $12,998
Apr-98 $19,703 $24,726 $13,021
May-98 $19,014 $24,420 $13,045
Jun-98 $18,300 $25,003 $13,060
Jul-98 $17,536 $24,966 $13,076
Aug-98 $15,640 $21,641 $13,092
</TABLE>
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS I SHARES. THE FUND
OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT
ITS PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS.
*Performance figures represent the change in value of an investment over the
period shown and have been restated to include the current, maximum 5.75%
initial sales charge, assuming reinvestment of distributions at net asset value.
Prior to July 1, 1992, Fund shares were offered at a higher initial sales
charge; thus, actual total returns would have been lower. On January 1, 1993,
the Fund implemented a Rule 12b-1 plan, which affects subsequent performance.
Past performance is not predictive of future results.
**Source: Morgan Stanley Capital International. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
***Source: Bureau of Labor Statistics (8/31/98).
Past performance is not predictive of future results.
8
PAGE
CLASS I
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 5-YEAR (9/12/89)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -19.94% 13.20% 65.94%
Average Annual Total Return(2) -24.56% 1.29% 5.11%
Value of $10,000 Investment(3) $7,544 $10,669 $15,640
<CAPTION>
8/31/94 8/31/95 8/31/96 8/31/97 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) 9.69% -1.74% 7.48% 22.06% -19.94%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include the sales charge.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and has been restated to include the
current, maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares
were offered at a higher sales charge; thus, actual total returns would have
been lower.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and have been restated to include the current,
maximum 5.75% initial sales charge. Prior to July 1, 1992, Fund shares were
offered at a higher sales charge; thus, actual total returns would have been
lower.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include the sales charge.
On January 1, 1993, the Fund's Class I shares implemented a Rule 12b-1 plan,
which affects subsequent performance. All calculations assume reinvestment of
distributions at net asset value. Since markets can go down as well as up,
investment return and principal value will fluctuate with market conditions,
currency volatility, and the economic, social and political climates of
countries where the Fund invests. Emerging markets involve heightened risks
related to the same factors, in addition to those associated with their
relatively small size and lesser liquidity. You may have a gain or loss when you
sell your shares.
Past performance is not predictive of future results.
9
PAGE
CLASS II
Templeton Global Real Estate Fund - Class II produced a cumulative total return
of -20.61% for the one-year period ended August 31, 1998. Cumulative total
return measures the change in value of an investment, assuming reinvestment of
all distributions, and does not include sales charges.
The Fund's share price, as measured by net asset value, decreased $3.61, from
$16.16 on August 31, 1997, to $12.55 on August 31, 1998. During the reporting
period, shareholders received per-share distributions of 21.48 cents ($0.2148)
in income dividends and 13 cents ($0.13) in long-term capital gains.
Distributions will vary depending on income earned by the Fund and any profits
realized from the sale of securities in the portfolio, as well as the level of
the Fund's operating expenses.
Past performance is not predictive of future results.
10
PAGE
The graph on the following page compares the performance of the Fund's Class II
shares since inception and the unmanaged Morgan Stanley Capital International(R)
(MSCI) World Index, which includes approximately 1,500 companies representing
the stock markets of 23 countries, including the U.S., Canada, the United
Kingdom, and Japan. It also shows the Fund's performance versus the Consumer
Price Index (CPI), a commonly used measure of inflation. Please remember that
the Fund's performance differs from that of an index because an index is not
managed according to any investment strategy, does not contain cash (the Fund
generally carries a certain percentage of cash at any given time), and includes
no sales charges or management or operating expenses. Of course, one cannot
invest directly in an index, nor is an index representative of the Fund's
portfolio.
Past performance is not predictive of future results.
11
PAGE
CLASS II
Total Return Index Comparison
$10,000 Investment (5/1/95 - 8/31/98)
[LINE GRAPH]
The following line graph compares the performance of Templeton Global Real
Estate Fund's Class II shares to that of the Morgan Stanley Capital
International World Index and to the Consumer Price Index, based on a $10,000
investment from 5/1/95 to 8/31/98.
<TABLE>
<CAPTION>
Templeton Global
Real Estate Fund - MSCI World
Class II* Index CPI
<S> <C> <C> <C>
5/1/95 $9,903 $10,000 $10,000
May-95 $10,364 $10,088 $10,020
Jun-95 $10,437 $10,086 $10,040
Jul-95 $10,663 $10,593 $10,040
Aug-95 $10,639 $10,359 $10,067
Sep-95 $10,784 $10,663 $10,086
Oct-95 $10,471 $10,497 $10,119
Nov-95 $10,479 $10,863 $10,112
Dec-95 $10,652 $11,183 $10,105
Jan-96 $10,952 $11,387 $10,164
Feb-96 $10,993 $11,458 $10,197
Mar-96 $10,910 $11,651 $10,250
Apr-96 $11,060 $11,927 $10,289
May-96 $11,251 $11,940 $10,309
Jun-96 $11,209 $12,002 $10,316
Jul-96 $10,935 $11,581 $10,335
Aug-96 $11,359 $11,716 $10,355
Sep-96 $11,616 $12,177 $10,388
Oct-96 $11,804 $12,264 $10,421
Nov-96 $12,167 $12,953 $10,441
Dec-96 $12,736 $12,748 $10,441
Jan-97 $12,966 $12,904 $10,473
Feb-97 $12,958 $13,054 $10,505
Mar-97 $12,813 $12,799 $10,531
Apr-97 $12,524 $13,219 $10,544
May-97 $13,171 $14,038 $10,537
Jun-97 $13,460 $14,739 $10,550
Jul-97 $14,031 $15,421 $10,563
Aug-97 $13,758 $14,392 $10,583
Sep-97 $14,456 $15,175 $10,609
Oct-97 $13,120 $14,379 $10,636
Nov-97 $13,197 $14,636 $10,629
Dec-97 $13,290 $14,816 $10,617
Jan-98 $13,168 $15,232 $10,636
Feb-98 $13,777 $16,265 $10,657
Mar-98 $14,064 $16,954 $10,678
Apr-98 $13,803 $17,122 $10,697
May-98 $13,298 $16,910 $10,717
Jun-98 $12,794 $17,314 $10,730
Jul-98 $12,254 $17,288 $10,742
Aug-98 $10,922 $14,985 $10,755
</TABLE>
THE HISTORICAL DATA SHOWN PERTAIN ONLY TO THE FUND'S CLASS II SHARES. THE FUND
OFFERS ANOTHER SHARE CLASS SUBJECT TO DIFFERENT FEES AND EXPENSES, WHICH AFFECT
ITS PERFORMANCE. SEE THE PROSPECTUS FOR DETAILS.
*Performance figures represent the change in value of an investment over the
periods shown and include all sales charges, assuming reinvestment of
distributions at net asset value. Past performance is not predictive of future
results.
**Source: Morgan Stanley Capital International. Index is unmanaged and includes
reinvested dividends. One cannot invest directly in an index.
***Source: Bureau of Labor Statistics (8/31/98).
Past performance is not predictive of future results.
12
PAGE
CLASS II
Periods ended 8/31/98
<TABLE>
<CAPTION>
SINCE
INCEPTION
1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cumulative Total Return(1) -20.61% 2.59% 10.29%
Average Annual Total Return(2) -22.18% 0.52% 2.68%
Value of $10,000 Investment(3) $7,782 $10,156 $10,922
<CAPTION>
8/31/96 8/31/97 8/31/98
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
One-Year Total Return(4) 6.69% 21.12% -20.61%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the 1.0% initial sales
charge and the 1.0% contingent deferred sales charge, applicable to shares
redeemed within 18 months of investment.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include all sales charges.
4. One-year total return represents the change in value of an investment over
the periods ended on the dates indicated and does not include sales charges.
All calculations assume reinvestment of distributions at net asset value. Since
markets can go down as well as up, investment return and principal value will
fluctuate with market conditions, currency volatility and the economic, social
and political climates of countries where the Fund invests. Emerging markets
involve heightened risks related to the same factors, in addition to those
associated with their relatively small size and lesser liquidity. You may have a
gain or loss when you sell your shares.
Past performance is not predictive of future results.
13
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS I
--------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year......................... $16.33 $13.78 $13.20 $13.66 $12.66
--------------------------------------------------------
Income from investment operations:
Net investment income..................................... .46 .39 .31 .39 .22
Net realized and unrealized gains (losses)................ (3.63) 2.58 .64 (.64) 1.00
--------------------------------------------------------
Total from investment operations........................... (3.17) 2.97 .95 (.25) 1.22
--------------------------------------------------------
Less distributions from:
Net investment income..................................... (.33) (.42) (.37) (.21) (.22)
Net realized gains........................................ (.05) -- -- -- --
In excess of net realized gains........................... (.08) -- -- -- --
--------------------------------------------------------
Total distributions........................................ (.46) (.42) (.37) (.21) (.22)
--------------------------------------------------------
Net asset value, end of year............................... $12.70 $16.33 $13.78 $13.20 $13.66
--------------------------------------------------------
--------------------------------------------------------
Total Return*.............................................. (19.94)% 22.06% 7.48% (1.74)% 9.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................ $97,823 $151,777 $125,875 $130,149 $131,544
Ratios to average net assets:
Expenses.................................................. 1.45% 1.45% 1.51% 1.55% 1.58%
Net investment income..................................... 2.70% 2.55% 2.73% 3.05% 1.97%
Portfolio turnover rate.................................... 23.18% 24.03% 20.07% 38.69% 32.34%
</TABLE>
*Total return does not reflect sales commissions.
14
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS II
-----------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------
1998 1997 1996 1995+
-----------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the year)
Net asset value, beginning of year.......................... $16.16 $13.67 $13.17 $12.25
-----------------------------------------------
Income from investment operations:
Net investment income...................................... .30 .31 .33 .03
Net realized and unrealized gains (losses)................. (3.57) 2.52 .52 .89
-----------------------------------------------
Total from investment operations............................ (3.27) 2.83 .85 .92
-----------------------------------------------
Less distributions from:
Net investment income...................................... (.21) (.34) (.35) --
Net realized gains......................................... (.05) -- -- --
In excess of net realized gains............................ (.08) -- -- --
-----------------------------------------------
Total distributions......................................... (.34) (.34) (.35) --
-----------------------------------------------
Net asset value, end of year................................ $12.55 $16.16 $13.67 $13.17
-----------------------------------------------
-----------------------------------------------
Total Return*............................................... (20.61)% 21.12% 6.69% 7.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's)............................. $6,869 $8,917 $5,275 $1,823
Ratios to average net assets:
Expenses................................................... 2.20% 2.20% 2.26% 2.26%**
Net investment income...................................... 1.97% 1.74% 2.20% 1.71%**
Portfolio turnover rate..................................... 23.18% 24.03% 20.07% 38.69%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period May 1, 1995 (effective date) to August 31, 1995.
See Notes to Financial Statements.
15
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 89.1%
BANKING 2.7%
Bangkok Bank Public Co. Ltd., fgn. ......................... Thailand 291,000 $ 204,881
Banque Nationale de Paris BNP............................... France 9,936 679,044
Development Bank of Singapore Ltd., fgn. ................... Singapore 43,000 148,902
HSBC Holdings Plc. ......................................... Hong Kong 79,916 1,696,457
National Australia Cap Sec Plc. ............................ Australia 3,400 92,225
*Shinhan Bank Co. Ltd. ..................................... South Korea 7,224 16,957
------------
2,838,466
------------
BUILDING MATERIALS & COMPONENTS 1.8%
Suez Cement Co. ............................................ Egypt 88,000 1,369,147
Unione Cementi Marchino Emiliane (Unicem), di Risp.......... Italy 139,580 546,755
------------
1,915,902
------------
CONSTRUCTION & HOUSING 2.2%
Daito Trust Construction Co. Ltd. .......................... Japan 101,800 814,746
++*Sundance Homes Inc. ..................................... United States 640,600 1,281,200
Toda Corp. ................................................. Japan 70,000 243,431
------------
2,339,377
------------
ENERGY SOURCES 1.0%
Societe Elf Aquitaine SA.................................... France 10,317 1,054,394
------------
FINANCIAL SERVICES .6%
Housing Development Finance Corp. Ltd. ..................... India 6,100 367,370
Lend Lease Corp. Ltd. ...................................... Australia 16,000 302,605
*Security Capital Group, wts. .............................. United States 13,795 296
------------
670,271
------------
FOREST PRODUCTS & PAPER 1.2%
St. Joe Co. ................................................ United States 60,000 1,203,750
------------
LEISURE & TOURISM 2.4%
Grand Hotel Holdings Ltd. .................................. Hong Kong 2,469,000 382,336
Mandarin Oriental Intl. Ltd. ............................... Singapore 1,501,000 705,470
Oriental Hotel (Thailand) Public Co. Ltd., fgn. ............ Thailand 76,200 378,272
Rank Group Plc.............................................. United Kingdom 224,500 1,067,633
------------
2,533,711
------------
MERCHANDISING .7%
Li & Fung Ltd. ............................................. Hong Kong 70,000 82,202
Wessel & Vett AS, C......................................... Denmark 12,000 645,299
------------
727,501
------------
</TABLE>
16
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING 1.9%
Anglo American Platinum Corp. Ltd. ......................... South Africa 1,208 $ 15,041
Boehler Uddeholm AG......................................... Austria 9,500 453,342
Industrias Penoles SA....................................... Mexico 391,100 937,589
RGC Ltd. ................................................... Australia 447,522 551,883
------------
1,957,855
------------
MISC MATERIALS & COMMODITIES .3%
De Beers/Centenary Linked Units, Reg. ...................... South Africa 27,600 333,764
------------
MULTI-INDUSTRY 5.1%
Cheung Kong Holdings Ltd. .................................. Hong Kong 618,000 2,392,505
First Pacific Co. .......................................... Hong Kong 1,952,667 604,759
Hutchison Whampoa Ltd. ..................................... Hong Kong 210,000 910,546
*Metro Pacific Corp. MDI.................................... Philippines 21,431,777 318,051
Swire Pacific Ltd., B....................................... Hong Kong 800 359
Wheelock and Company Ltd. .................................. Hong Kong 2,086,000 1,096,945
------------
5,323,165
------------
REAL ESTATE 62.4%
+American Health Properties Inc. ........................... United States 64,300 1,430,675
Bail Investissement......................................... France 8,700 1,193,858
+Boston Properties Inc. .................................... United States 65,000 1,856,563
*Canlan Investment Corp. ................................... Canada 293,000 299,716
+Carramerica Realty Corp. .................................. United States 65,000 1,462,500
*Catellus Development Corp. ................................ United States 90,000 1,130,625
+CBL & Associates Properties Inc. .......................... United States 160,000 3,980,000
+Charles E. Smith Residential Realty Inc. .................. United States 80,000 2,380,000
China Resources Beijing Land Ltd. .......................... China 2,000,000 281,319
China Resources Beijing Land Ltd., 144A..................... China 480,300 67,559
+Crescent Real Estate Equities Co. ......................... United States 113,500 2,610,500
+Equity Residential Properties.............................. United States 100,000 3,993,750
+Federal Realty Investment Trust............................ United States 33,000 664,125
+General Growth Properties.................................. United States 104,000 3,750,500
+Highwood Properties Inc., REIT............................. United States 127,800 3,250,913
Inversiones y Representacion SA............................. Argentina 338,051 811,485
Inversiones y Representacion SA, GDR........................ Argentina 832 19,760
+LTC Properties Inc. ....................................... United States 226,000 3,771,375
+Nationwide Health Properties Inc. ......................... United States 122,000 2,493,375
New Asia Realty and Trust Co. Ltd., A....................... Hong Kong 388,000 240,334
New World Development Co. Ltd. ............................. Hong Kong 761,109 820,118
+*Northstar Capital Investment Corp. ....................... United States 95,000 1,947,500
+Omega Healthcare Investors................................. United States 57,183 1,636,863
*Prima Inmobiliaria SA...................................... Spain 95,500 637,028
+Prologis Trust............................................. United States 93,808 1,876,160
Revenue Property Ltd. ...................................... Canada 3,294,739 5,160,701
Rouse Co. .................................................. United States 156,300 4,493,625
</TABLE>
17
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
REAL ESTATE (CONT.)
