SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN INVESTORS SECURITIES TRUST
DATED MARCH 1, 1994
AS AMENDED OCTOBER 26, 1994
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund, effective February 1, 1995:
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
2. MANAGEMENT OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND
(a) The following is added at the end of the first paragraph:
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.
(b) Substitute the following for the sales charge table and the ensuing two
paragraphs:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
--------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.................................... 2.25% 2.31% 2.00%
$100,000 but less than $250,000....................... 1.75% 1.78% 1.50%
$250,000 but less than $500,000....................... 1.25% 1.27% 1.00%
$500,000 but less than $1,000,000..................... 1.00% 1.01% 0.85%
$1,000,000 or more ................................... none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for
purchases of $1 million or more: 0.75% on sales of $1 million but less than
$2 million, plus 0.60% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all
sales charges may at times be allowed to the securities dealer. If 90% or
more of the sales commission is allowed, such securities dealer may be
deemed to be an underwriter as that term is defined in the Securities Act of
1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but
a contingent deferred sales charge of 1% is imposed on certain redemptions
of investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares
of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on
the purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds
in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included
for these aggregation purposes are (a) the mutual funds in the Franklin
Group of Funds except Franklin Valuemark Funds and Franklin Government
Securities Trust (the "Franklin Funds"), (b) other investment products
underwritten
1
<PAGE>
by Distributors or its affiliates (although certain investments may not have
the same schedule of sales charges and/or may not be subject to reduction)
and (c) the U.S. mutual funds in the Templeton Group of Funds except
Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). (Franklin Funds and Templeton Funds are
collectively referred to as the "Franklin Templeton Funds.") Sales charge
reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification
to Distributors that the investment qualifies for a discount. References
throughout the Prospectus, for purposes of aggregating assets or describing
the exchange privilege, refer to the above descriptions.
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 0.75% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
non-designated retirement plans, and up to 1% of the amount purchased to
securities dealers who initiate and are responsible for purchases made at
net asset value by certain designated retirement plans (excluding IRA and
IRA rollovers), certain trust company and trust departments of banks and
certain retirement plans of organizations with collective retirement plan
assets of $10 million or more. See definitions under "Description of Special
Net Asset Value Purchases" and as set forth in the SAI.
(c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a
front-end sales charge or a contingent deferred sales charge) by (1)
officers, directors, trustees, and full-time employees of the Trust, any of
the Franklin Templeton Funds, or of the Franklin Templeton Group, and by
their spouses and family members; (2) companies exchanging shares with or
selling assets pursuant to a merger, acquisition or exchange offer; (3)
insurance company separate accounts for pension plan contracts; (4) accounts
managed by the Franklin Templeton Group; (5) shareholders of Templeton
Institutional Funds, Inc. reinvesting redemption proceeds from that fund
under an employee benefit plan qualified under Section 401 of the Internal
Revenue Code of 1986, as amended, in shares of the Fund; (6) certain unit
investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers
and their affiliates, for their investment account only; and (8) registered
personnel and employees of securities dealers and by their spouses and
family members, in accordance with the internal policies and procedures of
the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the
shares redeemed, a new contingency period will begin. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however, do not begin to
run on redemption proceeds placed immediately after redemption in a Franklin
Bank Certificate of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled by a securities
dealer or other financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund is
made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value or without the imposition of
2
<PAGE>
a contingent deferred sales charge within 120 days of the payment date of
such distribution. To exercise this privilege, a written request to reinvest
the distribution must accompany the purchase order. Additional information
may be obtained from Shareholder Services at 1-800/632-2301. See
"Distributions in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value or without the
imposition of a contingent deferred sales charge by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value or without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).
Shares of the Fund may be purchased at net asset value or without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution.
In order to exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin Templeton Trust Company (the
"Trust Company"), the Fund or Investor Services, within 120 days after the
plan distribution. A prospectus outlining the investment objectives and
policies of a fund in which the shareholder wishes to invest may be obtained
by calling toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value or without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings
into the Fund should consult with expert counsel to determine the effect, if
any, of various payments made by the Fund or its investment manager on
arbitrage rebate calculations. If an investment by an eligible governmental
authority at net asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such
securities dealer in an amount not to exceed 0.25% of the amount invested.
Contact Franklin's Institutional Sales Department for additional
information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value or without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including, profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the
employer establishing the plan have 200 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund
or in any of the Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under Section 401
of the Code ("non-designated plans") may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which enable
Distributors to realize economies of scale in its sales efforts and sales
related expenses.
Shares of the Fund may be purchased at net asset value or without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise
3
<PAGE>
exclusive discretionary investment authority and which are held in a
fiduciary, agency, advisory, custodial or similar capacity. Such purchases
are subject to minimum requirements with respect to amount of purchase,
which may be established by Distributors. Currently, those criteria require
that the amount invested or to be invested during the subsequent 13-month
period in this Fund or any of the Franklin Templeton Investments must total
at least $1,000,000. Orders for such accounts will be accepted 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
such order.
Shares of the Fund may be purchased at net asset value or without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested. Refer to the SAI
for further information.
4. EXCHANGE PRIVILEGE
Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or Templeton money
market fund. See also "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
5. HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period of
12 months of the calendar month following their purchase. The charge is 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) Shares representing amounts attributable
to capital appreciation of those shares held less than 12 months; (ii)
shares purchased with reinvested dividends and capital gain distributions;
and (iii) other shares held longer than 12 months; and followed by any
shares held less than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; distributions
to participants in Trust Company retirement plan accounts due to death,
disability or attainment of age 591/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and,
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.
Requests for redemptions for a specified dollar amount will result in additional
shares being redeemed to cover any applicable contingent deferred sales charge
while requests for redemption of a specific number of shares will result in the
applicable contingent deferred sales charge being deducted from the total dollar
amount redeemed.
4
<PAGE>
FRANKLIN
SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
Franklin Investors Securities Trust
PROSPECTUS MARCH 1, 1994
AS AMENDED OCTOBER 26, 1994
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of both diversified and non-diversified separate
series. Each series of the Trust in effect represents a separate fund with its
own investment objectives and policies, with varying possibilities for income or
capital appreciation, and subject to varying market risks. Through the different
series, the Trust attempts to satisfy different investment objectives.
This Prospectus pertains only to the Franklin Short-Intermediate U.S. Government
Securities Fund (the "Fund"), a diversified series, which invests in a portfolio
of U.S. government securities, with primary emphasis on securities with
remaining maturities of 31/2 years or less. The Fund's investment objective is
to provide as high a level of current income consistent with prudent investing
while seeking preservation of shareholder's capital. The Fund will invest in
obligations of the U.S. government and its agencies or instrumentalities. The
Fund is designed for individuals and institutional accounts, such as
corporations, banks, savings and loan associations, trust companies, and other
entities. There can, of course, be no assurance that the Fund's objectives will
be achieved.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information concerning the Fund and other series of
the Trust, dated March 1, 1994, as may be amended from time to time, provides a
further discussion of certain areas in this Prospectus and other matters which
may be of interest to some investors. It has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before in-
<PAGE>
vesting. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which the prospective investor will find useful to have.
This Prospectus is not an offering of the securities herein described in any
state 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 the underwriter.
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table.................................. 2
Financial Highlights........................... 4
About the Trust................................ 4
Investment Objectives
and Policies of the Fund...................... 5
Management of the Fund......................... 7
Distributions to Shareholders.................. 9
Taxation of the Fund
and Its Shareholders.......................... 10
How to Buy Shares of the Fund.................. 11
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments............ 17
Other Programs and Privileges
Available to Fund Shareholders................ 19
Exchange Privilege............................. 20
How to Sell Shares of the Fund................. 23
Telephone Transactions......................... 26
Valuation of Fund Shares....................... 27
How to Get Information Regarding
an Investment in the Fund..................... 27
Performance.................................... 28
General Information............................ 29
Account Registrations.......................... 30
Important Notice Regarding
Taxpayer IRS Certifications................... 31
Portfolio Operations........................... 31
</TABLE>
EXPENSE TABLE
- --------------------------------------------------------------------------------
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on restated
annualized operating expenses of the Fund for the period ended October 31, 1993.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................. 2.25%
Maximum Sales Charge Imposed on Reinvested Dividends............. NONE
Deferred Sales Charge............................................ NONE
Redemption Fees.................................................. NONE
Exchange Fee (per transaction)................................... $ 5.00*
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees.................................................. 0.55%+
Maximum 12b-1 Fees............................................... 0.10%**
Other Expenses:
Shareholder Servicing Costs............................. 0.02%
Reports to Shareholders................................. 0.02%
Other................................................... 0.04%
-----
Total Other Expenses............................................. 0.08%
-----
Total Fund Operating Expenses.................................... 0.73%+
=====
</TABLE>
*$5.00 fee only imposed on Timing Accounts as described under "Exchange
Privilege." All other exchanges are without charge. +Represents the amount that
would have been payable by the Fund absent a fee reduction by the investment
manager and if the 12b-1 Plan had been in effect at the beginning of the period.
The investment manager waived a portion of its management fees. With this
reduction and excluding the 12b-1 fees, management fees and total operating
expenses represented 0.47% and 0.55%, respectively, of the average net assets of
the Fund. This arrangement may be terminated by the investment manager at any
time.
**The shareholders of the Fund approved a plan of distribution (the
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act") at a meeting held on April 13, 1994. This plan, which became
effective May 1, 1994, provides for payments made by the Fund in connection with
the distribution of its shares and/or for personal service provided and/or the
maintenance of shareholder accounts, up to a maximum annual rate of 0.10% of the
Fund's average net assets. Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that 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
those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted in the table above,
the Fund charges no redemption fees:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$30 $45 $62 $111
</TABLE>
THIS EXAMPLE IS BASED ON THE RESTATED ANNUALIZED OPERATING EXPENSES, INCLUDING
FEES SET BY CONTRACT, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The
operating expenses are borne by the Fund, and only indirectly by shareholders as
a result of their investment in the Fund. In addition, federal regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%.
3
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a share of
the Fund throughout the periods from the effective date of registration (April
15, 1987) to January 31, 1993 and for the nine-month period from February 1,
1993 to October 31, 1993. The information for each of the periods indicated has
been audited by Coopers & Lybrand, independent auditors, whose audit report
appears in the financial statements in the Trust's Statement of Additional
Information, a copy of which may be obtained as noted on the front cover of this
Prospectus. The remaining figures, which are also audited, are not covered by
the auditor's current report.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
-------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS(LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $.64 $ .045 $.685 $(.305) $ - $(.305) $10.38
1989 10.38 .78 (.300) .480 (.740) - (.740) 10.12
1990 10.12 .78 .097 .877 (.837) - (.837) 10.16
1991 10.16 .76 .248 1.008 (.864) (.004) (.868) 10.30
1992 10.30 .58 .374 .954 (.786) (.078) (.864) 10.39
1993 10.39 .57 .432 1.002 (.565) (.257) (.822) 10.57
1993(2) 10.57 .38 .245 .625 (.390) (.005) (.395) 10.80
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
AT END EXPENSES INCOME PORTFOLIO
PERIOD TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER
ENDED RETURN++ (IN 000'S) NET ASSETS NET ASSETS RATE
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1988(1) 6.33% $20,636 .14%* 6.5%* 13.14%
1989 4.63 29,150 .25 7.72 111.75
1990 8.78 30,996 .27 7.60 151.36
1991 10.19 48,981 .48 7.56 71.44
1992 9.44 163,690 .71 5.90 102.05
1993 10.01 235,382 .56 5.40 78.96
1993(2) 5.90 273,678 .55* 4.75* 31.71
</TABLE>
(1)For the period April 15, 1987 (effective date of registration) to January 31,
1988.
(2)For the nine months ended October 31, resulting from a change in fiscal
year from January 31.
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value. During the periods indicated, Franklin Advisers, Inc., the investment
manager, reduced its management fees and reimbursed other expenses incurred by
the Funds in the Trust. Had such action not been taken, the ratios of operating
expenses to average net assets would have been as follows:
1988(1)....................81%*
1989.......................79
1990.......................77
1991.......................74
1993.......................65
19932......................63*
ABOUT THE TRUST
- --------------------------------------------------------------------------------
The Trust is an open-end management investment company, or mutual fund,
organized as a Massachusetts business trust on December 16, 1986 and registered
with the SEC under the 1940 Act. The Fund and the additional diversified and
non-diversified series of the Trust, each issue a separate series of shares of
beneficial interest. Shares of the Fund may be purchased (minimum investment of
$100 initially and $25 thereafter) at the current public offering price, which
is equal to the Fund's net asset value (see "Valuation of Fund Shares") plus a
sales charge based upon a variable percentage (ranging from 2.25% to less than
0.25% of the offering price) depending upon the amount invested. (See "How to
Buy Shares of the Fund.")
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
- --------------------------------------------------------------------------------
The Fund seeks to provide investors with as high a level of current income as is
consistent with prudent investment practices, while also seeking preservation of
shareholders' capital. The objectives are a fundamental policy of the Fund and
may not be changed without shareholder approval. The Fund intends to invest up
to 100% of its total net assets in U.S. government securities. As a fundamental
policy of the Fund (which may only be changed with shareholder approval), the
Fund must invest at least 65% of the Fund's total net assets in U.S. government
securities. It is the investment policy of the Fund (which may be changed upon
notice to shareholders) to maintain the average dollar weighted maturity of its
portfolio in a range of two to five years. Within this range, the Fund intends
to emphasize an avearge weighted maturity of 31/2 years or less.
The Fund may invest in obligations either issued or guaranteed by the U.S.
government and its agencies or instrumentalities including, but not limited to:
direct obligations of the U.S. Treasury, such as U.S. Treasury bills, notes and
bonds; and obligations of U.S. government agencies or instrumentalities such as
Federal Home Loan Banks, Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives (including Central Bank
for Cooperatives), Federal Land Banks, Federal Intermediate Credit Banks,
Tennessee Valley Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan Marketing Association,
Federal Home Loan Mortgage Corporation or National Credit Union Administration.
Since inception, the assets of the Fund have been invested solely in direct
obligations of the U.S. Treasury and in repurchase agreements backed by the U.S.
Treasury. The level of income achieved by the Fund may not be as high as that of
other funds which invest in lower quality, longer-term securities. There is, of
course, no assurance that the Fund's investment objectives will be achieved. As
the value of the Fund's portfolio securities fluctuates, its net asset value per
share will also fluctuate.
Certain of the U.S. government securities in which the Fund may invest may be
purchased at a discount. Such securities, when held to maturity or retired, may
include an element of capital gain. The Fund does not intend to hold securities
for the purpose of achieving such capital gains, but will generally hold them as
long as current yields on these securities remain attractive. Capital losses may
be realized when securities purchased at a premium are held to maturity or are
called or redeemed at a price lower than their purchase price. Capital gains or
losses also may be realized upon the sale of securities. Since a substantial
portion of the Fund's assets at any particular time may consist of debt
securities, changes in the level of interest rates, among other things, will
likely affect the value of the Fund's holdings and thus the value of a
shareholder's investment. The dividends per share paid by the Fund may also vary
with each distribution.
SOME OF THE FUND'S OTHER INVESTMENT POLICIES
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral
5
<PAGE>
securing the repurchase agreement. The Fund might also incur disposition costs
in liquidating the collateral. However, the Fund intends to enter into
repurchase agreements only with government securities dealers recognized by the
Federal Reserve Board or with member banks of the Federal Reserve System. Under
the 1940 Act, a repurchase agreement is deemed to be the loan of money by the
Fund to the seller, collateralized by the underlying security. The U.S.
government security subject to resale (the collateral) will be held pursuant to
a written agreement and the Fund's custodian will take title to, or actual
delivery of, the security.