Ryoden Development Ltd. .................................... Hong Kong 3,270,000 $ 198,330
*Security Capital US Realty................................. Luxembourg 232,000 2,343,200
+Summit Properties Inc., REIT............................... United States 91,300 1,529,275
Taylor Woodrow Plc. ........................................ United Kingdom 315,802 727,118
Union du Credit Bail Immobilier Unibail..................... France 26,850 3,184,746
+Weeks Corp. ............................................... United States 135,000 3,729,375
Westfield Trust, units...................................... Australia 784,365 1,391,442
------------
65,364,413
------------
TELECOMMUNICATIONS .9%
+++Receipts of Telebras Stock............................... Brazil 6,664,000 339,740
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 15,700 560,294
------------
900,034
------------
TRANSPORTATION 3.0%
East Japan Railway Co. ..................................... Japan 180 863,092
Florida East Coast Industries Inc. ......................... United States 44,000 1,028,500
Peninsular & Oriental Steam Navigation Co. ................. United Kingdom 104,961 1,212,731
------------
3,104,323
------------
UTILITIES ELECTRICAL & GAS 2.9%
National Grid Group Plc. ................................... United Kingdom 199,070 1,439,215
National Power Plc. ........................................ United Kingdom 192,378 1,604,251
------------
3,043,466
------------
TOTAL COMMON STOCKS (COST $94,530,882)...................... 93,310,392
------------
PREFERRED STOCKS 3.1%
Banco Itau SA, pfd. ........................................ Brazil 1,117,000 474,552
Baumax AG, pfd. ............................................ Austria 36,907 716,797
Cia Vale do Rio Doce, A, pfd. .............................. Brazil 30,800 408,259
Cia Vale do Rio Doce, ADR, pfd. ............................ Brazil 31,200 413,561
+Equity Residential Properties Trust, G, cvt., pfd. ........ United States 40,000 860,000
Petrobras Distribuidora SA, pfd. ........................... Brazil 37,183,700 363,022
------------
TOTAL PREFERRED STOCKS (COST $5,347,947).................... 3,236,191
------------
<CAPTION>
PRINCIPAL
AMOUNT**
--------
<S> <C> <C> <C>
BONDS 3.3%
Government of Italy, cvt., 5.00%, 6/28/01................... Italy $1,345,000 2,177,219
Revenue Property Ltd., cvt., 6.00%, 3/01/04................. Canada 1,400,000 1,267,000
------------
TOTAL BONDS (COST $2,750,722)............................... 3,444,219
------------
SHORT TERM INVESTMENT (COST $222,904) .2%
U.S. Treasury Bill, 5.08%, 11/05/98......................... United States 225,000 223,095
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENT (COST
$102,852,455)............................................. 100,213,897
------------
</TABLE>
18
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
STATEMENT OF INVESTMENTS, AUGUST 31, 1998 (CONT.)
<TABLE>
<CAPTION>
PRINCIPAL
COUNTRY AMOUNT** VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a)REPURCHASE AGREEMENT 3.4%
Swiss Bank Corp., 5.75%, 9/01/98 (Maturity Value $3,541,566)
(COST $3,541,000) Collateralized by U.S. Treasury Notes &
Bonds..................................................... United States $3,541,000 $ 3,541,000
------------
TOTAL INVESTMENTS (COST $106,393,455) 99.1%................. 103,754,897
OTHER ASSETS, LESS LIABILITIES .9%.......................... 937,306
------------
TOTAL NET ASSETS 100.0%..................................... $104,692,203
------------
------------
</TABLE>
*Non-income producing.
**Securities traded in U.S. dollars.
(a)At August 31, 1998, all repurchase agreements held by the Fund had been
entered into on that date.
+Real Estate Investment Trust (41.3% of total net assets).
++The Investment Company Act of 1940 defines "affiliated companies" as
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" at August
31, 1998 were $1,281,200.
+++Receipts of Telebras stock represent a basket of twelve new holding companies
to be received in conjunction with the "split-up" of Telecomunicacoes
Brasileiras SA (Telebras).
See Notes to Financial Statements.
19
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $102,852,455).... $100,213,897
Repurchase agreement, at value and cost.................... 3,541,000
Cash....................................................... 3,039
Receivables:
Investment securities sold................................ 1,724,407
Fund shares sold.......................................... 70,866
Dividends and interest.................................... 469,600
------------
Total assets.......................................... 106,022,809
------------
Liabilities:
Payables:
Investment securities purchased........................... 538,943
Fund shares redeemed...................................... 584,821
To affiliates............................................. 137,461
Accrued liabilities........................................ 69,381
------------
Total liabilities..................................... 1,330,606
------------
Net assets, at value........................................ $104,692,203
------------
------------
Net assets consist of:
Undistributed net investment income........................ $ 2,668,960
Net unrealized depreciation................................ (2,638,558)
Distributions in excess of net realized gain............... (747,857)
Beneficial shares.......................................... 105,409,658
------------
Net assets, at value........................................ $104,692,203
------------
------------
CLASS I:
Net asset value per share ($97,823,354 / 7,702,649 shares
outstanding)............................................. $12.70
------------
------------
Maximum offering price per share ($12.70 / 94.25%)......... $13.47
------------
------------
CLASS II:
Net asset value per share ($6,868,849 / 547,442 shares
outstanding)*............................................ $12.55
------------
------------
Maximum offering price per share ($12.55 / 99.00%)......... $12.68
------------
------------
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
20
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $219,756)
Dividends.................................................. $5,518,960
Interest................................................... 431,441
----------
Total investment income............................... $ 5,950,401
Expenses:
Management fees (Note 3)................................... 1,075,695
Administrative fees (Note 3)............................... 215,139
Distribution fees (Note 3)
Class I................................................... 337,939
Class II.................................................. 82,956
Transfer agent fees (Note 3)............................... 199,773
Custodian fees............................................. 28,547
Reports to shareholders.................................... 104,200
Registration and filing fees............................... 39,000
Professional fees.......................................... 46,187
Trustees' fees and expenses................................ 14,000
Other...................................................... 1,598
----------
Total expenses........................................ 2,145,034
------------
Net investment income........................... 3,805,367
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... 1,456,549
Foreign currency transactions............................. (105,191)
----------
Net realized gain..................................... 1,351,358
Net unrealized depreciation on investments............ (32,063,545)
------------
Net realized and unrealized loss............................ (30,712,187)
------------
Net decrease in net assets resulting from operations........ $(26,906,820)
------------
------------
</TABLE>
See Notes to Financial Statements.
21
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED AUGUST 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 3,805,367 $ 3,760,069
Net realized gain from investments and foreign currency
transactions............................................ 1,351,358 6,263,665
Net unrealized appreciation (depreciation) on
investments.............................................. (32,063,545) 19,072,168
-------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ (26,906,820) 29,095,902
Distributions to shareholders from:
Net investment income:
Class I.................................................. (3,003,171) (3,880,651)
Class II................................................. (118,402) (148,294)
Net realized gains:
Class I.................................................. (466,731) --
Class II................................................. (28,174) --
In excess of net realized gains:
Class I.................................................. (705,284) --
Class II................................................. (42,573) --
Capital share transactions (Note 2):
Class I.................................................. (24,576,319) 2,081,128
Class II................................................. (154,617) 2,396,525
-------------------------------
Net increase (decrease) in net assets................... (56,002,091) 29,544,610
Net assets:
Beginning of year.......................................... 160,694,294 131,149,684
-------------------------------
End of year................................................ $104,692,203 $160,694,294
-------------------------------
-------------------------------
Undistributed net investment income included in net assets
End of year................................................ $ 2,668,960 $ 2,058,847
-------------------------------
-------------------------------
</TABLE>
See Notes to Financial Statements.
22
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Global Real Estate Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company. The Fund
seeks long-term capital growth, with current income as a secondary objective, by
investing primarily in securities of issuers throughout the world which are
principally engaged in or related to the real estate industry or which own
significant real estate assets. The following summarizes the Fund's significant
accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
23
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. BENEFICIAL SHARES
The Fund offers two classes of shares: Class I and Class II shares. The shares
differ by their initial sales load, distribution fees, voting rights on matters
affecting a single class of shares and the exchange privilege of each class.
At August 31, 1998, there were an unlimited number of shares of beneficial
interest authorized ($0.01 par value). Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
1998 1997
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS I SHARES:
Shares sold................................................ 989,236 $ 15,410,679 2,014,081 $ 30,445,208
Shares issued on reinvestment of distributions............. 239,459 3,769,262 232,731 3,281,785
Shares redeemed............................................ (2,822,831) (43,756,260) (2,082,833) (31,645,865)
-------------------------------------------------------------
Net increase (decrease).................................... (1,594,136) $(24,576,319) 163,979 $ 2,081,128
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
24
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements (continued)
2. BENEFICIAL SHARES (CONT.)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------
1998 1997
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS II SHARES:
Shares sold................................................. 202,765 $ 3,004,691 301,806 $ 4,542,020
Shares issued on reinvestment of distributions.............. 10,557 164,676 9,139 128,318
Shares redeemed............................................. (217,790) (3,323,984) (144,901) (2,273,813)
-------------------------------------------------------
Net increase (decrease)..................................... (4,468) $ (154,617) 166,044 $ 2,396,525
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also officers or directors of Templeton Global
Advisors Ltd. (TGAL), Franklin Templeton Services, Inc. (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors) and Franklin/Templeton
Investor Services, Inc. (Investors Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent, respectively.
The Fund pays an investment management fee to TGAL of 0.75% per year of the
average daily net assets of the Fund. The Fund pays an administrative fee to FT
Services based on the Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.25% and 1.00% per year of the average
daily net assets of Class I and Class II shares, respectively, for costs
incurred in marketing the Fund's Class I and Class II shares. Under the Class I
distribution plan, costs exceeding the maximum may be reimbursed in subsequent
periods. At August 31, 1998, unreimbursed costs were $89,940. Distributors
received net commissions from sales of Fund shares, and received contingent
deferred sales charges for the period of $53,103 and $6,227, respectively.
Legal fees of $13,549 were paid to a law firm in which a partner is an officer
of the Fund.
4. INCOME TAXES
At August 31, 1998, the Fund has deferred capital losses and deferred foreign
currency losses occurring subsequent to October 31, 1997 of $516,346 and
$108,756, respectively. For tax purposes, such losses will be reflected in the
year ending August 31, 1999.
25
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements (continued)
4. INCOME TAXES (CONT.)
At August 31, 1998, the net unrealized depreciation based on the cost of
investments for income tax purposes of $103,039,496 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 16,269,867
Unrealized depreciation..................................... (19,095,466)
------------
Net unrealized depreciation................................. $ (2,825,599)
------------
------------
</TABLE>
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of passive
foreign investment companies and foreign currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended August 31, 1998 aggregated $31,753,431 and $50,021,877, respectively.
26
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Independent Auditor's Report
THE BOARD OF TRUSTEES AND SHAREHOLDERS
TEMPLETON GLOBAL REAL ESTATE FUND
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Templeton Global Real Estate Fund as of August
31, 1998, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for the periods indicated in the
accompanying financial statements. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Templeton Global Real Estate Fund as of August 31, 1998, the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
[McGladrey & Pullen, LLP]
New York, New York
September 29, 1998
27
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Tax Designation
Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby
designates the following amount as a capital gain dividend for the fiscal year
ended August 31, 1998:
<TABLE>
<S> <C>
20% Rate Gain............................................... $1,287,920
----------
</TABLE>
Under Section 854(b)(2) of the Internal Revenue Code, the Fund hereby designates
11.66% of the ordinary income dividends as income qualifying for the dividends
received deduction for the fiscal year ended August 31, 1998.
28
PAGE
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Templeton Fund Information at
1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. To ensure the highest quality of service, telephone
calls to or from our service departments may be monitored, recorded and
accessed. These calls can be determined by the presence of a regular beeping
tone.
FRANKLIN TEMPLETON GROUP
GLOBAL GROWTH
Franklin Global Health Care Fund
Mutual Discovery Fund
Templeton Developing
Markets Trust
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Companies Fund
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Infrastructure Fund
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Opportunities Trust
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Templeton Global
Smaller Companies Fund
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GLOBAL GROWTH AND INCOME
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Income Fund
GLOBAL INCOME
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Income Fund
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Currency Fund
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Currency Fund
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GROWTH
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Discovery Fund
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Growth Fund
GROWTH AND INCOME
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Investment Fund*
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Securities Fund
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Securities Fund
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TAX-FREE INCOME
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Tax-Free Income Fund
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Income Fund
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FRANKLIN STATE-SPECIFIC
FUNDS SEEKING
TAX-FREE INCOME
Alabama
Arizona**
Arkansas***
California**
Colorado
Connecticut
Florida**
Georgia
Hawaii***
Indiana
Kentucky
Louisiana
Maryland
Massachusetts+
Michigan**
Minnesota+
Missouri
New Jersey
New York**
North Carolina
Ohio+
Oregon
Pennsylvania
Tennessee***
Texas
Virginia
Washington***
VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*These funds are now closed to new accounts, with the exception of retirement
plan accounts.
**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
***The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+Portfolio of insured municipal securities.
++Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates.
09/98
PAGE
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404-1585
1-800/DIAL BEN(R)
www.franklin-templeton.com
SHAREHOLDER SERVICES
1-800/632-2301
FUND INFORMATION
1-800/342-5236
This report must be preceded or accompanied by the current prospectus of
Templeton Global Real Estate Fund, which contains more complete information
including risk factors, charges and expenses. Like any investment in securities,
the value of the Fund's portfolio will be subject to the risk of loss from
market, currency, economic, political and other factors, as well as investment
decisions by the Investment Manager, which will not always be profitable or
wise. The Fund and its investors are not protected from such losses by the
Investment Manager. Therefore, investors who cannot accept this risk should not
invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded, and accessed. These calls can be
determined by the presence of a regular beeping tone.