When-Issued and Delayed Delivery Transactions. The Fund may purchase obligations
on a "when-issued" or "delayed delivery" basis. These transactions are
arrangements in which the Fund purchases securities with payment and delivery
scheduled for a future time, generally within two weeks. Purchases of securities
on a when-issued or delayed delivery basis are subject to market fluctuation and
are subject to the risk that the value or yields at delivery may be more or less
than the purchase price or the yields available when the transaction was entered
into. Although the Fund will generally purchase securities on a when-issued
basis with the intention of acquiring such securities, it may sell such
securities before the settlement date if it is deemed advisable. When the Fund
is the buyer in such a transaction, it will maintain, in a segregated account
with its custodian, cash or high-grade marketable securities having an aggregate
value equal to the amount of such purchase commitments until payment is made. To
the extent the Fund engages in when-issued and delayed delivery transactions, it
will do so only for the purpose of acquiring portfolio securities consistent
with the Fund's investment objectives and policies, and not for the purpose of
investment leverage. In when-issued and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The other party's failure may
cause the Fund to miss a price or yield considered advantageous. Securities
purchased on a when-issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. The Fund is not subject to any
percentage limit on the amount of its assets which may be invested in
when-issued purchase obligations.
Concentration. The Fund will not invest more than 25% of the value of its total
assets in any one particular industry.
Borrowing. The Fund does not borrow money or mortgage or pledge any of the
assets of the Fund, except that it may borrow from banks for temporary or
emergency purposes up to 5% of its total assets and pledge up to 5% of its total
assets in connection therewith.
Loans of Portfolio Securities. As approved by the Board of Trustees and subject
to the following conditions, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
bank cash collateral with an initial market value of at least 102% of the market
value of the securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 102%. The lending of securities is a common
practice in the securities industry. The Fund engages in security loan
arrangements with the primary objective of increasing the Fund's income either
through investing the cash collateral in short-term, interest bearing
obligations or by receiving a loan premium from the borrower. Under the
securities loan agreement, the Fund continues to be entitled to all dividends or
interest on any loaned
6
<PAGE>
securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase or at any time, more
than 10% of the value of the total net assets of the Fund.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the Statement of Additional
Information.
The foregoing discussion of permissible investments and practices is subject to
the fundamental policy of the Fund, which can only be changed with shareholder
approval, that the Fund will only purchase securities and engage in trading
practices which are permitted without limitation to national banks, federal
savings and loan associations and federal credit unions.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund. In addition to the factors which affect the value of individual
securities,as described in the preceding sections, a shareholder may anticipate
that the value of Fund shares will fluctuate with movements in the broader
equity and bond markets, as well. In particular, changes in interest rates will
affect the value of the Fund's portfolio and thus its share price. Increased
rates of interest which frequently accompany inflation and/or a growing economy
are likely to have a negative effect on the value of Fund shares. History
reflects both increases and decreases in the prevailing rate of interest and
these may reoccur unpredictably in the future.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly-owned holding company, the principal shareholders
of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann,
who own approximately 20%, 16% and 10%, respectively, of Resources' outstanding
shares. Through its subsidiaries, Resources is engaged in various aspects of the
financial services industry. Advisers acts as investment manager or
administrator to 34 U.S. registered investment companies (111 separate series)
with aggregate assets of over $75 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the period ended October 31, 1993, fees totalling 0.55% (annualized as a
result of a change
7
<PAGE>
in fiscal year from January to October) of the average daily net assets of the
Fund would have accrued to Advisers. Total operating expenses, including
management fees, would have represented 0.63% (annualized) of the average net
assets of the Fund. Pursuant to an agreement by Advisers to waive a portion of
its fees, the Fund paid management fees totaling 0.47% (annualized) of the
average net assets of the Fund and operating expenses totaling 0.55%
(annualized). This arrangement may be terminated by Advisers at any time.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the
Statement of Additional Information.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date") the Fund adopted a plan pursuant to
Rule 12b-1 under the 1940 Act (the "Plan"), as approved by shareholders at a
special meeting held on April 13, 1993. Under the Plan, the Fund may reimburse
Distributors or others for all expenses incurred by Distributors or others in
the promotion and distribution of the Fund's shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid to
securities dealers or their firms or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such distribution expenses
is 0.10% per annum of the average daily net assets of the Fund, payable on a
quarterly basis. All expenses of distribution and marketing in excess of 0.10%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Fund. The Plan also covers any payments to or by
the Fund, Advisers, Distributors, or other parties on behalf of the Fund,
Advisers, or Distributors, to the extent such payments are deemed to be for the
financing of any activity primarily intended to result in the sale of shares
issued by the Fund within the context of Rule 12b-1. The payments under the Plan
are included in the maximum operating expenses which may be borne by the Fund.
In implementing the Plan, the Board has determined that the annual fees payable
thereunder will be equal to the sum of: (i) the amount obtained by multiplying
0.10% by the average daily net assets represented by shares of the Fund that
were acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.05% by the average daily
net assets represented by shares of the Fund that were
8
<PAGE>
acquired before the Effective Date of the Plan ("Old Assets"). Such fees will be
paid to the current securities dealer of record on the shareholder's account. In
addition, until such time as the maximum payment of 0.10% is reached on a yearly
basis, up to an additional 0.02% will be paid to Distributors under the Plan.
The payments to be made to Distributors will be used by Distributors to defray
other marketing expenses that have been incurred in accordance with the Plan,
such as advertising.
While the above is the current method for calculating the 12b-1 fees to be paid
by the Fund, the fee is a Fund expense so that all shareholders, regardless of
when they purchased their shares, will bear 12b-1 expenses at the same rate.
That rate initially will be at least 0.07% (0.05% plus 0.02%) of the average
daily net assets and, as Fund shares are sold on or after the Effective Date,
will increase over time. Thus, as the proportion of Fund shares purchased on or
after the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the proposed Plan will also increase
(but will not exceed the maximum allowable under the Plan). While this is the
currently anticipated calculation for fees payable under the Plan, the Plan
permits the Fund's trustees to allow the Fund to pay a full 0.10% on all assets
at any time. The approval of the Fund's Board of Trustees would be required to
change the calculation of the payments to be made under the Plan.
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) will generally
be made once a year in December and will reflect the net short-term and net
long-term capital gains realized by the Fund as of October 31, its fiscal
year-end. The Fund reserves the right to make more than one distribution derived
from net short-term and net long-term capital gains in any year or to adjust the
timing of these distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Fund's Board of Trustees, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends daily and pay them monthly on or about the last business day of
the month. The amount of income dividend payments by the Fund is dependent upon
the amount of net income received by the Fund from its portfolio holdings, is
not guaranteed and is subject to the discretion of the Fund's Board of Trustees.
The Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and any capital gain distributions will be automatically reinvested in
the shareholder's account in the form of additional shares, valued at the
closing net asset value (without sales charge) on the dividend reinvestment
date. Shareholders have the right to
9
<PAGE>
change their election with respect to the receipt of distributions by notifying
the Fund, but any such change will be effective only as to distributions for
which the payment date is seven or more business days after the Fund has been
notified. See the Statement of Additional Information for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial processing.
Dividends which may be paid in the interim will be sent to the address of
record. Additional information regarding automated fund transfers may be
obtained from Franklin's Shareholder Services Department. Dividend and capital
gain distributions are eligible for investment in another fund in the Franklin
Group of Funds or the Templeton Group at net asset value.
Shareholders, with certain exceptions, may change their dividend options by
telephone. See the section entitled "Telephone Transactions".
TAXATION OF THE FUND AND ITS SHAREHOLDERS
- --------------------------------------------------------------------------------
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the Statement of Additional
Information.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and qualified to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). By distributing all of its net investment income and net
realized short-term and long-term capital gain for a fiscal year in accordance
with the timing requirements imposed by the Code and by meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares. Distributions derived from the excess of net long-term
capital gain over net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has owned Fund shares and
regardless of whether such distributions are received in cash or in additional
shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be
10
<PAGE>
treated as if received by the shareholder on December 31 of the calendar year in
which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares. All or a portion of the sales charge incurred in purchasing shares
of the Fund will not be included in the federal tax basis of such shares sold or
exchanged within ninety (90) days of their purchase (for purposes of determining
gain or loss with respect to such shares) if the sales proceeds are reinvested
in the Fund or in another fund in the Franklin/Templeton Group and a sales
charge which would otherwise apply to the reinvestment is reduced or eliminated.
Any portion of such sales charge excluded from the tax basis of the shares sold
will be added to the tax basis of the shares acquired in the reinvestment.
Shareholders should consult with their tax advisors concerning the tax rules
applicable to the redemption or exchange of Fund shares.
For corporate shareholders, none of the distributions paid by the Fund for the
fiscal year ended January 31, 1993 qualified for the dividends received
deduction, and it is not anticipated that any of the current year's dividends
will qualify.
Many states grant tax-free status to dividends paid out to shareholders of
mutual funds from interest income earned by the mutual fund from direct
obligations of the U.S. government, subject in some cases to minimum investment
requirements to be met by the Fund. Investments in repurchase agreements
collateralized by U.S. government securities do not generally qualify for this
purpose. At the end of each calendar year, the Fund will provide shareholders
with the percentage of any dividends paid which may qualify for such tax-free
status. Shareholders should consult their own tax advisors with respect to the
application of state and local income tax laws to these distributions and on the
application of other state and local intangible property or income tax laws to
their shares and to distributions and redemption proceeds received from the
Fund.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
HOW TO BUY SHARES OF THE FUND
- --------------------------------------------------------------------------------
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin. The Fund and Distributors
reserve the right to refuse any order for the purchase of shares.
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<PAGE>
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund, or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. On
orders for 100,000 shares or more, the offering price will be calculated to four
decimal places. On orders for less than 100,000 shares, the offering price will
be calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TOTAL SALES CHARGE
----------------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 2.25% 2.31% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.27% 1.00%
$500,000 but less than $1,000,000 1.00% 1.01% 0.85%
$1,000,000 but less than $2,500,000 0.50% 0.50% 0.50%
$2,500,000 but less than $5,000,000 0.25% 0.25% 0.25%
$5,000,000 or more 0.00% 0.00% 0.00%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
Sales Charges on purchases of $1,000,000 or more are paid to the securities
dealer, if any involved in the trade, who may therefore be deemed an
"underwriter" under the Securities Act of 1933, as amended.
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the many funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group (except
Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for $5,000,000 or more will be at net asset value. Purchases
pursuant to the Rights of Accu-
12
<PAGE>
mulation will be at the applicable sales charge until the additional purchase,
plus the value of the account or the amount previously invested, less
redemptions, exceeds $5,000,000, in which event there will be no sales charge on
the excess. Sales charge reductions based upon purchases in more than one of the
funds in the Franklin Group or Templeton Group (the "Franklin/Templeton Group")
may be effective only after notification to Distributors that the investment
qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and other
funds in the Franklin Group of Funds or the Templeton Group. Compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising,
sales campaigns and/or shareholder services and programs regarding one or more
of the Franklin Group of Funds or the Templeton Group and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain dealers whose representatives have sold or are expected to sell
significant amounts of such shares. Compensation may include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Dealers may not use sales of the Fund's shares to qualify for this compensation
to the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned additional compensation is paid for by the Fund
or its shareholders.
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the
Franklin/Templeton Group may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund, may qualify for a reduction in the
sales charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge.
At any time within 90 days after the first investment which the investor wants
to qualify for the reduced sales charge, a signed Shareholder Appli-
13
<PAGE>
cation, with the Letter of Intent section completed, may be filed with the Fund.
After the Letter of Intent is filed, each additional investment made will be
entitled to the sales charge applicable to the level of investment indicated on
the Letter of Intent as described above. Sales charge reductions based upon
purchases in more than one company in the Franklin/Templeton Group will be
effective only after notification to Distributors that the investment qualifies
for a discount. The shareholder's holdings in the Franklin/Templeton Group
acquired more than 90 days before the Letter of Intent is filed will be counted
towards completion of the Letter of Intent but will not be entitled to a
retroactive downward adjustment of sales charge. Any redemptions made by the
shareholder during the 13-month period will be subtracted from the amount of the
purchases for purposes of determining whether the terms of the Letter of Intent
have been completed. If the Letter of Intent is not completed within the
13-month period, there will be an upward adjustment of the sales charge as
specified below, depending upon the amount actually purchased (less redemptions)
during the period.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not
be available for disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. If the total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in the name of the investor or delivered to the
investor or the investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the dealer through whom purchases were made pursuant
to the Letter of Intent (to reflect such further quantity discount) on
purchases made within 90 days before, and on those made after filing the
Letter. The resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to a single
purchase or the dollar amount of the total purchases. If the total purchases,
less redemptions, are less than the amount specified under the Letter, the
investor 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
which would have applied to the aggregate purchases if the total of such
purchases had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order.
If within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize
such difference will be made. In the event of a total redemption of the account
prior to fulfillment of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption, and the balance will be
forwarded to the investor. By completing the Letter of Intent section of the
Shareholder Application, an investor grants to Distributors a security interest
in the reserved shares and irrevocably appoints
14
<PAGE>
Distributors as attorney-in-fact with full power of substitution to surrender
for redemption any or all shares for the purpose of paying any additional sales
charge due. Purchases under the Letter of Intent will conform with the
requirements of Rule 22d-1 under the 1940 Act. The investor or the investor's
securities dealer must inform Investor Services or Distributors that this Letter
is in effect each time a purchase is made.
Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current purchase.
For example, if members of the group had previously invested and still held
$80,000 of Fund shares and now were investing $25,000, the sales charge would be
1.75%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without sales charge) by
employee benefit plans qualified under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code, subject to minimum
requirements with respect to number of employees or amount of purchase, which
may be established by Distributors. Currently those criteria require that the
employer establishing the plan have 500 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund or
another company or companies in the Franklin/Templeton Group totals at least
$1,000,000. Employee savings plans and employee benefit plans not qualified
under Section 401 of the Code may be afforded the same privilege if they meet
the above requirements as well as the uniform criteria for qualified groups
previously described under Group Purchases which enable Distributors to realize
economies of scale in its sales efforts and sales related expenses. If
investments by employee benefit plans at net asset value are made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make a pay-
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<PAGE>
ment, out of their own resources, to such dealer in an amount not to exceed
1.00% of the amount invested.
Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted 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 such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer who
has executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another fund
in the Franklin Group of Funds or the Templeton Group which were purchased with
a sales charge. An investor may reinvest an amount not exceeding the redemption
proceeds. Shares of the Fund redeemed in connection with an exchange into
another fund (see "Exchange Privilege") are not considered "redeemed" for this
privilege. In order to exercise this privilege, a written order for the purchase
of shares of the Fund must be received by the Fund or the Fund's Shareholder
Services Agent within 120 days after the redemption. The 120 days, however, do
not begin to run on redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD (including any
rollover) matures. Reinvestment at net asset value may also be handled by a
securities dealer who may charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a reinvestment is
included in the tax section of this Prospectus and the Statement of Additional
Information.
Dealers may place trades to purchase shares of the Fund at net asset value on
behalf of investors who have, within the past 60 days, redeemed an investment in
a registered management investment company which charges a contingent deferred
sales charge and which has investment objectives similar to those of the Fund.
Shares of the Fund may also be purchased at net asset value by (1) officers,
directors, trustees and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors and
affiliates of such companies, if they have been such for at least 90 days, and
by their spouses and family members, (2) registered securities dealers and their
affiliates, for their investment account only, and (3) registered personnel and
employees of securities dealers and by their spouses and family members, in
accordance with the internal policies and proce-
16
<PAGE>
dures of the employing securities dealer. Such sales are made upon the written
assurance of the purchaser that the purchase is made for investment purposes and
that the securities will not be transferred or resold except through redemption
or repurchase by or on behalf of the Fund. Employees of securities dealers must
obtain a special application from their employers or from Franklin's Sales
Department in order to qualify.
Shares of the Fund may be purchased at net asset value by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Group of Funds or the Templeton Group (including former participants of the
Franklin/Templeton Profit Sharing 401(k) plan). In order to exercise this
privilege a written order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company ("FTTC"), the Fund or Investor
Services, within 120 days after the plan distribution. A prospectus outlining
the investment objectives and policies of a fund in which the shareholder wishes
to invest may be obtained by calling toll free at 1-800/DIAL BEN
(1-800/342-5236).