410 A98 10/98 [LOGO] Printed on recycled paper
SEMI ANNUAL REPORT
FEBRUARY 28, 1999
TEMPLETON GLOBAL
REAL ESTATE FUND
[LOGO]
FRANKLIN TEMPLETON(R)
PAGE
[LOGO] CELEBRATING OVER 50 YEARS
Thank you for investing with Franklin Templeton. We encourage our investors to
maintain a long-term perspective and remember that all securities markets move
both up and down, as do mutual fund share prices. We appreciate your past
support and look forward to serving your investment needs in the years ahead.
In 1992, Sir John Templeton retired after a 50-year career of helping investors
manage their money. Currently he devotes all of his time and efforts to the John
Templeton Foundation. A major portion of his assets remain invested in the
Templeton funds which are managed by many of the investment professionals he
selected and trained.
[PHOTO OF JEFFREY A. EVERETT APPEARS HERE]
JEFFREY A. EVERETT, CFA
Portfolio Manager
Templeton Global Real Estate Fund
PAGE
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Shareholder Letter .......................... 1
Performance Summary ......................... 6
Financial Highlights &
Statement of Investments ................... 8
Financial Statements ........................ 13
Notes to Financial Statements ............... 16
</TABLE>
SHAREHOLDER LETTER
Your Fund's Goal: Templeton Global Real Estate Fund seeks long-term capital
growth, and its secondary goal is current income. Under normal market
conditions, the Fund invests primarily in the equity and debt securities of
companies located anywhere in the world that are engaged in or related to the
real estate industry or which own significant real estate assets.
Dear Shareholder:
This semiannual report of Templeton Global Real Estate Fund covers the six
months ended February 28, 1999. As most global equity markets recovered from
their October slump, many indicators pointed toward improved performance for
real estate stocks. In the U.S., Europe and Hong Kong, where the Fund then had
its highest weightings, new supply of properties was limited, and expansion of
many global corporations was contributing to rising occupancy rates while
interest rate declines were lowering financing costs and increasing operating
income for real estate companies. Relatively high dividend yields of many real
estate securities made the sector look even more attractive to us. Despite these
positive indicators, the sector as a whole performed
FUND CATEGORY
[PYRAMID GRAPH]
GLOBAL
GROWTH
GROWTH & INCOME
INCOME
TAX-FREE INCOME
You will find a complete listing of the Fund's portfolio holdings, including
dollar value and number of shares or principal amount, beginning on page 10 of
this report.
PAGE
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets
2/28/99
[PIE CHART APPEAR HERE]
[THIS CHART SHOWS IN PIE CHART FORMAT THE GEOGRAPHIC DISTRIBUTIO OF TEMPLETON
GLOBAL REAL ESTATE FUND'S PORTFOLIO HOLDINGS ON FEBRUARY 28, 1999, BASED ON
TOTAL NET ASSETS.]
<TABLE>
<CAPTION>
<S> <C>
North America 42.5%
Europe 19.2%
Asia 14.0%
Latin America 5.2%
Other 5.0%
Fixed Income 4.1%
Other Net Assets 10.0%
</TABLE>
poorly when compared with other equities. Within this environment, Templeton
Global Real Estate Fund - Class A shares produced a six-month cumulative total
return of 2.11%, as shown in the Performance Summary on page 7.
During the reporting period, we took advantage of the real estate sector's
weakness to increase several existing positions and initiate new holdings in
stocks we considered undervalued, because we believed investors were likely to
eventually recognize the value of limited supply and increasing liquidity in
global real estate markets.
The Fund's holdings of carefully selected U.S. Real Estate Investment Trusts
(REITs)(1) fluctuated slightly during the six months under review. In our
opinion, stocks like Boston Properties Inc. and Equity Residential Properties,
two REITs with highly respected management teams and well-located assets in
metropolitan areas, have the potential to perform well. We also believe that
Rouse Co., an owner and operator of high-end regional malls in key locations
throughout the U.S., could excel in the retail sector. Although these companies'
performance over the past year has been disappointing, we believe their
management has displayed skill and foresight, and that investors may eventually
revalue their worth.
In Europe, increased demand for space and a limited supply of property
contributed to higher rents in many cities, as the European Monetary Union
encouraged companies there to expand across the continent. Cross-border
competition caused some corporations to exchange property holdings for
relatively liquid shares of real estate firms, and some companies spun off real
estate assets into separate corporate entities. Such spin-offs
1. REIT is a company that owns and manages large real estate investments,
providing investors with potential benefits from owning real estate on a scale
that most individuals could not achieve.
2
PAGE
TOP 10 HOLDINGS
2/28/99
[THIS CHART LISTS THE TOP 10 HOLDINGS, INCLUDING INDUSTRY AND COUNTRY, OF
TEMPLETON GLOBAL REAL ESTATE FUND, BASED ON TOTAL NET ASSETS AS OF 2/28/99.]
<TABLE>
<CAPTION>
COMPANY, % OF TOTAL
INDUSTRY, COUNTRY NET ASSETS
- ----------------- ----------
<S> <C>
Weeks Corp.
Real Estate, U.S. 4.4%
Rouse Co.
Real Estate, U.S. 4.3%
Union du Credit Bail
Immobilier Unibail
Real Estate, France 3.8%
Equity Residential Properties
Real Estate, U.S. 3.6%
Highwoods Properties Inc.
Real Estate, U.S. 3.5%
LTC Properties Inc.
Real Estate, U.S. 3.2%
CBL & Associates
Properties Inc.
Real Estate, U.S. 2.7%
Nationwide Health
Properties Inc.
Real Estate, U.S. 2.5%
Boston Properties Inc.
Real Estate, U.S. 2.4%
Crescent Real Estate
Equities Co.
Real Estate, U.S. 2.2%
</TABLE>
may enhance shareholder value by enabling these new firms to focus on real
estate as a core business, something many European companies have not done in
the past.
During the reporting period, we maintained positions in a number of Asian
property companies, which we believe could be long-term beneficiaries of
improving economic conditions and pent-up demand. Hong Kong holdings, which made
up 10.5% of the total portfolio on February 28, 1999, provided welcome gains,
helping compensate for lagging returns of real estate companies elsewhere. In an
effort to stimulate the economy and ensure adequate public housing, Hong Kong's
government reduced interest rates, and banks were able to re-enter the mortgage
loan market, helping to create a resurgence of residential purchases. At the
same time, property prices there firmed up as it appeared that a government
moratorium on land sales might cause tighter property supply in the near future.
These conditions helped Hong Kong developers Cheung Kong Holdings Ltd. and New
World Development Co. Ltd. sell residential units, providing them with cash for
future land purchases.
Looking forward, we believe that favorable supply and demand trends, low
interest rates and expanding credit may generate growth and consolidation
opportunities for many well-managed real estate companies throughout the world.
In our opinion, U.S. REITs possess compelling fundamentals, which have been
unfairly overlooked by U.S. investors. In 1998, the Standard & Poor's(R) 500
(S&P 500(R)) Index's earnings growth was essentially flat, yet the
price-to-earnings (P/E) multiple increased 25%.
3
PAGE
Essentially, general stock prices rose while company earnings did not. During
the same period, U.S. REIT P/E multiples fell 30%, while earnings growth
declined to 10% annually, down from the 15-20% levels of the previous two years.
Also, the average cash flow growth of U.S. REITs has exceeded the cash flow
growth of the S&P 500 by 2.9% over the past six calendar years.(2) Furthermore,
as of February 28, 1999, REIT dividend yields were 2.4% higher than 10-year U.S.
Treasury bond yields.(3) Based on these factors, we believe investors may come
to realize the merits of U.S. REITs' solid yield and consistent cash flow
growth.
Of course, there are special risks involved with global investing related to
market, currency, economic, social, political and other factors. Emerging market
securities involve similar but heightened risks, in addition to those associated
with their relatively small size and lesser liquidity. Investing in any emerging
market means accepting a certain amount of volatility and, in some cases, severe
market corrections. Since the Fund concentrates on the real estate industry, its
share price may experience greater volatility than those of more broadly
diversified investments. For example, Taiwan's equity market has increased 951%
in the last 15 years, but has suffered six declines of more than 20% during that
time.(4) While short-term volatility can be disconcerting, declines in excess of
50% are not unusual in such markets. These special risks and other
considerations are discussed in the Fund's prospectus.
2. Litt, Jonathan. "REIT Insight," Paine Webber, January 29, 1999, p.2.
3. Source: Standard & Poor's Micropal.
4. Source: Bloomberg. Based on quarterly percentage price change over 15 years
ended December 31, 1998. Market returns are measured in U.S. dollars and do not
include reinvested dividends.
4
PAGE
Please remember that this discussion reflects our views, opinions and portfolio
holdings as of February 28, 1999, the end of the reporting period. However,
market and economic conditions are changing constantly, which can be expected to
affect our strategies and the Fund's portfolio composition. Although past
performance is not predictive of future results, these insights may help give
you a better understanding of our investment and management philosophy.
We thank you for your participation in Templeton Global Real Estate Fund and
look forward to serving you in the future. Please feel free to contact us with
any questions or comments you may have.
Sincerely,
/s/JEFFREY A. EVERETT
- ----------------------
Jeffrey A. Everett, CFA
Portfolio Manager
Templeton Global Real Estate Fund
5
PAGE
PERFORMANCE SUMMARY AS OF 2/28/99
Distributions will vary based on earnings of the Fund's portfolio and any
profits realized from the sale of the portfolio's securities, as well as the
level of each class' operating expenses. Past distributions are not indicative
of future trends. All total returns include reinvested distributions at net
asset value.
PRICE AND DISTRIBUTION INFORMATION (9/1/98 - 2/28/99)
<TABLE>
<CAPTION>
CLASS A CHANGE 2/28/99 8/31/98
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value - $0.22 $12.48 $12.70
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTIONS
-------------------------------
<S> <C>
Dividend Income $0.5100
Long-term Capital Gain $0.0100
TOTAL $0.5200
</TABLE>
<TABLE>
<CAPTION>
CLASS C CHANGE 2/28/99 8/31/98
- ---------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value - $0.15 $12.40 $12.55
</TABLE>
<TABLE>
<CAPTION>
Distributions
-------------------------------
<S> <C>
Dividend Income $ 0.3814
Long-term Capital Gain $ 0.0100
TOTAL $ 0.3914
</TABLE>
CLASS A (formerly Class I):
Subject to the current, maximum 5.75% initial sales charge. Prior to July 1,
1992, Fund shares were offered at a higher initial sales charge. Thus, actual
total returns would have been lower. On January 1, 1993, the Fund implemented a
Rule 12b-1 plan, which affects subsequent performance.
CLASS C (formerly Class II):
Subject to 1% initial sales charge and a 1% contingent deferred sales charge
(CDSC) for shares redeemed within 18 months of investment. These shares have
higher annual fees and expenses than Class A shares.
Templeton Global Real Estate Fund paid distributions derived from long-term
capital gains of 1 cent ($0.0100) per share in October, 1998. The Fund hereby
designates such distributions as capital gain dividends per Internal Revenue
Code Section 852 (b)(3).
6 Past performance is not predictive of future results.
PAGE
PERFORMANCE
<TABLE>
<CAPTION>
INCEPTION
CLASS A 6-MONTH 1-YEAR 5-YEAR (9/12/89)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 2.11% - 18.75% 1.66% 69.44%
Average Annual Total Return(2) - 3.73% - 23.40% - 0.85% 5.07%
Value $10,000 Investment(3) $9,627 $7,660 $9,584 $15,970
</TABLE>
<TABLE>
<CAPTION>
2/28/95 2/28/96 2/28/97 2/28/98 2/28/99
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
One-Year Total Return(4) - 12.10% 11.79% 18.66% 7.31% - 18.75%
</TABLE>
<TABLE>
<CAPTION>
INCEPTION
CLASS C 6-MONTH 1-YEAR 3-YEAR (5/1/95)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return(1) 1.73% - 19.35% 1.07% 12.20%
Average Annual Total Return(2) - 0.30% - 20.93% 0.03% 2.79%
Value of $10,000 Investment(3) $9,970 $7,907 $10,009 $11,111
</TABLE>
<TABLE>
<CAPTION>
2/28/97 2/28/98 2/28/99
------------------------------------------------
<S> <C> <C> <C>
One-Year
Total Return(4) 17.87% 6.32% - 19.35%
</TABLE>
1. Cumulative total return represents the change in value of an investment over
the periods indicated and does not include sales charges.
2. Average annual total return represents the average annual change in value of
an investment over the periods indicated and includes the current, applicable,
maximum sales charge(s) for that class. Six-month return has not been
annualized.
3. These figures represent the value of a hypothetical $10,000 investment in the
Fund over the periods indicated and include the current, applicable, maximum
sales charge(s) for that class.
4. One-year total return represents the change in value of an investment over
the one-year periods ended on the specified dates and does not include sales
charges.
Since markets can go down as well as up, investment return and principal value
will fluctuate with market conditions, currency volatility and the social,
economic and political climates of countries where the Fund invests. Emerging
markets involve heightened risks related to the same factors, in addition to
those associated with their relatively small size and lesser liquidity. You may
have a gain or loss when you sell your shares.
Past performance is not predictive of future results. 7
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 1999 ----------------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout
the period)
Net asset value, beginning of
period.............................. $12.70 $16.33 $13.78 $13.20 $13.66 $12.66
---------------------------------------------------------------------------------------
Income from investment operations:
Net investment income.............. .21 .46 .39 .31 .39 .22
Net realized and unrealized gains
(losses)......................... .09 (3.63) 2.58 .64 (.64) 1.00
---------------------------------------------------------------------------------------
Total from investment operations.... .30 (3.17) 2.97 .95 (.25) 1.22
---------------------------------------------------------------------------------------
Less distributions from:
Net investment income.............. (.51) (.33) (.42) (.37) (.21) (.22)
Net realized gains................. (.01) (.05) -- -- -- --
In excess of net realized gains.... -- (.08) -- -- -- --
---------------------------------------------------------------------------------------
Total distributions................. (.52) (.46) (.42) (.37) (.21) (.22)
---------------------------------------------------------------------------------------
Net asset value, end of period...... $12.48 $12.70 $16.33 $13.78 $13.20 $13.66
=======================================================================================
Total Return*....................... 2.11% (19.94)% 22.06% 7.48% (1.74)% 9.69%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)... $82,581 $97,823 $151,777 $125,875 $130,149 $131,544
Ratios to average net assets:
Expenses........................... 1.54%** 1.45% 1.45% 1.51% 1.55% 1.58%
Net investment income.............. 2.91%** 2.70% 2.55% 2.73% 3.05% 1.97%
Portfolio turnover rate............. 1.30% 23.18% 24.03% 20.07% 38.69% 32.34%
</TABLE>
*Total return does not reflect sales commissions and is not annualized.