Shares of the Fund may also be purchased at net asset value by any state,
county, or city, or any instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS INVOLVING
TAX-DEFERRED INVESTMENTS
- --------------------------------------------------------------------------------
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund may be
used as an investment vehicle for an already existing retirement plan, or FTTC
may provide the plan documents and trustee or custodian services. A plan
document must be adopted in order for a plan to be in existence.
FTTC, an affiliate of Distributors, can serve as custodian or trustee for
various types of retirement plans. Brochures for each of the plans sponsored by
Franklin contain important information regarding eligibility, contribution
limits and Internal Revenue Service ("IRS") requirements.
Please note that the separate applications other than the one contained in this
prospectus must be used to establish an FTTC retirement account. To obtain
17
<PAGE>
a retirement plan brochure or application, call toll free 1-800/DIAL BEN
(1-800/342-5236).
The Franklin IRA is an individual retirement account in which the contributions,
annually limited to the lesser of $2,000 or 100% of an individual's earned
compensation, accumulate on a tax-deferred basis until withdrawn. Under the
current tax law, individuals who (or whose spouses) are covered by a company
retirement plan (termed "active participants") may be restricted in the amount
they may claim as an IRA deduction on their returns. The IRA deduction is
gradually reduced to the extent that a taxpayer's adjusted gross income exceeds
certain specified limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned compensation, may be
established by a married couple in which only one spouse is a wage earner. The
$2,250 may be split between the two IRAs, so long as no more than $2,000 is
contributed to either one for a given tax year.
A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying distribution from an employer-sponsored retirement plan, such as
a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the distribution
will be exempt from 20% mandatory federal withholding, a new withholding law
enacted in 1993.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small businesses
(generally 25 or fewer employees) to provide a retirement plan for their
employees and, at the same time, provide for a tax-deduction to the employer.
SEP-IRA contributions are made to an employee's IRA, at the discretion of the
employer, up to the lesser of $30,000 or 15% of compensation* per employee. The
SAR-SEP allows employees to contribute a portion of their salary to an IRA on a
pre-tax basis through salary deferrals. The maximum annual salary deferral limit
for a SAR-SEP is the lesser of 15% of compensation (adjusted for deferrals or
$9,240 (1994 limit; indexed for inflation).
The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
certain non-profit and educational institutions [ss.501(c) (3) organizations and
public schools]. The 403(b) Plan allows participants to determine the annual
amount of salary they wish to defer. The maximum annual salary deferral amount
is generally the lesser of 25% of compensation (adjusted for deferrals) or
$9,500.
The Franklin Business Retirement Plans provide employers with additional
retirement plan options and may be used individually, in combination, or with
custom designed features. The Profit Sharing Plan allows an employer to make
contributions, at its discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension Plan allows the
employer to contribute up to the lesser of $30,000 or 25% of compensation* per
employee; however, contributions are required annually at the rate (percentage)
elected by the employer at the outset of the plan. In order to achieve a
combined contribution rate of 25% while maintaining a certain degre of
flexibility, employers may establish both a Profit Sharing Plan and a Money
Purchase Pension Plan (with a fixed contribution rate of 10%).
FTTC can add optional provisions to the Profit Sharing and Money Purchase
Pension Plans described above and provide Defined Benefit, Target Benefit, and
401(k) Plans on a custom designed basis. Business Retirement Plans, whether
standard or custom designed, may require an annual report (Form 5500) to be
filed with the IRS.
Redemptions from any Franklin retirement plan accounts require the completion of
specific distribution
*The limit on compensation for determining SEP and qualified plan contributions
is reduced from $235,840 in 1993 to $150,000 in 1994. The new $150,000 limit
will be adjusted for inflation, but only in $10,000 increments.
18
<PAGE>
forms to comply with IRS regulations. Please see "How to Sell Shares of the
Fund."
Individuals and employers should consult with a competent tax or financial
advisor before choosing a retirement plan.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
- --------------------------------------------------------------------------------
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested in writing by the shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semi-annual or annual basis. If the shareholder establishes a plan
any capital gain distributions and income dividends paid by the Fund will
19
<PAGE>
be reinvested to the shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of shares at net asset
value on the day of the transaction (which is generally the first business day
of the month in which the payment is scheduled) with payment generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another fund in the Franklin Group of Funds or the
Templeton Group, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days for
initial processing. Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent withdrawals exceed shares
earned through dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total plan balance, the
account will be closed and the remaining balance will be sent to the
shareholder. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. Because the amount withdrawn
under the plan may be more than actual yield or income part of payment may be a
return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments or suspend one such
payment by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of other mutual
funds in the Franklin Group of Funds or the Templeton Group (as defined under
"How to Buy Shares of the Fund") which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectus of the
20
<PAGE>
fund they wish to exchange into for all specific requirements or limitations on
exercising the exchange privilege, for example, minimum holding periods or
applicable sales charges. Exchanges may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE
SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT 1-800/632-2301
OR THE AUTOMATED FRANKLIN TELEFACTS(R) SYSTEM AT 1-800/247-1753. IF THE
SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, THE
FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges by Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, accrued but unpaid income
dividends and capital gain distributions will be reinvested in the Fund at the
net asset value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund in accordance with the procedures set forth
above. Because the exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income tax purposes.
Backup
21
<PAGE>
withholding and information reporting may also apply. Information regarding the
possible tax consequences of such an exchange is included in the tax section in
this Prospectus and in the Statement of Additional Information.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise. The Exchange Privilege
may be modified or discontinued by the Fund at any time upon 60 days' written
notice to shareholders.
RETIREMENT ACCOUNTS
Franklin/Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) make an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) make more than two exchanges out of the Fund per
calendar quarter, or (iii) exchange shares equal in value to at least $5 million
dollars, or more than 1/4 of 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market
22
<PAGE>
timing" strategy may be disruptive to the Fund and therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
- --------------------------------------------------------------------------------
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at 1:00 p.m. Pacific time) each day that the New York Stock
Exchange (the "Exchange") is open for business will receive the price calculated
on the following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medal-
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<PAGE>
lion Program ("STAMP") or other recognized signature guarantee medallion
program. A notarized signature will not be sufficient for the request to be in
proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction, require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who file a Franklin/Templeton Telephone Transaction Authorization
Agreement (the "Agreement") may redeem shares of the Fund by telephone, subject
to the Restricted Account exception noted under "Telephone Transactions -
Restricted Accounts." INFORMATION MAY BE OBTAINED BY WRITING TO THE FUND OR
INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING
1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES
TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS,
HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE
TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with a completed Application on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time on
any business day will be processed that same day. The redemption check will be
sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must com-
24
<PAGE>
plete an Institutional Telephone Privileges Agreement which is available from
Franklin's Institutional Services Department by telephoning 1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of electronic
transmission from securities dealers who have entered into a dealer or similar
agreement with Distributors. This is known as a repurchase. The only difference
between a normal redemption and a repurchase is that if the shareholder redeems
shares through a dealer, the redemption price will be the net asset value next
calculated after the shareholder's dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction and all other
documents set forth above. A shareholder's letter should reference the Fund, the
account number, the fact that the repurchase was ordered by a dealer and the
dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
the shareholder's redemption will be sent will begin when the Fund receives all
documents required to complete ("settle") the repurchase in proper form. The
redemption proceeds will not earn dividends or interest during the time between
receipt of the dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle the repurchase.
Thus, it is in a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The shareholder's
dealer may charge a fee for handling the order. The Statement of Additional
Information contains more information on the redemption of shares.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or securities dealer may call Franklin's Retirement Plans
Department to obtain the necessary forms.