**Annualized.
8
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Highlights (continued)
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED AUGUST 31,
FEBRUARY 28, 1999 --------------------------------------------
(UNAUDITED) 1998 1997 1996 1995+
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
(For a share outstanding throughout the period)
Net asset value, beginning of period.............. $12.55 $16.16 $13.67 $13.17 $12.25
-------------------------------------------------------------------
Income from investment operations:
Net investment income............................ .12 .30 .31 .33 .03
Net realized and unrealized gains (losses)....... .12 (3.57) 2.52 .52 .89
-------------------------------------------------------------------
Total from investment operations.................. .24 (3.27) 2.83 .85 .92
-------------------------------------------------------------------
Less distributions from:
Net investment income............................ (.38) (.21) (.34) (.35) --
Net realized gains............................... (.01) (.05) -- -- --
In excess of net realized gains.................. -- (.08) -- -- --
-------------------------------------------------------------------
Total distributions............................... (.39) (.34) (.34) (.35) --
-------------------------------------------------------------------
Net asset value, end of period.................... $12.40 $12.55 $16.16 $13.67 $13.17
===================================================================
Total Return*..................................... 1.73% (20.61)% 21.12% 6.69% 7.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's)................. $4,410 $6,869 $8,917 $5,275 $1,823
Ratios to average net assets:
Expenses......................................... 2.30%** 2.20% 2.20% 2.26% 2.26%**
Net investment income............................ 2.11%** 1.97% 1.74% 2.20% 1.71%**
Portfolio turnover rate........................... 1.30% 23.18% 24.03% 20.07% 38.69%
</TABLE>
*Total return does not reflect sales commissions or the contingent deferred
sales charge and is not annualized.
**Annualized.
+For the period May 1, 1995 (effective date) to August 31, 1995.
See Notes to Financial Statements.
9
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
------------------------------------
<S> <C> <C> <C>
COMMON STOCKS 83.8%
BANKING 3.2%
*Bangkok Bank Public Co. Ltd., fgn.......................... Thailand 291,000 $ 491,238
Banque Nationale de Paris BNP............................... France 8,023 640,290
Development Bank of Singapore Ltd., fgn..................... Singapore 43,000 312,137
HSBC Holdings Plc........................................... Hong Kong 41,301 1,162,095
National Australia Bank Ltd................................. Australia 6,300 105,037
Shinhan Bank Co. Ltd........................................ South Korea 7,946 48,709
-----------
2,759,506
-----------
BUILDING MATERIALS & COMPONENTS 2.5%
Suez Cement Co. ............................................ Egypt 88,000 1,576,600
Unione Cementi Marchino Emiliane (Unicem), di Risp.......... Italy 139,580 637,261
-----------
2,213,861
-----------
CONSTRUCTION & HOUSING .4%
Toda Corp................................................... Japan 70,000 333,333
-----------
ENERGY SOURCES 1.5%
Perez Companc SA, B......................................... Argentina 51,000 207,653
Societe Elf Aquitaine SA, Br. .............................. France 10,317 1,075,926
-----------
1,283,579
-----------
FINANCIAL SERVICES .9%
Housing Development Finance Corp. Ltd....................... India 6,800 363,304
Lend Lease Corp. Ltd........................................ Australia 32,506 403,691
-----------
766,995
-----------
FOREST PRODUCTS & PAPER 1.5%
St. Joe Co.................................................. United States 60,000 1,293,750
-----------
LEISURE & TOURISM 3.1%
Grand Hotel Holdings Ltd.................................... Hong Kong 2,469,000 340,980
Mandarin Oriental Intl. Ltd................................. Singapore 1,501,000 727,985
Oriental Hotel (Thailand) Public Co. Ltd., fgn.............. Thailand 76,200 387,942
*Prime Hospitality Corp..................................... United States 37,200 381,300
Rank Group Plc.............................................. United Kingdom 229,606 873,593
-----------
2,711,800
-----------
MERCHANDISING .8%
Li & Fung Ltd............................................... Hong Kong 70,000 126,488
Wessel & Vett, Theodore AS, C............................... Denmark 12,000 551,052
-----------
677,540
-----------
</TABLE>
10
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
METALS & MINING 2.0%
Anglo American Platinum Corp. Ltd........................... South Africa 1,208 $ 19,851
Boehler Uddeholm AG......................................... Austria 9,500 455,316
Industrias Penoles SA....................................... Mexico 391,100 1,170,746
RGC Ltd..................................................... Australia 447,522 126,438
-----------
1,772,351
-----------
MISC MATERIALS & COMMODITIES .5%
De Beers/Centenary Linked Units, Reg. ...................... South Africa 27,600 475,816
-----------
MULTI-INDUSTRY 6.7%
Cheung Kong Holdings Ltd.................................... Hong Kong 268,000 1,824,659
First Pacific Co............................................ Hong Kong 1,952,667 1,178,241
Hutchison Whampoa Ltd....................................... Hong Kong 210,000 1,456,875
*Metro Pacific Corp. MDI.................................... Philippines 500,000 24,647
Swire Pacific Ltd., B....................................... Hong Kong 800 488
Wheelock and Company Ltd.................................... Hong Kong 2,156,675 1,329,176
-----------
5,814,086
-----------
REAL ESTATE 53.2%
+American Health Properties Inc............................. United States 64,300 1,225,719
Bail Investissement......................................... France 6,626 905,579
+Boston Properties Inc...................................... United States 65,000 2,100,313
*Canlan Investment Corp..................................... Canada 254,000 159,854
+Carramerica Realty Corp.................................... United States 65,000 1,397,500
+CBL & Associates Properties Inc............................ United States 93,900 2,341,631
+Charles E. Smith Residential Realty Inc.................... United States 51,600 1,515,750
China Resources Beijing Land Ltd............................ China 1,520,000 255,042
China Resources Beijing Land Ltd., 144A..................... China 480,300 80,590
*Corporacion Geo SA, B...................................... Mexico 23,000 60,763
+Crescent Real Estate Equities Co........................... United States 91,880 1,917,995
+Equity Residential Properties.............................. United States 75,800 3,107,800
+Federal Realty Investment Trust............................ United States 33,000 728,063
+General Growth Properties.................................. United States 28,830 973,013
+Highwoods Properties Inc................................... United States 127,800 3,059,218
Inversiones y Representacion SA............................. Argentina 344,072 802,009
Inversiones y Representacion SA, GDR........................ Argentina 846 19,617
+LTC Properties Inc......................................... United States 226,000 2,825,000
+Nationwide Health Properties Inc........................... United States 122,000 2,196,000
New Asia Realty and Trust Co. Ltd., A....................... Hong Kong 388,000 320,506
New World Development Co. Ltd............................... Hong Kong 761,109 1,399,865
*Northstar Capital Investment Corp.......................... United States 95,000 1,508,125
*Prima Inmobiliaria SA...................................... Spain 95,500 748,526
+Rouse Co................................................... United States 160,700 3,756,363
*Security Capital US Realty................................. Luxembourg 232,000 1,809,600
+Summit Properties Inc...................................... United States 91,300 1,512,156
Taylor Woodrow Plc.......................................... United Kingdom 315,802 857,525
</TABLE>
11
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
STATEMENT OF INVESTMENTS, FEBRUARY 28, 1999 (UNAUDITED) (CONT.)
<TABLE>
<CAPTION>
COUNTRY SHARES VALUE
------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONT.)
REAL ESTATE (CONT.)
Union du Credit Bail Immobilier Unibail..................... France 26,850 $ 3,301,169
+Weeks Corp................................................. United States 140,400 3,790,800
Westfield Trust, units...................................... Australia 784,365 1,607,265
-----------
46,283,356
-----------
TELECOMMUNICATIONS 1.3%
Telecomunicacoes Brasileiras SA (Telebras).................. Brazil 6,664,000 230,866
Telefonos de Mexico SA (Telmex), L, ADR..................... Mexico 15,700 897,844
-----------
1,128,710
-----------
TRANSPORTATION 2.8%
Florida East Coast Industries Inc........................... United States 44,000 1,193,500
Peninsular & Oriental Steam Navigation Co................... United Kingdom 104,961 1,233,362
-----------
2,426,862
-----------
UTILITIES ELECTRICAL & GAS 3.4%
National Grid Group Plc..................................... United Kingdom 199,070 1,439,875
National Power Plc.......................................... United Kingdom 192,378 1,530,160
-----------
2,970,035
-----------
TOTAL COMMON STOCKS (COST $70,753,213)...................... 72,911,580
===========
PREFERRED STOCKS 2.1%
Banco Itau SA, pfd.......................................... Brazil 1,117,000 392,459
Baumax AG, pfd.............................................. Austria 36,907 607,723
Cia Vale do Rio Doce, A, pfd................................ Brazil 30,800 394,270
Cia Vale do Rio Doce, ADR, pfd.............................. Brazil 31,200 399,391
-----------
TOTAL PREFERRED STOCKS (COST $3,456,240).................... 1,793,843
-----------
<CAPTION>
PRINCIPAL
AMOUNT**
----------
<S> <C> <C> <C>
BONDS 4.1%
Government of Italy, cvt., 5.00%, 6/28/01................... Italy $1,345,000 2,347,025
Revenue Property Ltd., cvt., 6.00%, 3/01/04................. Canada 1,400,000 1,232,000
-----------
TOTAL BONDS (COST $2,750,722)............................... 3,579,025
-----------
TOTAL INVESTMENTS (COST $76,960,175) 90.0%.................. 78,284,448
OTHER ASSETS, LESS LIABILITIES 10.0%........................ 8,706,321
-----------
TOTAL NET ASSETS 100.0%..................................... $86,990,769
===========
</TABLE>
*Non-income producing.
**Securities denominated in U.S. dollars.
+Real Estate Investment Trust (37.30% of total net assets).
See Notes to Financial Statements.
12
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<S> <C>
Assets:
Investments in securities, at value (cost $76,960,175)..... $78,284,448
Receivables:
Investment securities sold................................ 9,522,850
Fund shares sold.......................................... 69,549
Dividends and interest.................................... 409,686
-----------
Total assets.......................................... 88,286,533
-----------
Liabilities:
Payables:
Fund shares redeemed...................................... 451,283
To affiliates............................................. 97,951
Funds advanced by custodian............................... 667,015
Accrued expenses.......................................... 79,515
-----------
Total liabilities..................................... 1,295,764
-----------
Net assets, at value........................................ $86,990,769
===========
Net assets consist of:
Undistributed net investment income........................ $ 190,999
Net unrealized appreciation................................ 1,324,273
Accumulated net realized loss.............................. (3,010,812)
Beneficial shares.......................................... 88,486,309
-----------
Net assets, at value........................................ $86,990,769
===========
CLASS A:
Net asset value per share ($82,580,951 / 6,616,131 shares
outstanding)............................................. $12.48
===========
Maximum offering price per share ($12.48 / 94.25%)......... $13.24
===========
CLASS C:
Net asset value per share ($4,409,818 / 355,582 shares
outstanding)*............................................ $12.40
===========
Maximum offering price per share ($12.40 / 99.00%)......... $12.53
===========
</TABLE>
*Redemption price per share is equal to net asset value less any applicable
sales charge.
See Notes to Financial Statements.
13
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Statements (continued)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
<TABLE>
<S> <C> <C>
Investment Income:
(net of foreign taxes of $25,145)
Dividends.................................................. $ 2,121,738
Interest................................................... 132,811
-----------
Total investment income............................... $ 2,254,549
Expenses:
Management fees (Note 3)................................... 380,114
Administrative fees (Note 3)............................... 76,023
Distribution fees (Note 3)
Class A................................................... 119,789
Class C................................................... 28,157
Transfer agent fees (Note 3)............................... 105,000
Custodian fees............................................. 600
Reports to shareholders.................................... 53,100
Registration and filing fees............................... 17,900
Professional fees.......................................... 11,200
Trustees' fees and expenses................................ 10,500
Other...................................................... 1,139
-----------
Total expenses........................................ 803,522
-----------
Net investment income........................... 1,451,027
-----------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments............................................... (2,222,110)
Foreign currency transactions............................. 34,066
-----------
Net realized loss..................................... (2,188,044)
Net unrealized appreciation on investments............ 3,962,831
-----------
Net realized and unrealized gain............................ 1,774,787
-----------
Net increase in net assets resulting from operations........ $ 3,225,814
===========
</TABLE>
See Notes to Financial Statements.
14
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Statements (continued)
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, 1999 YEAR ENDED
(UNAUDITED) AUGUST 31, 1998
---------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income..................................... $ 1,451,027 $ 3,805,367
Net realized gain (loss) from investments and foreign
currency transactions................................... (2,188,044) 1,351,358
Net unrealized appreciation (depreciation) on
investments............................................. 3,962,831 (32,063,545)
---------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................ 3,225,814 (26,906,820)
Distributions to shareholders from:
Net investment income:
Class A.................................................. (3,762,372) (3,003,171)
Class C.................................................. (166,616) (118,402)
Net realized gains:
Class A.................................................. (70,499) (466,731)
Class C.................................................. (4,412) (28,174)
In excess of net realized gains:
Class A.................................................. -- (705,284)
Class C.................................................. -- (42,573)
Capital share transactions (Note 2):
Class A.................................................. (14,451,836) (24,576,319)
Class C.................................................. (2,471,513) (154,617)
---------------------------------------
Net decrease in net assets.............................. (17,701,434) (56,002,091)
Net assets:
Beginning of period........................................ 104,692,203 160,694,294
---------------------------------------
End of period.............................................. $ 86,990,769 $104,692,203
=======================================
Undistributed net investment income included in net assets:
End of period.............................................. $ 190,999 $ 2,668,960
=======================================
</TABLE>
See Notes to Financial Statements.
15
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements (unaudited)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Global Real Estate Fund (the Fund) is registered under the Investment
Company Act of 1940 as a diversified, open-end investment company. The Fund
seeks long-term capital growth, and its secondary goal is current income. Under
normal conditions, the Fund invests primarily in the equity and debt securities
of companies located anywhere in the world that are engaged in or related to the
real estate industry or which own significant real estate assets. The following
summarizes the Fund's significant accounting policies.
a. SECURITY VALUATION:
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the latest reported sales price. Over-the-counter securities and
listed securities for which no sale is reported are valued within the range of
the latest quoted bid and asked prices. Securities for which market quotations
are not readily available are valued at fair value as determined by management
in accordance with procedures established by the Board of Trustees.
b. FOREIGN CURRENCY TRANSLATION:
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date. When
the Fund purchases or sells foreign securities it will customarily enter into a
foreign exchange contract to minimize foreign exchange risk from the trade date
to the settlement date of such transactions.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions, and the difference between the recorded
amounts of dividends, interest and foreign withholding taxes, and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange gains and losses arise from changes in foreign exchange rates
on foreign currency denominated assets and liabilities other than investments in
securities held at the end of the reporting period.
c. INCOME TAXES:
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute all of its taxable income.