OTHER
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
25
<PAGE>
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) exchange
Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Application as described under "How to
Sell Shares of the Fund - Redemptions by Telephone" will be able to redeem
shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone are
genuine, the requested transaction will not be executed, and neither the Fund
nor Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin/Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any distribution, redemption or
dividend payment. While the telephone exchange privilege is extended to
Franklin/Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans. Changes to dividend options must also
be made in writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2" when prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
26
<PAGE>
VALUATION OF FUND SHARES
- --------------------------------------------------------------------------------
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and "ask"
(offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, accrued expenses and taxes and any necessary
reserves is deducted from the aggregate gross value of all assets, and the
difference is divided by the number of shares of the Fund outstanding at the
time. 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 for
which market quotations are readily available are valued within the range of the
most recent bid and ask prices as obtained from one or more dealers that make
markets in the securities. Portfolio securities which 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 the Manager. 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 of Trustees. All money market
instruments with a maturity of more than 60 days are valued at current market,
as discussed above. All money market instruments with a maturity of 60 days or
less are valued at their amortized cost, which the Board of Trustees has
determined in good faith constitutes fair value for purposes of complying with
the 1940 Act. This valuation method will continue to be used until such time as
the trustees determine that it does not constitute fair value for such purposes.
With the approval of trustees, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
- --------------------------------------------------------------------------------
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund Code
36 followed by the # sign, when requested to do so by the automated operator.
The TeleFACTS System is also available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
27
<PAGE>
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
-------------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield which is calculated according to a formula prescribed by the SEC (see the
Statement of Additional Information) is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect,
rather than
28
<PAGE>
using the dividends during the past 12 months. 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
short-term capital gain, and is calculated over a different period of time.
In each case performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, distribution rate or total return may be in any future period.
Additional information is contained in the Fund's annual report, which is
available without charge upon request.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the Statement of Additional Information.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series. All shares have
one vote and, when issued, are fully paid, nonassessable, and redeemable.
All shares of each series have equal voting, dividend and liquidation rights.
Shares of each fund vote separately as to issues affecting that fund, or the
Trust, unless otherwise permitted by the 1940 Act. The shares have noncumulative
voting rights, which means that in all elections of trustees, the holders of
more than 50% of the shares voting can elect 100% of the trustees if they choose
to do so and in such event, the holders of the remaining shares voting will not
be able to elect any person or persons to the Board of Trustees. The Trust does
not intend to hold annual meetings. The Trust may, however, hold a special
shareholder meeting for such purposes as changing fundamental investment
restrictions, approving a new management agreement or any other matters which
are required to be acted on by shareholders under the 1940 Act. A meeting may
also be called by a majority of the Board of Trustees or by shareholders holding
at least ten percent of the shares entitled to vote at the meeting. Shareholders
may receive assistance in communicating with other shareholders in connection
with the election or removal of trustees such as that provided in Section 16(c)
of the 1940 Act. The Board of Trustees may from time to time establish other
funds of the Trust, the assets and liabilities of which will be separate and
distinct from any other fund.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has been in existence for at least 12 months and has a
value of less than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of shares
29
<PAGE>
and has been inactive (except for the reinvestment of distributions) for a
period of at least six months, provided advance notice is given to the
shareholder. More information is included in the Statement of Additional
Information.
OTHER INFORMATION
Shares have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights; however, holders of shares of any fund may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in "Exchange Privilege."
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
- --------------------------------------------------------------------------------
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean as "joint tenants with rights of survivorship" and not as
"tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities
30
<PAGE>
dealer or other representative is of record on an investor's account, the
investor will be deemed to have authorized the use of electronic instructions on
the account, including, without limitation, those initiated through the services
of the NSCC, to have adopted as instruction and signature any such electronic
instructions received by the Fund and the Shareholder Services Agent, and to
have authorized them to execute the instructions without further inquiry. At the
present time, such services which are available, or which are anticipated to be
made available in the near future, include the "NSCC's Networking," "Fund/SERV,"
and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS
- --------------------------------------------------------------------------------
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject to backup withholding
if the IRS or a broker notifies the Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an awaiting "TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
- --------------------------------------------------------------------------------
The following persons are primarily responsible for the day-to-day management of
the Fund's portfolios and have been since the Fund's inception.
Jack Lemein, Senior Vice President of Advisers, holds a bachelor of science
degree in finance from the University of Illinois. Mr. Lemein has been in the
securities industry since 1967 and with Advisers since 1984. He is a member of
several securities industry committees and associations.
David Capurro, Portfolio Manager of Advisers, holds a bachelor of science degree
in business administration and a master's degree in finance from California
State University at Hayward. Mr. Capurro has been with Advisers since 1983.
Tom Runkel, Portfolio Manager of Advisers, is a Chartered Financial Analyst and
holds a bachelor of arts degree in political science from the University of
California at Davis and a master's degree in business administration from the
University of Santa Clara. Mr. Runkel has been with Advisers since 1983. He is a
member of several securities industry committees and associations.
31
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS FOR
FRANKLIN EQUITY INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
DATED MARCH 1, 1994, AS AMENDED MAY 1, 1994
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund:
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
2. MANAGEMENT OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND
a) Substitute the following for the sales charge table and the ensuing two
paragraphs:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000................................ 4.50% 4.71% 4.00%
$100,000 but less than $250,000................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000................... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000................. 2.25% 2.30% 2.00%
$1,000,000 or more ............................... none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors to dealers who
initiate and are responsible for purchases of $1 million or more: 1.00% on
sales of $1 million but less $2 million, plus 0.80% on sales of $2 million
but less than $3 million, plus 0.50% on sales of $3 million but less than
$50 million, plus 0.25% on sales of $50 million but less than $100 million,
plus 0.15% on sales of $100 million or more. Dealer concession breakpoints
are reset every 12 months for purposes of additional purchases.
Distributors, or one of its affiliates, may make payments, out of its
own resources, of up to 1% of the amount purchased to securities dealers
who initiate and are responsible for purchases made at net asset value by
certain designated retirement plans (excluding IRA and IRA rollovers),
certain trust company and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets
of $10 million or more) See "Description of Special Net Asset Value
Purchases" as described under "Purchases at Net Asset Value" and as set
forth in the SAI.
No front-end sales charge applies on investments of $1 million or more,
but a contingent deferred sales charge of 1% is imposed on certain
redemptions within 12 months of the calendar month following such
investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission
is allowed, such dealer may be deemed to be an underwriter as that term
is defined in the Securities Act of 1933, as amended.
The size of a transaction which determines the applicable sales charge
on the purchase of Fund shares is determined by adding the amount
of the shareholder's current purchase plus the cost or cur-
1
<PAGE>
rent value (whichever is higher) of a shareholder's existing
investment in one or more of the funds in the Franklin Group of Funds(R)
and the Templeton Group of Funds. Included for these aggregation
purposes are (a) the mutual funds in the Franklin Group of Funds except
Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have
the same schedule of sales charges and/or may not be subject to reduction)
and (c) the U.S. mutual funds in the Templeton Group of Funds except
Templeton American Trust, Inc., Templeton Capital Accumulator Fund, Inc.,
Templeton Variable Annuity Fund, and Templeton Variable Products Series
Fund (the "Templeton Funds"). (Franklin Funds and Templeton Funds are
collectively referred to as the "Franklin Templeton Funds.") Sales charge
reductions based upon aggregate holdings of (a), (b) and (c) above
("Franklin Templeton Investments") may be effective only after notification
to Distributors that the investment qualifies for a discount. References
throughout the Prospectus, for purposes of aggregating assets or describing
the exchange privilege, refer to the above descriptions.
b) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without the
imposition of a front-end sales charge and/or contingent deferred sales
charge) by (1) officers, directors, trustees and full-time employees of the
Fund, any of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2) companies exchanging
shares with or selling assets pursuant to a merger, acquisition or exchange
offer; (3) insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5) Shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers
and their affiliates, for their investment account only, and (8) registered
personnel and employees of securities dealers, which have directly or through
affiliates, signed an agreement with Distributors, and by their spouses and
family members, in accordance with the internal policies and procedures of
the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. Credit
will be given for any contingent deferred sales charge paid on the shares
redeemed. Shares of the Fund redeemed in connection with an exchange into
another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120
days, however, do not begin to run on redemption proceeds placed immediately
after redemption in a Franklin Bank Certificate of Deposit ("CD") until the
CD (including any rollover) matures. Reinvestment at net asset value may also
be handled by a securities dealer or other financial institution, who may
charge the shareholder a fee for this service. The redemption is a taxable
transaction but reinvestment without a sales charge may affect the amount of
gain or loss recognized and the tax basis of the shares reinvested. If there
has been a loss on the redemption, the loss may be disallowed if a
reinvestment in the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a reinvestment is included in
the tax section of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value within 120 days of the pay-
2
<PAGE>
ment date of such distribution. To exercise this privilege, a written
request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value by registered
investment advisors and/or their affiliated broker-dealers, who have entered
into a supplemental agreement with Distributors, on behalf of their clients
who are participating in a comprehensive fee program (also known as a wrap
fee program).
Shares of the Fund may be purchased at net asset value by anyone who has
taken a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution. In
order to exercise this privilege a written order for the purchase of shares
of the Fund must be received by Franklin Templeton Trust Company (the "Trust
Company"), the Fund or Investor Services, within 120 days after the plan
distribution. A prospectus outlining the investment objectives and policies
of a fund in which the shareholder wishes to invest may be obtained by
calling toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value by any state,
county, or city, or any instrumentality, department, authority or agency
thereof which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment laws from
paying a sales charge or commission in connection with the purchase of
shares of any registered management investment company ("an eligible
governmental authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL
ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors considering
investment of proceeds of bond offerings into the Fund should consult
with expert counsel to determine the effect, if any, of various payments
made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at
net asset value is made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may
make a payment, out of their own resources, to such dealer in an amount
not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES.
Shares of the Fund may also be purchased at net asset value by certain
designated retirement plans, including profit sharing, pension, 401(k)
and simplified employee pension plans, subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the
employer establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13-month period
in the Fund or in any of the Franklin Templeton Investments totals at
least $1,000,000. Employee benefit plans not designated above or
qualified under Section 401 of the Code may be afforded the same privilege
if they meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which
enable Distributors to realize economies of scale in its sales efforts
and sales related expenses.
Shares of the Fund may be purchased at net asset value by trust companies
and bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are
3
<PAGE>
held in a fiduciary, agency, advisory, custodial or similar capacity. Such
purchases are subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will
be accepted 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 such order.
Shares of the Fund may be purchased at net asset value by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested.
Refer to the SAI for further information.
4. EXCHANGE PRIVILEGE
Add the following paragraph under the subsection "Miscellaneous Information":
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within 12 months of the calendar month following the original purchase date,
a contingent deferred sales charge will be imposed. The 12-month period will
be tolled (or stopped) for the period such shares are exchanged into and held
in a Franklin or Templeton money market fund. See also "How to Sell Shares of
the Fund - Contingent Deferred Sales Charge."
5. HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of
1% applies to redemptions of those investments within 12 months of the
calendar month after their purchase. The charge is 1% of the lesser of
the value of the shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the total cost of such shares, and is
retained by Distributors. In determining if a charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) shares representing amounts attributable
to capital appreciation of those shares held less than 12 months;
(ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than 12 months; and
followed by any shares held less than 12 months, on a "first in, first
out" basis.
The contingent deferred sales charge is waived for: exchanges;
distributions to participants in Trust Company qualified retirement plans
due to death, disability or attainment of age 591/2; tax-free returns of
excess contributions to employee benefit plans, including those due to
termination or plan transfer; distributions from employee benefit plans;
redemptions through a Systematic Withdrawal Plan set up prior to February
1, 1995 and, for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3%
quarterly, 6% semiannually or 12% annually); and redemptions initiated by
the Fund due to a shareholder's account falling below the minimum
specified account size.
REQUESTS FOR REDEMPTIONS FOR A SPECIFIED DOLLAR AMOUNT WILL RESULT IN
ADDITIONAL SHARES BEING REDEEMED TO COVER ANY APPLICABLE CONTINGENT
DEFERRED SALES CHARGE WHILE REQUESTS FOR REDEMPTION OF A SPECIFIC NUMBER
OF SHARES WILL RESULT IN THE APPLICABLE CONTINGENT DEFERRED SALES CHARGE
BEING DEDUCTED FROM THE TOTAL DOLLAR AMOUNT REDEEMED.
4
<PAGE>
FRANKLIN
EQUITY
INCOME FUND
Franklin Investors Securities Trust
PROSPECTUS MARCH 1, 1994
AS AMENDED MAY 1, 1994
(FRANKLIN LOGO)
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Equity Income Fund (the "Fund"), formerly known as Franklin Special
Equity Income Fund, a separate diversified series of Franklin Investor
Securities Trust (the "Trust"), has as its objective to maximize total return
through emphasis on high current income and capital appreciation, consistent
with reasonable risk. The Fund seeks to achieve this objective primarily
through investing in common and preferred stocks with above average dividend
yields. Of course, there can be no assurance that the Fund's objectives can be
achieved.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares
and other items which a prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
A Statement of Additional Information concerning the Fund and other series of
the Trust, dated March 1, 1994, as may be amended from time to time, provides a
further discussion of certain areas in this Prospectus and other matters which
may be of interest to some investors. It has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus is not an offering of the securities herein described
in any state 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 the underwriter.
1
<PAGE>
CONTENTS PAGE
Expense Table.................................... 2
Financial Highlights............................. 4
About the Trust.................................. 5
Investment Objective and
Policies of the Fund............................ 5
Management of the Fund........................... 10
Distributions to Shareholders.................... 11
Taxation of the Fund
and Its Shareholders............................ 13
How to Buy Shares of the Fund.................... 14
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments.............. 20
Other Programs and Privileges
Available to Fund Shareholders.................. 22
Exchange Privilege............................... 23
How to Sell Shares of the Fund................... 26
Telephone Transactions........................... 29
Valuation of Fund Shares......................... 30
How to Get Information
Regarding an Investment in the Fund............. 31
Performance...................................... 31
General Information.............................. 32
Account Registrations............................ 33
Important Notice Regarding
Taxpayer IRS Certifications..................... 34
Portfolio Operations ............................ 34
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or
indirectly in connection with an investment in the Fund. These figures are
based on the aggregate annualized operating expenses of the Fund (including
fees set by contract) for the nine months ended October 31, 1993, restated to
reflect the higher sales charge and distribution expenses as though both had
been in effect at the beginning of the fiscal period.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)............................ 4.50%+
Maximum Sales Charge Imposed on Reinvested Dividends .......... NONE++
Deferred Sales Charge.......................................... NONE
Redemption Fees................................................ NONE
Exchange Fee (per transaction)................................. $5.00*
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ANNUALIZED FUND OPERATING EXPENSES
(as a percentage of average net assets)
<S> <C> <C>
Management Fees................................................... 0.63%**
Maximum 12b-1 Fees.............................................. 0.25%++
Other Expenses:
Shareholder Servicing Costs................................... 0.10%
Reports to Shareholders....................................... 0.06%
Other......................................................... 0.08%
-----
Total Other Expenses.................................................. 0.24%
-------
Total Fund Operating Expenses......................................... 1.12%**
</TABLE> =======
+The maximum sales charge is being changed to 4.50% effective July 1, 1994. The
current maximum of 4.00% will remain in effect until June 30, 1994.
++Shareholders of the Fund have approved the adoption of a plan of distribution
(the "Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "1940 Act"), which will provide for payments made by the Fund in
connection with the distribution of its shares, up to a maximum annual rate of
0.25% of the Fund's average net assets, which takes effect on May 1, 1994. At
the same time, the sales charge on reinvested dividends is being eliminated.
Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that 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 those same rules. See
"Management of the Fund - Plan of Distribution."
*$5.00 fee only imposed on Timing Accounts as described under "Exchange
Privilege." All other exchanges are without charge.