16
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements (unaudited) (continued)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.)
d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
Realized and unrealized gains and losses and net investment income, other than
class specific expenses, are allocated daily to each class of shares based upon
the relative proportion of net assets of each class.
e. ACCOUNTING ESTIMATES:
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the amounts of income and expense during the reporting
period. Actual results could differ from those estimates.
2. BENEFICIAL SHARES
The Fund offers two classes of shares; Class A and Class C shares. Effective
January 1, 1999, Class I and Class II shares were renamed Class A and Class C,
respectively. The shares differ by their initial sales load, distribution fees,
voting rights on matters affecting a single class of shares and the exchange
privilege of each class.
At February 28, 1999, there were an unlimited number of shares of beneficial
interest authorized ($0.01 par value). Transactions in the Fund's shares were as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
-------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A SHARES:
Shares sold................................................ 448,346 $ 5,946,720 989,236 $ 15,410,679
Shares issued on reinvestment of distributions............. 257,073 3,446,332 239,459 3,769,262
Shares redeemed............................................ (1,791,937) (23,844,888) (2,822,831) (43,756,260)
-------------------------------------------------------------
Net decrease............................................... (1,086,518) $(14,451,836) (1,594,136) $(24,576,319)
=============================================================
</TABLE>
17
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements (unaudited) (continued)
2. BENEFICIAL SHARES (CONT.)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
FEBRUARY 28, 1999 AUGUST 31, 1998
-------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS C SHARES:
Shares sold................................................. 23,991 $ 409,035 202,765 $ 3,004,691
Shares issued on reinvestment of distributions.............. 10,880 144,965 10,557 164,676
Shares redeemed............................................. (226,731) (3,025,513) (217,790) (3,323,984)
-------------------------------------------------------
Net decrease................................................ (191,860) $(2,471,513) (4,468) $ (154,617)
=======================================================
</TABLE>
3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Certain officers of the Fund are also officers or directors of Templeton Global
Advisors Ltd. (TGAL), Franklin Templeton Services, Inc. (FT Services),
Franklin/Templeton Distributors, Inc. (Distributors) and Franklin/Templeton
Investor Services, Inc. (Investors Services), the Fund's investment manager,
administrative manager, principal underwriter and transfer agent, respectively.
The Fund pays an investment management fee to TGAL of 0.75% per year of the
average daily net assets of the Fund. The Fund pays an administrative fee to FT
Services based on the Fund's average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED
FEE RATE AVERAGE DAILY NET ASSETS
- -----------------------------------------------------------------
<S> <C>
0.15% First $200 million
0.135% Over $200 million, up to and including $700 million
0.10% Over $700 million, up to and including $1.2 billion
0.075% Over $1.2 billion
</TABLE>
The Fund reimburses Distributors up to 0.25% and 1.00% per year of the average
daily net assets of Class A and Class C shares, respectively, for costs incurred
in marketing the Fund's Class A and Class C shares. Under the Class A
distribution plan, costs exceeding the maximum may be reimbursed in subsequent
periods. At February 28, 1999, unreimbursed costs were $93,938. Distributors
received net commissions from sales of the Fund's shares, and received
contingent deferred sales charges for the period of $5,241 and $1,524,
respectively.
Legal fees of $13,740 were paid to a law firm in which a partner is an officer
of the Fund.
4. INCOME TAXES
At August 31, 1998, the Fund had deferred capital losses and deferred foreign
currency losses occurring subsequent to October 31, 1997 of $516,346 and
$108,756, respectively. For tax purposes, such losses will be reflected in the
year ending August 31, 1999.
18
PAGE
TEMPLETON GLOBAL REAL ESTATE FUND
Notes to Financial Statements (unaudited) (continued)
4. INCOME TAXES (CONT.)
At February 28, 1999, the net unrealized appreciation based on the cost of
investments for income tax purposes of $77,271,449 was as follows:
<TABLE>
<S> <C>
Unrealized appreciation..................................... $ 12,281,449
Unrealized depreciation..................................... (11,268,450)
------------
Net unrealized appreciation................................. $ 1,012,999
============
</TABLE>
Net investment income and net realized capital gains differ for financial
statement and tax purposes primarily due to differing treatments of passive
foreign investment companies and foreign currency transactions.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the
period ended February 28, 1999 aggregated $1,286,603 and $24,746,701,
respectively.
19
PAGE
This page intentionally left blank.
PAGE
LITERATURE REQUEST
For a free brochure and prospectus, which contain more complete information,
including charges and expenses, call Franklin Templeton Fund Information at
1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. To ensure the highest quality of service, telephone
calls to or from our service departments may be monitored, recorded and
accessed. These calls can be determined by the presence of a regular beeping
tone.
FRANKLIN TEMPLETON GROUP
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Opportunities Trust
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Templeton Global
Smaller Companies Fund
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GLOBAL GROWTH AND INCOME
Franklin Global Utilities Fund
Mutual European Fund
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GLOBAL INCOME
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Income Fund
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GROWTH
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Growth Fund
GROWTH AND INCOME
Franklin Asset Allocation Fund
Franklin Balance Sheet
Investment Fund*
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FRANKLIN FUNDS SEEKING
TAX-FREE INCOME
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Tax-Free Income Fund
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FUNDS SEEKING
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Alabama
Arizona**
California**
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North Carolina
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Pennsylvania
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VARIABLE ANNUITIES++
Franklin Valuemark(R)
Franklin Templeton
Valuemark Income Plus
(an immediate annuity)
*These funds are now closed to new accounts, with the exception of retirement
plan accounts.
**Two or more fund options available: long-term portfolio, intermediate-term
portfolio, a portfolio of insured municipal securities, and/or a high yield
portfolio (CA) and a money market portfolio (CA and NY).
***The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
+Portfolio of insured municipal securities.
++Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin
Advisers, Inc. and its Templeton and Franklin affiliates.
01/99
PAGE
Bulk Rate
U.S. Postage
PAID
So. San Francisco, CA
Permit No. 655
[LOGO]
FRANKLIN TEMPLETON(R)
Templeton Global Real Estate Fund
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777
SEMIANNUAL REPORT
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404-1585
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SHAREHOLDER SERVICES
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FUND INFORMATION
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This report must be preceded or accompanied by the current Templeton Global Real
Estate Fund prospectus, which contains more complete information including risk
factors, charges and expenses. Like any investment in securities, the value of
the Fund's portfolio will be subject to the risk of loss from market, currency,
economic, political and other factors, as well as investment decisions by the
Investment Manager, which will not always be profitable or wise. The Fund and
its investors are not protected from such losses by the Investment Manager.
Therefore, investors who cannot accept this risk should not invest in shares of
the Fund. To ensure the highest quality of service, telephone calls to or from
our service departments may be monitored, recorded, and accessed. These calls
can be determined by the presence of a regular beeping tone.
410 S99 04/99 [RECYCLE LOGO] Printed on recycled paper
Franklin Real Estate Securities Fund
Franklin Real Estate Securities Fund
Templeton Global Real Estate Fund
Combining Pro Forma Statement of Investments, April 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Franklin Real Estate Securities Fund
COUNTRY SHARES VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stocks 93.2%
Banking .6%
a Bangkok Bank Public Co. Ltd., fgn.
Development Bank of Singapore Ltd., fgn.
HSBC Holdings PLC
National Australia Bank Ltd.
Shinhan Bank Co. Ltd.
Building Materials & Components .4%
Suez Cement Co.
Unione Cementi Marchino Emiliane (Unicem), di Risp
Construction & Housing .1%
Toda Corp.
a Diversified Property Type 4.8%
Crescent Operating Inc. United States 16,000 63,000
Security Capital Group Inc., B United States 1,114,400 16,855,300
Security Capital US Realty United States 675,000 5,737,500
-----------
22,655,800
-----------
Energy Sources .4%
a Perez Companc SA, B
Societe Elf Aquitaine SA, Br.
Equity REIT - Apartments 10.3%
Apartment Investment & Management Co. United States 200,000 $ 8,012,500
Archstone Communities Trust United States 487,000 11,048,813
Avalonbay Communities Inc. United States 135,000 4,725,000
Camden Property Trust United States 255,074 6,886,998
Charles E. Smith Residential Realty Inc. United States 120,000 3,900,000
Equity Residential Properties Trust United States 318,000 14,707,500
-----------
49,280,811
-----------
Equity REIT - Diversified Property Type 12.2%
Crescent Real Estate Equities Co. United States 183,650 4,109,169
Colonial Properties Trust United States 83,100 2,274,863
Duke Realty Investment Inc. United States 340,000 7,990,000
Glenborough Realty Trust Inc. United States 854,000 14,678,125
Liberty Property Trust United States 380,000 9,167,500
Spieker Properties Inc. United States 260,000 10,205,000
Vornado Realty Trust United States 180,200 7,027,800
-----------
55,452,457
-----------
Equity REIT - Health Care 1.2%
Omega Healthcare Investors Inc. United States 225,000 5,934,375
-----------
Equity REIT - Hotels 10.3%
FelCor Lodging Trust Inc. United States 425,000 10,173,438
Host Marriott Corp. United States 759,709 10,113,626
Innkeepers USA Trust United States 410,000 4,228,125
MeriStar Hospitality Corp. United States 743,700 17,105,100
Patriot American Hospitality Inc. United States 831,830 4,211,139
Winston Hotels Inc. United States 370,000 3,607,500
-----------
49,438,928
-----------
Equity REIT - Industrial 2.6%
Cabot Industrial Trust United States 245,000 4,991,870
ProLogis Trust United States 363,000 7,623,000
-----------
12,614,870
-----------
Equity REIT - Office 17.1%
Alexandria Real Estate Equities Inc. United States 351,900 9,919,181
Arden Realty Inc. United States 390,000 9,750,000
Brandywine Realty Trust United States 649,300 12,255,538
Equity Office Properties Trust United States 551,000 15,186,938
Highwoods Properties Inc. United States 300,000 7,725,000
Mack-Cali Realty Corp. United States 275,000 8,507,813
SL Green Realty Corp. United States 194,500 3,865,688
TriNet Corporate Realty Trust United States 415,000 11,386,563
-----------
78,596,721
-----------
Equity REIT - Residential Communities 2.5%
Manufactured Home Communities Inc. United States 170,000 4,303,125
Sun Communities Inc. United States 220,000 7,700,000
-----------
12,003,125
-----------
Equity REIT - Retail - Community Centers 5.1%
Burnham Pacific Properties Inc. United States 318,400 3,661,600
Developers Diversified Realty Corp. United States 230,000 3,636,875
Kimco Realty Corp. United States 260,000 10,205,000
Regency Realty Corp. United States 307,439 6,648,368
-----------
24,151,843
-----------
Equity REIT - Retail - Regional Malls 4.3%
Simon Property Group Inc. United States 425,000 12,192,188
Mills Corp. United States 108,900 2,130,356
The Macerich Co. United States 235,000 6,007,188
-----------
20,329,732
-----------
Equity REIT - Storage 3.2%
Public Storage Inc. United States 555,400 15,481,775
-----------
Financial Services .2%
Housing Development Finance Corp. Ltd.
Lend Lease Corp. Ltd.
Forest Products & Paper .3%
St. Joe Co.
Hotels 5.2%
a Candlewood Hotel Co. Inc. United States 385,000 1,371,563
a MeriStar Hotels & Resorts Inc. United States 392,000 1,421,000
a Prime Hospitality Corp. United States 350,000 4,265,625
Starwood Lodging Trust United States 485,000 17,793,438
-----------
24,851,626
-----------
Leisure & Tourism .7%
Grand Hotel Holdings Ltd.
Mandarin Oriental International Ltd.
Oriental Hotel (Thailand) Public Co. Ltd., fgn.
a Prime Hospitality Corp.
Rank Group PLC
Merchandising .2%
Li & Fung Ltd.
Wessel & Vett, Theodore AS
Metals & Mining .4%
Anglo American Platinum Corp. Ltd.
Boehler-Uddeholm AG
Industrias Penoles SA
RGC Ltd.
Misc Materials & Commodities .1%
De Beers/Centenary Linked Units
Multi-Industry 1.8%
Cheung Kong Holdings Ltd.
First Pacific Co. Ltd.
Hutchison Whampoa Ltd.
a Metro Pacific Corp. MDI
Swire Pacific Ltd., B
Wheelock and Company Ltd.
Real Estate 7.7%
American Health Properties Inc.
Bail Investissement
Boston Properties Inc.
a Canlan Investment Corp.
Carramerica Realty Corp.
China Resources Beijing Land Ltd.
China Resources Beijing Land Ltd., 144A
Corporacion Geo SA, B
Equity Residential Properties Trust
Federal Realty Investment Trust, SBI
General Growth Properties
Inversiones y Representacion SA
Inversiones y Representacion SA, GDR
LTC Properties Inc.
Nationwide Health Properties Inc.
New Asia Realty and Trust Co. Ltd., A
New World Development Co. Ltd.
a Northstar Capital Investment Corp., 144A
a Prima Inmobiliaria SA
Rouse Co.
Summit Properties Inc.
Taylor Woodrow PLC
Union du Credit Bail Immobilier Unibail
Weeks Corp.
Telecommunications .3%
Telecomunicacoes Brasileiras SA
a Telecomunicacoes Brasileiras SA (Telebras)
Telefonos de Mexico SA (Telmex), ADR
Transportation .6%
Florida East Coast Industries Inc.
Peninsular & Oriental Steam Navigation Co.
Utilities Electrical & Gas .6%
National Grid Group PLC
National Power PLC
-----------
Total Common Stocks (Cost $461,797,242) 370,792,063
-----------
Preferred Stocks .5%
Banco Itau SA, pfd.
Baumax AG, pfd.
Cia Vale do Rio Doce, A, pfd.
Cia Vale do Rio Doce, A, ADR, pfd.
Total Preferred Stocks (Cost $3,456,240)
Principal
Amount**
----------
Bonds .4%
Government of Italy, cvt., 5.00%, 6/28/01
Revenue Property Ltd., cvt., 6.00%, 3/01/04
Total Bonds (Cost $1,816,282)
-----------
Total Long Term Investments (Cost $467,069,764) 94.1% 370,792,063
-----------
Repurchase Agreement 3.6%
Joint Repurchase Agreement, 4.862%, 5/03 (cost $17,129,185) United States $17,129,185 17,129,185
Collateralized by U.S. Treasury Bills & Notes
-----------
Total Investments (Cost $484,198,949) 97.7% 387,921,248
Other Assets, less Liabilities 2.3% (63,728)
-----------
Total Net Assets 100.0% $ 387,857,520
-----------
a Non-income producing
** Securities traded in U.S. Dollars unless otherwise indicated.
</TABLE>
FRANKLIN REAL ESTATE SECURITIES FUND
FRANKLIN REAL ESTATE SECURITIES FUND
TEMPLETON GLOBAL REAL ESTATE FUND
COMBINING PRO FORMA STATEMENT OF INVESTMENTS, APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
TEMPLETON GLOBAL REAL ESTATE FUND
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------
COMMON STOCKS 93.2%
BANKING .6%
<S> <C> <C>
a Bangkok Bank Public Co. Ltd., fgn. Thailand 291,000 $ 870,295
Development Bank of Singapore Ltd., fgn. Singapore 43,000 457,042
HSBC Holdings PLC Hong Kong 41,301 1,534,709
National Australia Bank Ltd. Australia 3,300 64,344
Shinhan Bank Co. Ltd. South Korea 7,946 87,583
---------
3,013,973
---------
BUILDING MATERIALS & COMPONENTS .4%
Suez Cement Co. Egypt 88,000 1,503,094
Unione Cementi Marchino Emiliane (Unicem), di Risp Italy 65,580 312,907
---------
1,816,001
---------
CONSTRUCTION & HOUSING .1%
Toda Corp. Japan 70,000 391,740
---------
a DIVERSIFIED PROPERTY TYPE 4.8%
Crescent Operating Inc.
Security Capital Group Inc., B
Security Capital US Realty
ENERGY SOURCES .4%
a Perez Companc SA, B Argentina 70,000 434,174
Societe Elf Aquitaine SA, Br. France 10,317 1,604,493
---------
2,038,667
---------
EQUITY REIT - APARTMENTS 10.3%
Apartment Investment & Management Co.
Archstone Communities Trust
Avalonbay Communities Inc.
Camden Property Trust
Charles E. Smith Residential Realty Inc.
Equity Residential Properties Trust
EQUITY REIT - DIVERSIFIED PROPERTY TYPE 12.2%
Crescent Real Estate Equities Co. United States 91,880 2,055,815
Colonial Properties Trust
Duke Realty Investment Inc.
Glenborough Realty Trust Inc.
Liberty Property Trust
Spieker Properties Inc.
Vornado Realty Trust
---------
2,055,815
---------
EQUITY REIT - HEALTH CARE 1.2%
Omega Healthcare Investors Inc.
EQUITY REIT - HOTELS 10.3%
FelCor Lodging Trust Inc.
Host Marriott Corp.
Innkeepers USA Trust
MeriStar Hospitality Corp.
Patriot American Hospitality Inc.
Winston Hotels Inc.
EQUITY REIT - INDUSTRIAL 2.6%
Cabot Industrial Trust
ProLogis Trust
EQUITY REIT - OFFICE 17.1%
Alexandria Real Estate Equities Inc.
Arden Realty Inc.
Brandywine Realty Trust
Equity Office Properties Trust
Highwoods Properties Inc. United States 127,800 3,290,850
Mack-Cali Realty Corp.
SL Green Realty Corp.
TriNet Corporate Realty Trust
---------
3,290,850
---------
EQUITY REIT - RESIDENTIAL COMMUNITIES 2.5%
Manufactured Home Communities Inc.
Sun Communities Inc.
EQUITY REIT - RETAIL - COMMUNITY CENTERS 5.1%
Burnham Pacific Properties Inc.
Developers Diversified Realty Corp.
Kimco Realty Corp.
Regency Realty Corp.
EQUITY REIT - RETAIL - REGIONAL MALLS 4.3%
Simon Property Group Inc.
Mills Corp.
The Macerich Co.
EQUITY REIT - STORAGE 3.2%
Public Storage Inc.
FINANCIAL SERVICES .2%
Housing Development Finance Corp. Ltd. India 6,800 349,696
Lend Lease Corp. Ltd. Australia 32,945 444,832
---------
794,528
---------
FOREST PRODUCTS & PAPER .3%
St. Joe Co. United States 60,000 1,526,250
---------
HOTELS 5.2%
a Candlewood Hotel Co. Inc.
a MeriStar Hotels & Resorts Inc.
a Prime Hospitality Corp.
Starwood Lodging Trust
LEISURE & TOURISM .7%
Grand Hotel Holdings Ltd. Hong Kong 2,469,000 347,233
Mandarin Oriental International Ltd. Singapore 1,501,000 1,133,255
Oriental Hotel (Thailand) Public Co. Ltd., fgn. Thailand 76,200 377,766
a Prime Hospitality Corp. United States 37,200 453,375
Rank Group PLC United Kingdom 229,606 951,917
---------
3,263,546
---------
MERCHANDISING .2%
Li & Fung Ltd. Hong Kong 70,000 171,603
Wessel & Vett, Theodore AS Denmark 12,000 547,102
---------
718,705
---------
METALS & MINING .4%
Anglo American Platinum Corp. Ltd. South Africa 1,208 21,886
Boehler-Uddeholm AG Austria 9,500 559,214
Industrias Penoles SA Mexico 391,100 1,322,714
RGC Ltd. Australia 447,522 138,736
---------
2,042,550
---------
MISC MATERIALS & COMMODITIES .1%
De Beers/Centenary Linked Units South Africa 27,600 687,231
---------
MULTI-INDUSTRY 1.8%
Cheung Kong Holdings Ltd. Hong Kong 268,000 2,437,794
First Pacific Co. Ltd. Hong Kong 1,952,667 1,511,654
Hutchison Whampoa Ltd. Hong Kong 210,000 1,883,116
a Metro Pacific Corp. MDI Philippines 500,000 26,824
Swire Pacific Ltd., B Hong Kong 800 681
Wheelock and Company Ltd. Hong Kong 2,156,675 2,504,380
---------
8,364,449
---------
REAL ESTATE 7.7%
American Health Properties Inc. United States 64,300 1,273,944
Bail Investissement France 1,924 255,049
Boston Properties Inc. United States 65,000 2,360,313
a Canlan Investment Corp. Canada 194,500 122,873
Carramerica Realty Corp. United States 65,000 1,608,750
China Resources Beijing Land Ltd. China 1,520,000 268,681
China Resources Beijing Land Ltd., 144A China 480,300 84,900
Corporacion Geo SA, B Mexico 23,000 96,829
Equity Residential Properties Trust United States 75,800 3,505,750
Federal Realty Investment Trust, SBI United States 33,000 787,875
General Growth Properties United States 28,830 1,061,304
Inversiones y Representacion SA Argentina 344,072 1,153,100
Inversiones y Representacion SA, GDR Argentina 846 28,341
LTC Properties Inc. United States 226,000 3,036,875
Nationwide Health Properties Inc. United States 122,000 2,478,125
New Asia Realty and Trust Co. Ltd., A Hong Kong 388,000 450,554
New World Development Co. Ltd. Hong Kong 761,109 1,885,477
a Northstar Capital Investment Corp., 144A United States 95,000 1,508,125
a Prima Inmobiliaria SA Spain 95,500 741,595
Rouse Co. United States 160,700 3,907,019
Summit Properties Inc. United States 91,300 1,666,225
Taylor Woodrow PLC United Kingdom 315,802 986,405
Union du Credit Bail Immobilier Unibail France 26,850 3,408,730
Weeks Corp. United States 140,400 4,361,175
---------
37,038,014
---------
TELECOMMUNICATIONS .3%
Telecomunicacoes Brasileiras SA Brazil 6,664,000 349,468
a Telecomunicacoes Brasileiras SA (Telebras) Brazil 6,664,000 241
Telefonos de Mexico SA (Telmex), ADR Mexico 15,700 1,189,275
---------
1,538,984
---------
TRANSPORTATION .6%
Florida East Coast Industries Inc. United States 44,000 1,402,500
Peninsular & Oriental Steam Navigation Co. United Kingdom 104,961 1,531,069
---------
2,933,569
---------
UTILITIES ELECTRICAL & GAS .6%
National Grid Group PLC United Kingdom 199,070 1,381,407
National Power PLC United Kingdom 192,378 1,552,560
---------
2,933,967
---------
TOTAL COMMON STOCKS (COST $461,797,242) 74,448,839
---------
PREFERRED STOCKS .5%
Banco Itau SA, pfd. Brazil 1,117,000 589,162
Baumax AG, pfd. Austria 36,907 644,258
Cia Vale do Rio Doce, A, pfd. Brazil 30,800 593,907
Cia Vale do Rio Doce, A, ADR, pfd. Brazil 31,200 601,620
---------
TOTAL PREFERRED STOCKS (COST $3,456,240) 2,428,947
---------
PRINCIPAL
AMOUNT**
------- ---------
BONDS .4%
Government of Italy, cvt., 5.00%, 6/28/01 Italy $ 415,000 772,419
Revenue Property Ltd., cvt., 6.00%, 3/01/04 Canada 1,400,000 1,232,000
---------
---------
TOTAL BONDS (COST $1,816,282) 2,004,419
---------
---------
TOTAL LONG TERM INVESTMENTS (COST $467,069,764) 94.1% 78,882,205
---------
REPURCHASE AGREEMENT .6%
Joint Repurchase Agreement, 4.862%, 5/03/99, (COST $17,129,185)
Collateralized by U.S. Treasury Bills & Notes
---------
TOTAL INVESTMENTS (COST $484,198,949) 97.7% 78,882,205
OTHER ASSETS, LESS LIABILITIES 2.3% 11,231,752
---------
TOTAL NET ASSETS 100.0% $ 90,113,957
---------
a Non-income producing
** Securities traded in U.S. Dollars unless otherwise indicated.
</TABLE>
FRANKLIN REAL ESTATE SECURITIES FUND
FRANKLIN REAL ESTATE SECURITIES FUND
TEMPLETON GLOBAL REAL ESTATE FUND
COMBINING PRO FOREALSESTATENSECURITIESTFUNDS, APRIL 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA COMBINED
SHARES VALUE
---------------------------------------------------------------------------
COMMON STOCKS 93.2%
BANKING .6%
<S> <C> <C>
a Bangkok Bank Public Co. Ltd., fgn. 291,000 $ 870,295
Development Bank of Singapore Ltd., fgn. 43,000 457,042
HSBC Holdings PLC 41,301 1,534,709
National Australia Bank Ltd. 3,300 64,344
Shinhan Bank Co. Ltd. 7,946 87,583
----------
3,013,973
----------
BUILDING MATERIALS & COMPONENTS .4%
Suez Cement Co. 88,000 1,503,094
Unione Cementi Marchino Emiliane (Unicem), di Risp 65,580 312,907
----------
1,816,001
----------
CONSTRUCTION & HOUSING .1%
Toda Corp. 70,000 391,740
----------
a DIVERSIFIED PROPERTY TYPE 4.8%
Crescent Operating Inc. 16,000 63,000
Security Capital Group Inc., B 1,114,400 16,855,300
Security Capital US Realty 675,000 5,737,500
----------
22,655,800
----------
ENERGY SOURCES .4%
a Perez Companc SA, B 70,000 434,174
Societe Elf Aquitaine SA, Br. 10,317 1,604,493
----------
2,038,667
----------
EQUITY REIT - APARTMENTS 10.3%
Apartment Investment & Management Co. 200,000 $ 8,012,500
Archstone Communities Trust 487,000 11,048,813
Avalonbay Communities Inc. 135,000 4,725,000
Camden Property Trust 255,074 6,886,998
Charles E. Smith Residential Realty Inc. 120,000 3,900,000
Equity Residential Properties Trust 318,000 14,707,500
----------
49,280,811
----------
EQUITY REIT - DIVERSIFIED PROPERTY TYPE 12.2%
Crescent Real Estate Equities Co. 275,530 6,164,984
Colonial Properties Trust 83,100 2,274,863
Duke Realty Investment Inc. 340,000 7,990,000
Glenborough Realty Trust Inc. 854,000 14,678,125
Liberty Property Trust 380,000 9,167,500
Spieker Properties Inc. 260,000 10,205,000
Vornado Realty Trust 180,200 7,027,800
----------
57,508,272
----------
EQUITY REIT - HEALTH CARE 1.2%
Omega Healthcare Investors Inc. 225,000 5,934,375
----------
EQUITY REIT - HOTELS 10.3%
FelCor Lodging Trust Inc. 425,000 10,173,438
Host Marriott Corp. 759,709 10,113,626
Innkeepers USA Trust 410,000 4,228,125
MeriStar Hospitality Corp. 743,700 17,105,100
Patriot American Hospitality Inc. 831,830 4,211,139
Winston Hotels Inc. 370,000 3,607,500
----------
49,438,928
----------
EQUITY REIT - INDUSTRIAL 2.6%
Cabot Industrial Trust 245,000 4,991,870
ProLogis Trust 363,000 7,623,000
---------
12,614,870
----------
EQUITY REIT - OFFICE 17.1%
Alexandria Real Estate Equities Inc. 351,900 9,919,181
Arden Realty Inc. 390,000 9,750,000
Brandywine Realty Trust 649,300 12,255,538
Equity Office Properties Trust 551,000 15,186,938
Highwoods Properties Inc. 427,800 11,015,850
Mack-Cali Realty Corp. 275,000 8,507,813
SL Green Realty Corp. 194,500 3,865,688
TriNet Corporate Realty Trust 415,000 11,386,563
----------
81,887,571
----------
EQUITY REIT - RESIDENTIAL COMMUNITIES 2.5%
Manufactured Home Communities Inc. 170,000 4,303,125
Sun Communities Inc. 220,000 7,700,000
----------
12,003,125
----------
EQUITY REIT - RETAIL - COMMUNITY CENTERS 5.1%
Burnham Pacific Properties Inc. 318,400 3,661,600
Developers Diversified Realty Corp. 230,000 3,636,875
Kimco Realty Corp. 260,000 10,205,000
Regency Realty Corp. 307,439 6,648,368
----------
24,151,843
----------
EQUITY REIT - RETAIL - REGIONAL MALLS 4.3%
Simon Property Group Inc. 425,000 12,192,188
Mills Corp. 108,900 2,130,356
The Macerich Co. 235,000 6,007,188
----------
20,329,732
----------
EQUITY REIT - STORAGE 3.2%
Public Storage Inc. 555,400 15,481,775
----------
FINANCIAL SERVICES .2%
Housing Development Finance Corp. Ltd. 6,800 349,696
Lend Lease Corp. Ltd. 32,945 444,832
----------
794,528
----------
FOREST PRODUCTS & PAPER .3%
St. Joe Co. 60,000 1,526,250
----------
HOTELS 5.2%
a Candlewood Hotel Co. Inc. 385,000 1,371,563
a MeriStar Hotels & Resorts Inc. 392,000 1,421,000
a Prime Hospitality Corp. 350,000 4,265,625
Starwood Lodging Trust 485,000 17,793,438
----------
24,851,626
----------
LEISURE & TOURISM .7%
Grand Hotel Holdings Ltd. 2,469,000 347,233
Mandarin Oriental International Ltd. 1,501,000 1,133,255
Oriental Hotel (Thailand) Public Co. Ltd., fg 76,200 377,766
a Prime Hospitality Corp. 37,200 453,375
Rank Group PLC 229,606 951,917
----------
3,263,546
----------
MERCHANDISING .2%
Li & Fung Ltd. 70,000 171,603
Wessel & Vett, Theodore AS 12,000 547,102
----------
718,705
----------
METALS & MINING .4%
Anglo American Platinum Corp. Ltd. 1,208 21,886
Boehler-Uddeholm AG 9,500 559,214
Industrias Penoles SA 391,100 1,322,714
RGC Ltd. 447,522 138,736
----------
2,042,550
----------
MISC MATERIALS & COMMODITIES .1%
De Beers/Centenary Linked Units 27,600 687,231
----------
MULTI-INDUSTRY 1.8%
Cheung Kong Holdings Ltd. 268,000 2,437,794
First Pacific Co. Ltd. 1,952,667 1,511,654
Hutchison Whampoa Ltd. 210,000 1,883,116
a Metro Pacific Corp. MDI 500,000 26,824
Swire Pacific Ltd., B 800 681
Wheelock and Company Ltd. 2,156,675 2,504,380
----------
8,364,449
----------
REAL ESTATE 7.7%
American Health Properties Inc. 64,300 1,273,944
Bail Investissement 1,924 255,049
Boston Properties Inc. 65,000 2,360,313
a Canlan Investment Corp. 194,500 122,873
Carramerica Realty Corp. 65,000 1,608,750
China Resources Beijing Land Ltd. 1,520,000 268,681
China Resources Beijing Land Ltd., 144A 480,300 84,900
Corporacion Geo SA, B 23,000 96,829
Equity Residential Properties Trust 75,800 3,505,750
Federal Realty Investment Trust, SBI 33,000 787,875
General Growth Properties 28,830 1,061,304
Inversiones y Representacion SA 344,072 1,153,100
Inversiones y Representacion SA, GDR 846 28,341
LTC Properties Inc. 226,000 3,036,875
Nationwide Health Properties Inc. 122,000 2,478,125
New Asia Realty and Trust Co. Ltd., A 388,000 450,554
New World Development Co. Ltd. 761,109 1,885,477
a Northstar Capital Investment Corp., 144A 95,000 1,508,125
a Prima Inmobiliaria SA 95,500 741,595
Rouse Co. 160,700 3,907,019
Summit Properties Inc. 91,300 1,666,225
Taylor Woodrow PLC 315,802 986,405
Union du Credit Bail Immobilier Unibail 26,850 3,408,730
Weeks Corp. 140,400 4,361,175
----------
37,038,014
----------
TELECOMMUNICATIONS .3%
Telecomunicacoes Brasileiras SA 6,664,000 349,468
a Telecomunicacoes Brasileiras SA (Telebras) 6,664,000 241
Telefonos de Mexico SA (Telmex), ADR 15,700 1,189,275
----------
1,538,984
----------
TRANSPORTATION .6%
Florida East Coast Industries Inc. 44,000 1,402,500
Peninsular & Oriental Steam Navigation Co. 104,961 1,531,069
----------
2,933,569
----------
UTILITIES ELECTRICAL & GAS .6%
National Grid Group PLC 199,070 1,381,407
National Power PLC 192,378 1,552,560
----------
2,933,967
----------
----------
TOTAL COMMON STOCKS (COST $461,797,242) 445,240,902
----------
PREFERRED STOCKS .5%
Banco Itau SA, pfd. 1,117,000 589,162
Baumax AG, pfd. 36,907 644,258
Cia Vale do Rio Doce, A, pfd. 30,800 593,907
Cia Vale do Rio Doce, A, ADR, pfd. 31,200 601,620
----------
TOTAL PREFERRED STOCKS (COST $3,456,240) 2,428,947
----------
PRINCIPAL
AMOUNT**
---------
BONDS .4
Government of Italy, cvt., 5.00%, 6/28/01 $ 415,000 772,419
Revenue Property Ltd., cvt., 6.00%, 3/01/04 1,400,000 1,232,000
----------
TOTAL BONDS (COST $1,816,282) 2,004,419
----------
----------
TOTAL LONG TERM INVESTMENTS (COST $467,069,764) 94.1% 449,674,268
----------
REPURCHASE AGREEMENT 3.6%
Joint Repurchase Agreement, 4.862%, 5/03/99 17,129,185 17,129,185
Collateralized by U.S. Treasury Bills & Notes
----------
TOTAL INVESTMENTS (COST $484,198,949) 97.7% 466,803,453
OTHER ASSETS, LESS LIABILITIES 2.3% 11,168,024
----------
TOTAL NET ASSETS 100.0% $ 477,971,477
----------
a Non-income producing
** Securities traded in U.S. Dollars unless otherwise indicated.
</TABLE>
FRANKLIN REAL ESTATE SECURITIES TRUST
FRANKLIN REAL ESTATE SECURITIES FUND
TEMPLETON GLOBAL REAL ESTATE FUND
Financial Statements
PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
APRIL 30, 1999
<TABLE>
<CAPTION>
Franklin
Franklin Templeton Real Estate
Real Estate Global Securities Fund
Securities Real Estate Pro Forma
Fund Fund Combined
--------------------------------------------------
Assets:
Investments in securities:
<S> <C> <C> <C>
Cost $ 416,952,372 $ 67,246,577 $ 484,198,949
------------- ------------ -------------
Value 387,921,248 78,882,205 466,803,453
Receivables:
Investment securities sold 1,041,553 11,268,146 12,309,699
Capital shares sold 1,416,985 13,176 1,430,161
Dividends and interest 494,422 518,170 1,012,592
------------- ------------ -------------
Total assets 390,874,208 90,681,697 481,555,905
------------- ------------ -------------
Liabilities:
Payables:
Investment securities purchased - 32,958 32,958
Capital shares redeemed 1,808,052 314,513 2,122,565
Funds Advanced by Custodian - 33,623 33,623
Affiliates 660,428 95,300 755,728
Shareholders 468,112 - 468,112
Other liabilities 80,096 91,346 171,442
------------- ------------ -------------
Total liabilities 3,016,688 567,740 3,584,428
------------- ------------ -------------
Net assets, at value $ 387,857,520 $ 90,113,957 $477,971,477
============= ============ =============
CLASS A **:
Net assets, at value $ 278,301,203 $ 85,663,567 $ 363,964,770
============= ============ =============
Shares outstanding *** 18,339,216 6,000,585 23,982,402
============= ============ =============
Net asset value per share * $ 15.18 $ 14.28 $ 15.18
============= ============ =============
Maximum offering price per share
(net asset value per share -:-94.25%) $ 16.11 $ 15.15 $ 16.11
============= ============ =============
CLASS B **:
Net assets, at value $ 1,119,462 - $ 1,119,462
============= ============ =============
Shares outstanding 73,863 - 73,863
============= ============ =============
Net asset value per share and
maximum offering price per share* $ 15.16 - $ 15.16
============= ============ =============
CLASS C **:
Net assets, at value $ 105,861,019 $ 4,450,390 $ 110,311,409
============= ============ =============
Shares outstanding*** 7,072,878 313,938 7,370,165
============= ============ =============
Net asset value per share * $ 14.97 $ 14.18 $ 14.97
============= ============ =============
Maximum offering price per share
(net asset value per share -:- 99.00%) $ 15.12 $ 14.32 $ 15.12
============= ============ =============
ADVISOR CLASS:
Net assets, at value $ 2,575,836 - $ 2,575,836
============= ============ =============
Shares outstanding 169,325 - 169,325
============= ============ =============
Net asset value and maximum offering price per share $ 15.21 - $ 15.21
============= ============ =============
</TABLE>
* Redemption price is equal to net asset value less any applicable contingent
deferred sales charge.
** Effective January 1, 1999, Class I and Class II Shares were renamed Class A
and Class C, respectively and the Franklin Real Estate Securities Fund began
offering a new class of shares, Class B.
*** Shares issued for Class A and Class C for Franklin Real Estate Securities
Fund Pro Forma Combined were determined by dividing class specific net assets of
the Templeton Global Real Estate Fund at 4/30/99 by Class A and Class C net
asset values of the Franklin Real Estate Securities Fund at 4/30/99.
FRANKLIN REAL ESTATE SECURITIES TRUST
FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA COMBINING STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
Franklin
Real Estate
Franklin Templeton Global Securities Fund
Real Estate Real Estate Pro Forma Pro Forma
Securities Fund Fund Adjustments Combined
--------------- -------------- ------------- --------------
Investment income:*
<S> <C> <C> <C>
Dividends $ 24,030,549 $ 4,993,546 - $ 29,024,095
Interest 1,607,782 358,068 - 1,965,850
--------------- -------------- ------------- --------------
Total investment income 25,638,331 5,351,614 - 30,989,945
--------------- -------------- ------------- --------------
Expenses:
Management fees 2,138,145 808,841 (302,811)** 2,644,175
Administrative fees - 161,771 (161,771)*** -
Distribution fees - - - -
Class A 736,186 253,194 - 989,380
Class B 1,377 - - 1,377
Class C 1,177,330 59,913 - 1,237,243
Transfer agent fees 526,370 199,000 - 725,370
Custodian fees 4,660 600 - 5,260
Reports to shareholders 113,385 100,136 - 213,521
Registration and filing fees 151,501 37,900 (105,750)+ 83,651
Professional fees 23,489 21,400 (21,400)+ 23,489
Trustees' fees and expenses 11,559 18,500 (18,500)**** 11,559
Other 5,258 - - 5,258
--------------- -------------- ------------- --------------
Total expenses 4,889,260 1,661,255 (610,232) 5,940,283
Net investment income 20,749,071 3,690,359 610,232 25,049,662
--------------- -------------- ------------- --------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments 2,824,842 (8,953,946) - (6,129,104)
Foreign currency transactions - (83,978) - (83,978)
--------------- -------------- ------------- --------------
Net realized gain (loss) 2,824,842 (9,037,924) - (6,213,082)
Net unrealized depreciation on investment(70,145,582) (7,702,080) - (77,847,662)
--------------- -------------- ------------- --------------
Net realized and unrealized loss (67,320,740) (16,740,004) - (84,060,744)
--------------- -------------- ------------- --------------
Net decrease in net assets
resulting from operations $(46,571,66) (13,049,645) - $(59,011,082)
--------------- -------------- ------------- --------------
</TABLE>
* Net of foreign taxes of $153,826 for the Templeton Global Real Estate Fund.
** Pro Forma adjustment for difference in Management fee schedule.
*** Under an agreement with Advisers, FT Services provides administrative
services to the Fund. The fee is paid by Advisers based on average daily net
assets, and is not an additional expense of the Fund.
**** Trustees fees and expenses are based on expenses incurred by the Board of
Trustees of the Franklin Real Estate Securities Fund.
+ Certain registration fees and expenses are no longer applicable after the
merger.
FRANKLIN REAL ESTATE SECURITIES FUND
TEMPLETON GLOBAL REAL ESTATE FUND
NOTES TO PRO FORMA COMBINING STATEMENTS (UNAUDITED)
1. BASIS OF COMBINATION:
Subject to approval of the proposed Agreement and Plan of Reorganization
(the "Agreement and Plan") by the shareholders of the Templeton Global Real
Estate Fund ("Global Real Estate Fund"), the Franklin Real Estate
Securities Fund ("Real Estate Securities Fund") will acquire all the net
assets of the Global Real Estate Fund in exchange for the Class A and Class
C shares of Real Estate Securities Fund. The merger will be accounted for
by the method of accounting for tax free business combinations of
investment companies. The pro forma combining Statement of Assets and
Liabilities reflects the financial position of Real Estate Securities Fund
and Global Real Estate Fund at April 30, 1999 as though the merger occurred
as of that date. The pro forma combining Statement of Operations reflects
the results of operations of the Real Estate Securities Fund and the Global
Real Estate Fund for the period May 1, 1998 to April 30, 1999 as though the
merger occurred on May 1, 1998. The pro forma financial statements do not
reflect the expenses of either fund in carrying out its obligations under
the Agreement and Plan of Reorganization or any adjustment with respect to
additional distributions that may be made prior to reorganization. The pro
forma financial statements are presented for the information of the reader,
and should be read in conjunction with the historical financial statements
of the funds.
2. SHARES OF BENEFICIAL INTEREST:
The number of Class A and Class C shares issued was calculated by dividing
the Class A and Class C net assets of the Global Real Estate Fund at April
30, 1999 by the Class A and Class C net asset values per share of the Real
Estate Securities Fund at April 30, 1999.
PART C. OTHER INFORMATION
Item 15. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") 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 the 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 by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Please see the Declaration of Trust, By-Laws, Management Agreement, and
Distribution Agreements previously filed as exhibits and incorporated herein
by reference.
Item 16. EXHIBITS (Incorporated by reference to the filings as noted)
The following exhibits are incorporated herein by reference to the
previously filed document indicated below, except as noted:
(1) Copies of the charter of the Registrant 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 corresponding instruments of
the Registrant:
(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
Filing: Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: August 29, 1997
(3) Copies of any voting trust agreement affecting more than 5
percent of any class of equity securities of the Registrant:
Not Applicable
(4) Form of Agreement and Plan of Reorganization is included in this
Registration Statement as Exhibit A to the Prospectus/Proxy
Statement.
(5) Copies of all instruments defining the rights of holders of the
securities being registered including, where applicable, the
relevant portion of the articles of incorporation or by-laws of
the Registrant:
Not Applicable
(6) Copies of all investment advisory contracts relating to the
management 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
(7) 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) Amendment of Amended and Restated Distribution
Agreement between Registrant and Franklin/Templeton
Distributors, Inc., dated January 12, 1999
Filing: Post-Effective Amendment No. 10 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 28, 1999
(iii) Forms of Dealer Agreements between Franklin/Templeton
Distributors, Inc. and Securities Dealers dated March
1, 1998
Filing: Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: December 23, 1998
(8) Copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
directors or officers of the Registrant in their capacity as
such. Furnish a reasonably detailed description of any plan that
is not set forth in a formal document.
Not Applicable
(9) Copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act for 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) Amendment dated May 7, 1997 to Master Custody Agreement
between Registrant and Bank of New York dated February 16,
1996
Filing: Post-Effective Amendment No. 8 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 19, 1998
(iii) Amendment dated February 27, 1998 to Master Custody
Agreement between Registrant and Bank of New York
dated February 16, 1996
Filing: Post-Effective Amendment No. 10 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 28, 1999
(iv) 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
(v) Foreign Custody Manager Agreement between the
Registrant and The Bank of New York dated February
27, 1998
Filing: Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: December 23, 1998
(10) Copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, and any agreements with any person
relating to implementation of the plan, and copies of any plan
entered into by Registrant pursuant to Rule 18f-3 under the 1940
Act, any agreements with any person relating to the
implementation of the plan, any amendment to the plan, and a copy
of the portion of the minutes of the Registrant's directors
describing any action taken to revoke the 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
(iii) Class B Distribution Plan pursuant to Rule 12b-1
dated October 16, 1998
Filing: Post-Effective Amendment No. 10 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 28, 1999
(iv) Form of Multiple Class Plan
Filing: Post-Effective Amendment No. 10 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: June 28, 1999
(11) 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 non-assessable:
(i) Opinion and Consent of Counsel
Filing: Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: December 23, 1998
(12) An opinion, and consent to their use, of counsel or, in lieu of
an opinion, a copy of the revenue ruling from the Internal
Revenue Service, supporting the tax matters and consequences to
shareholders discussed in the prospectus:
(i) Form of an opinion, and consent to its use, of counsel,
supporting the tax matters and consequences to shareholders
discussed in the prospectus.
(13) Copies of all other material contracts of the Registrant not made
in the ordinary course of business which are to be performed in
whole or in part on or after the date of filing the Registration
Statement:
(i) Subcontract for Fund Administrative Services dated
October 1, 1996, as amended, April 30, 1998, between
Franklin Advisers, Inc. and Franklin Templeton
Services Inc.
Filing: Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A
File No. 33-69048
Filing Date: December 23, 1998
(14) Copies of any other opinions, appraisals or rulings, and consents
to their use relied on in preparing the registration statement
and required by Section 7 of the 1933 Act:
(i) Consent of Independent Auditors,
PricewaterhouseCoopers, LLP, for Franklin Real Estate
Securities Trust
(ii) Consent of Independent Auditors, McGladrey & Pullen,
LLP, for Templeton Global Real Estate Fund
(15) All financial statements omitted pursuant to Item 14(a)(1):
Not Applicable
(16) Manually signed copies of any power of attorney pursuant to which
the name of any person has been signed to the Registration
Statement.
(i) Power of Attorney dated April 15, 1999
Item 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act, the reoffering
prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may
be deemed underwriters, in addition to the information called for
by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus
that is filed under paragraph (1) above will be filed as a part
of an amendment to the registration statement and will not be
used until the amendment is effective, and that, in determining
any liability under the 1933 Act, each post-effective amendment
shall be deemed to be a new Registration Statement for the
securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of
them.
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement
has been signed on behalf of the Registrant, in the City of San Mateo, and
the State of California, on the 29th day of June, 1999.
FRANKLIN REAL ESTATE SECURITIES TRUST
(Registrant)
By: LEIANN NUZUM
Leiann Nuzum
Assistant Secretary
As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated:
RUPERT H. JOHNSON, JR.* Principal Executive Officer and Trustee
Rupert H. Johnson, Jr. Dated: June 29, 1999
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: June 29, 1999
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: June 29, 1999
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: June 29, 1999
FRANK H. ABBOTT III* Trustee
Frank H. Abbot III Dated: June 29, 1999
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: June 29, 1999
HARMON E. BURNS* Trustee
Harmon E. Burns Dated: June 29, 1999
ROBERT F. CARLSON* Trustee
Robert F. Carlson Dated: June 29, 1999
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: June 29, 1999
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: June 29, 1999
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: June 29, 1999
*By: /S/ LEIANN NUZUM
Leiann Nuzum, Attorney-in-Fact
(pursuant to Power of Attorney filed herewith)
FRANKLIN REAL ESTATE SECURITIES TRUST
REGISTRATION STATEMENT ON FORM N-14
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(1)(i) Certificate of Trust of Franklin Real Estate *
Securities Trust dated September 14, 1993
EX-99.(1)(ii) Agreement and Declaration of Trust of *
Franklin Real Estate Securities Trust dated
September 14, 1993
EX-99.(1)(iii) Certificate of Amendment of Agreement and *
Declaration of Trust of Franklin Real Estate
Securities Trust dated February 16, 1995
EX-99.(2) (i) By-Laws *
EX-99.(2)(ii) Amendment to the By-Laws dated October 27, *
1994
EX-99.(4) Form of Agreement and Plan of Reorganization **
EX-99.(6)(i) Management Agreement between the Registrant, *
on behalf of Franklin Real Estate Securities
Fund, and Franklin Advisers, Inc., dated
January 3, 1994
EX-99.(6)(ii) Amendment to Management Agreement between *
the Registrant, on behalf of Franklin Real
Estate Securities Fund, dated August 1, 1995
EX-99.(7)(i) Amended and Restated Distribution Agreement *
between Registrant and Franklin/Templeton
Distributors, Inc., dated April 23, 1995
EX-99.(7)(ii) Amendment of Amended and Restated *
Distribution Agreement between Registrant
and Franklin/Templeton Distributors, Inc.,
dated January 12, 1999
EX-99.(7)(iii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc., and
Securities Dealers
EX-99.(9)(i) Master Custodian Agreement between *
Registrant and Bank of New York dated
February 16, 1996
EX-99.(9)(ii) Amendment dated May 7, 1997 to Master *
Custody Agreement between Registrant and
Bank of New York
EX-99.(9)(iii) Amendment dated February 27, 1998 to Master *
Custody Agreement between Registrant and
Bank of New York
EX-99.(9)(iv) Terminal Link Agreement between Registrant *
and Bank of New York dated February 16, 1996
EX-99.(9)(v) Foreign Custody Manager Agreement between *
the Registrant and The Bank of New York
dated dated February 27, 1998
EX-99.(10)(i) Distribution Plan pursuant to Rule 12b-1 *
dated January 3, 1994
EX-99.(10)(ii) Class II Distribution Plan pursuant to Rule *
12b-1 dated March 30, 1995
EX-99.(10)(iii) Class B Distribution Plan pursuant to Rule *
12b-1 dated October 16, 1998
EX-99.(10)(iv) Multiple Class Plan *
EX-99.(11)(i) Opinion and consent of counsel *
EX-99.(12)(i) Form of Opinion and Consent of counsel Attached
supporting tax matters
EX-99.(13)(i) Subcontract for Fund Administrative Services *
dated October 1, 1996 as amended March 11,
1998 between Franklin Advisers, Inc. and
Franklin Templeton Services, Inc.
EX-99.(14)(i) Consent of PricewaterhouseCoopers, LLP, Attached
Independent Auditors
EX-99.(l4)(ii) Consent of McGladrey & Pullen, LLP, Attached
Independent Auditors
EX-99.(16)(i) Power of Attorney dated April 15, 1999 Attached
*Incorporated by Reference
**Included in this Registration Statement as Exhibit A to the Prospectus/Proxy
Statement
FORM OF OPINION
, 1999
Board of Trustees
Franklin Real Estate Securities Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Board of Trustees
Templeton Global Real Estate Fund
777 Mariners Island Blvd.
San Mateo, CA 94404
Re: AGREEMENT AND PLAN OF REORGANIZATION, DATED AS OF THE
DAY OF , 1999 (THE "AGREEMENT"), BY AND BETWEEN TEMPLETON
GLOBAL REAL ESTATE FUND, A MASSACHUSETTS BUSINESS TRUST
("ACQUIRED FUND") AND FRANKLIN REAL ESTATE SECURITIES TRUST, A
DELAWARE BUSINESS TRUST, (THE "TRUST") ON BEHALF OF FRANKLIN REAL
ESTATE SECURITIES FUND ("ACQUIRING FUND")
Ladies and Gentlemen:
You have requested our opinion as to certain federal income tax
consequences of the reorganization of Acquired Fund which will consist of (i)
the acquisition by the Acquiring Fund of substantially all of the property,
assets and goodwill of the Acquired Fund in exchange solely for shares of
beneficial interest, par value $0.01 per share, of Acquiring Fund - Class A
("Acquiring Fund Class A Shares") and shares of beneficial interest, par
value $0.01 per share, of Acquiring Fund - Class C ("Acquiring Fund Class C
Shares") (collectively, "Acquiring Fund Shares"); (ii) the distribution of
(a) Acquiring Fund Class A Shares to the shareholders of Acquired Fund -
Class A shares ("Acquired Fund Class A Shares") and (b) Acquiring Fund Class
C Shares to the shareholders of Acquired Fund - Class C shares ("Acquired
Fund Class C Shares"), according to their respective interests; and (iii) the
subsequent dissolution of Acquired Fund as soon as practicable after the
closing (the "Reorganization"), all upon and subject to the terms and
conditions of the Agreement.
In rendering our opinion, we have reviewed and relied upon (a)
the Agreement and Plan of Reorganization, dated as of the day
of , 1999, by and between the Trust on behalf of Acquiring
Fund and Acquired Fund, (b) the proxy materials provided to stockholders of
the Acquired Fund in connection with the Special Meeting of Stockholders of
the Acquired Fund held on the day of , 1999, (c)
certain representations concerning the Reorganization made to us by the Trust
on behalf of Acquiring Fund and by the Acquired Fund in a letter
dated , 1999 (the "Representation Letter"), (d) all
other documents, financial and other reports and corporate minutes which we
deemed relevant or appropriate, and (e) such statutes, regulations, rulings
and decisions as we deemed material to the rendition of this opinion. All
terms used herein, unless otherwise defined, are used as defined in the
Agreement.
For purposes of this opinion, we have assumed that the Acquired
Fund on the effective date of the Reorganization satisfies, and following the
Reorganization, the Acquiring Fund will continue to satisfy, the requirements
of subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), for qualification as a regulated investment company.
Under regulations to be prescribed by the Secretary of Treasury
under Section 1276(d) of the Code, certain transfers of market discount bonds
will be excepted from the requirement that accrued market discount be
recognized on disposition of a market discount bond under Section 1276(a) of
the Code. Such regulations are to provide, in part, that accrued market
discount will not be included in income if no gain is recognized under
Section 361(a) of the Code where a bond is transferred in an exchange
qualifying as a tax-free reorganization. As of the date hereof, the
Secretary has not issued any regulations under Section 1276 of the Code.
Based on the foregoing and provided the Reorganization is carried
out in accordance with the applicable laws of the State of Delaware and the
Commonwealth of Massachusetts, the Agreement and the Representation Letter,
it is our opinion that:
1. The Reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Code, and
Acquired Fund and Acquiring Fund will each be a party to the reorganization
within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by Acquired Fund upon
the transfer of all of its assets to Acquiring Fund in exchange solely for
Acquiring Fund Shares pursuant to Section 361(a) and Section 357(a) of the
Code. We express no opinion as to whether any accrued market discount will
be required to be recognized as ordinary income pursuant to Section 1276 of
the Code.
3. No gain or loss will be recognized by Acquiring Fund upon
the receipt by it of all of the assets of Acquired Fund in exchange solely
for Acquiring Fund Shares pursuant to Section 1032(a) of the Code.
4. The basis of the assets of Acquired Fund received by
Acquiring Fund will be the same as the basis of such assets to Acquired Fund
immediately prior to the exchange pursuant to Section 362(b) of the Code.
5. The holding period of the assets of Acquired Fund received
by Acquiring Fund will include the period during which such assets were held
by Acquired Fund pursuant to Section 1223(2) of the Code.
6. No gain or loss will be recognized by the stockholders of
Acquired Fund upon the exchange of their Acquired Fund Shares for Acquiring
Fund Shares (including fractional shares to which they may be entitled),
pursuant to Section 354(a) of the Code.
7. The basis of the Acquiring Fund Shares received by the
stockholders of Acquired Fund (including fractional shares to which they may
be entitled) will be the same as the basis of the Acquired Fund Shares
exchanged therefor pursuant to Section 358(a)(1) of the Code.
8. The holding period of the Acquiring Fund Shares received by
the stockholders of Acquired Fund (including fractional shares to which they
may be entitled) will include the holding period of the Acquired Fund Shares
surrendered in exchange therefor, provided that the Acquired Fund Shares were
held as a capital asset on the effective date of the Reorganization, pursuant
to Section 1223(1) of the Code.
9. Acquiring Fund will succeed to and take into account as of
the date of the proposed transfer (as defined in Section 1.381(b)-1(b) of the
Income Tax Regulations) the items of Acquired Fund described in Section
381(c) of the Code, subject to the conditions and limitations specified in
Sections 381(b) and (c), 382, 383 and 384 of the Code.
Our opinion is based upon the Code, the applicable Treasury
Regulations promulgated thereunder, the present position of the Internal
Revenue Service as set forth in published revenue rulings and revenue
procedures, present administrative positions of the Internal Revenue Service,
and existing judicial decisions, all of which are subject to change either
prospectively or retroactively. We do not undertake to make any continuing
analysis of the facts or relevant law following the date of this letter.
Our opinion is conditioned upon the performance by Acquiring Fund
and Acquired Fund of their undertakings in the Agreement and the
Representation Letter.
This opinion is being rendered to the Trust, on behalf of
Acquiring Fund and to the Acquired Fund, and may be relied upon only by such
funds and the stockholders of each.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG, LLP
By:___________________________________
William P. Zimmerman, a Partner
MCGLADREY & PULLEN, LLP RSM
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS INTERNATIONAL
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated September 29, 1998 on the financial
statements of Templeton Global Real Estate Fund which is included in the
Registration Statement on Form N-14 of Franklin Real Estate Securities Trust,
File No. 33-69048, as filed with the Securities and Exchange Commission.
/s/McGladrey & Pullen, LLP
New York, New York
June 24, 1999
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
Franklin Real Estate Securities Trust on Form N-14 of our reports dated June
3, 1998 and June 4, 1999 on our audits of the financial statements and
financial highlights of Franklin Real Estate Securities Trust for the years
ended April 30, 1998 and April 30, 1999, respectively, which reports are
included in the Annual Reports to Shareholders for the years ended April 30,
1998 and April 30, 1999, which are included in the Registration Statement.
/s/PricewaterhouseCoopers LLP
San Francisco, California
June 25, 1999
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN REAL ESTATE
SECURITIES TRUST hereby appoint MARK H. PLAFKER, HARMON E. BURNS, DEBORAH R.
GATZEK, KAREN L. SKIDMORE and LEIANN NUZUM (with full power to each of them
to act alone) his attorney-in-fact and agent, in all capacities, to execute,
file or withdraw any of the documents referred to below relating to the
Company's Registration Statement on Form N-14 under the Securities Act of
1933, or any amendment to such Registration Statement, covering the sale of
shares by the Company under a prospectus becoming effective after this date,
with all exhibits and any and all documents required to be filed with respect
thereto with any regulatory authority. Each of the undersigned grants to each
of said attorneys full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes as he
could do if personally present, thereby ratifying all that said
attorneys-in-fact and agents may lawfully do or cause to be done by virtue
hereof.
The undersigned officers and trustees hereby execute this Power of
Attorney as of this 15th day of April, 1999.
/s/Rupert H. Johnson, Jr. /s/Frank H. Abbott
Rupert H. Johnson, Jr., Frank H. Abbott, III,
Principal Executive Officer Trustee
and Trustee
/s/Harris J. Ashton /s/Harmon E. Burns
Harris J. Ashton, Harmon E. Burns,
Trustee Trustee
/s/Robert F. Carlson /s/Joseph Fortunato
Robert F. Carlson, S. Joseph Fortunato,
Trustee Trustee
/s/Charles B. Johnson /s/Rupert H. Johnson
Charles B. Johnson, Rupert H. Johnson, Jr.,
Trustee Trustee
/s/Frank W.T. LaHaye /s/Gordon S. Macklin
Frank W.T. LaHaye, Gordon S. Macklin,
Trustee Trustee
/s/Martin L. Flanagan /s/Diomedes Loo-Tam
Martin L. Flanagan, Diomedes Loo-Tam,
Principal Financial Officer Principal Accounting Officer