**Represents the amount that would have been payable by the Fund assuming the
distribution plan had been in effect and absent a fee reduction by the
investment manager. However, the investment manager waived a portion of its
management fees. With this reduction, management fees and total operating
expenses, including management fees, represented 0.01% and 0.25%, respectively,
of the average net assets of the Fund.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the initial sales charge, that apply to a $1,000 investment in the
Fund over various time periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period. As noted in the table above, the
Fund charges no redemption fees:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$56 $79 $104 $175
</TABLE>
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUALIZED OPERATING EXPENSES, INCLUDING
FEES SET BY CONTRACT, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The
operating expenses are borne by the Fund and only indirectly by shareholders as
a result of their investment in the Fund. In addition, federal regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%. No deduction was made for sales charges on
reinvested dividends; the expenses would be increased if they were reflected.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund throughout the periods from the effective date of registration (March
15, 1988) to January 31, 1993 and for the nine-month period from February 1,
1993 to October 31, 1993. The information for each of the periods indicated has
been audited by Coopers & Lybrand, independent auditors, whose audit report
appears in the financial statements in the Fund's Statement of Additional
Information, a copy of which may be obtained as noted on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSETS
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS(LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAIN DISTRIBUTIONS OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989(2) $10.00 $.56 $ .887 $1.447 $(.370) $(.077) $(.447) $11.00
1990 11.00 .75 .527 1.277 (.655) (.092) (.747) 11.53
1991 11.53 .72 (.803) (.083) (.736) (.071) (.807) 10.64
1992 10.64 .42 1.967 2.387 (.660) (.057) (.717) 12.31
1993 12.31 .66 1.307 1.967 (.682) (.135) (.817) 13.46
1993(2) 13.46 .60 1.435 2.035 (.495) (.090) (.585) 14.91
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
AT END TO AVERAGE INCOME PORTFOLIO
PERIOD TOTAL OF YEAR NET ASSETS TO AVERAGE TURNOVER
ENDED RETURN++ (IN 000'S) (SEE NOTE 6)** NET ASSETS RATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1989(2) 14.61%(1) $ 2,527 --%* 5.78%* 11.34%
1990 11.43 7,221 -- 6.23 33.11
1991 (.92) 10,808 .18 6.60 26.99
1992 22.76 16,144 .25 5.77 40.59
1993 16.23 26,092 .25 5.18 31.05
1993(2) 15.27 42,177 .25* 5.86* 19.33
</TABLE>
(1) For the period March 15, 1988 (effective date of registration) to January
31, 1989.
(2) For the nine months ended October 31, resulting from a change in fiscal
year from January 31.
* Annualized.
+ Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value.
**During the periods indicated, Franklin Advisers, Inc., the investment
manager, reduced its management fees and reimbursed other expenses incurred by
the Funds. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
<TABLE>
<S> <C>
1989(1)................ .73%*
1990................... .83
1991................... .83
1992................... .84
1993................... .81
1993(2)................ .87*
</TABLE>
4
<PAGE>
ABOUT THE TRUST
The Trust is an open-end management investment company, or mutual fund,
organized as a Massachusetts business trust on December 16, 1986 and has
registered with the SEC under the 1940 Act. The Fund and the other series of
the Trust each issue a separate series of shares of beneficial interest, each a
separate entity with its own investment objective and policies and varying
possibilities for income or capital appreciation, and each subject to varying
market risks. The Fund is diversified.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.5% to less than 1.0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")
INVESTMENT OBJECTIVE AND
POLICIES OF THE FUND
The investment objective of the Fund is to maximize its total return through
emphasis on high current income and long-term capital appreciation, consistent
with reasonable risk. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval.
The Fund pursues its investment objective by investing at least 65% of its
total assets (except when maintaining a temporary defensive position) in a
broadly diversified portfolio of common and preferred stocks offering current
dividend yields above the average of the market defined by the Standard &
Poor's 400 and 500 Indices. The balance of the Fund's net assets may be
invested in other securities which, in the aggregate, are considered to be
consistent with the Fund's investment objective. Such other investments may
include securities convertible into common and preferred stocks, covered call
options, put options, United States ("U.S.") government securities, securities
of foreign issuers, corporate bonds, high grade commercial paper, bankers'
acceptances and other short-term instruments. There is, of course, no assurance
that the Fund's objectives will be achieved.
When maintaining a temporary defensive position, the Fund may invest any
portion of its assets in U.S. government securities, high grade commercial
paper, bankers' acceptances, and variable interest rate corporate or bank notes.
CURRENT INVESTMENT STRATEGY
The Fund seeks to attain its fundamental investment objective by investing
primarily in common and preferred stocks of major companies with high current
dividend yields relative to the market.
This emphasis on a stock's current dividend yield is based upon the investment
philosophy that dividend income is generally a significant contributor to the
returns available from investing in stocks over the long term and that dividend
income is often more consistent than capital appreciation as a source of
investment return. Moreover, the price volatility of stocks with relatively
higher dividend yields tends to be less than stocks that pay out little
dividend income, affording the Fund the potential for greater principal
stability.
The Fund evaluates the common stock dividend yields of many financially strong
companies as compared to the average dividend yield of the general stock market
defined by the Standard & Poor's 400 and 500 Indices. This results in a unique
relative yield range for each company which in turn provides a discipline for
determining whether a stock is attractive for purchase or sale.
5
<PAGE>
Because high relative yield as defined above is frequently accompanied by a
lower stock price, the Fund seeks to buy a stock when its relative yield is
high. Conversely, it seeks to sell a stock when its yield is low relative to
its history, which may be caused by an increase in the price of the stock. The
Fund may then reinvest the proceeds into other high relative yielding issues.
This approach may allow the Fund to take advantage of capital appreciation
opportunities presented by quality stocks that are temporarily out of favor
with the market and which are subsequently "rediscovered."
In addition to offering above average yields, securities selected for
investment by this strategy may provide some of the following characteristics
consistent with the Fund's fundamental objectives: above average dividend
growth prospects; low price to normalized earnings (projected earnings under
normal operating conditions), to cash flow, to book value and/or to realizable
liquidation value.
The Fund's investment objective of maximizing total return is a fundamental
policy which may not be changed without prior shareholder approval. The above
described investment strategy is the current approach used by the Fund to
attempt to achieve its objective; it is not a fundamental policy of the Fund
and is subject to change at the discretion of the Fund's Trustees and without
prior shareholder approval.
OTHER INVESTMENT POLICIES OF THE FUND
Fixed-Income Debt Securities. The Fund may invest in fixed-income debt
securities up to a maximum of 35% of the Fund's total assets consistent with
the Fund's investment objectives. In seeking securities which meet the Fund's
investment objectives and current investment strategy, the Fund will acquire
only the securities which are rated B or better by Standard & Poor's
Corporation ("S&P") or Ba or better by Moody's Investor Services ("Moody's") or
securities which are unrated but which are judged to be of comparable quality.
Instruments rated B by S&P or Ba by Moody's generally lack characteristics of
desirable investments and are judged to have predominantly speculative
elements. Further details on these debt rating definitions are included in the
Appendix to the Statement of Additional Information. Rather than relying
principally on the ratings assigned by rating services, however, the investment
analysis of debt securities being considered for the Fund's portfolio may also
include, among other things, consideration of relative values based on such
factors as anticipated cash flow, interest coverage, asset coverage, earnings
prospects, the experience and managerial strength of the issuer, responsiveness
to changes in interest rates and business conditions, debt maturity schedules
and borrowing requirements and the issuer's changing financial condition and
public recognition thereof.
The Fund may also invest in securities which are obligations of the U.S.
government or its agencies or instrumentalities. Such U.S. government
securities include, but are not limited to, U.S. Treasury bonds, notes and
bills, Treasury certificates of indebtedness and securities issued by
instrumentalities of the U.S. government.
To the extent that the Fund's portfolio at any particular time may consist of
debt securities, changes in the level of interest rates, among other things,
are likely to affect the value of the Fund's holdings and thus the value of a
shareholder's investment.
Options on Equity Securities. When emphasizing high current income to achieve
its investment objective of maximizing total return, the Fund may write covered
call options on securities it actually owns, which are listed for trading on a
national
6
<PAGE>
securities exchange, and it may also purchase listed call options.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the purchaser of the option the right to buy and
obligates the writer to sell the underlying security at the exercise price at
any time during the option period, regardless of the market price of the
underlying security. The purchaser of an option pays a cash premium, which
typically reflects, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand factors and interest rates.
Call options written by the Fund give the holder the right to buy the
underlying security from the Fund at a stated exercise price upon exercising
the option at any time prior to its expiration. A call option written by the
Fund is "covered" if the Fund owns or has an absolute right (such as by
conversion) to the underlying security covered by the call. 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 and 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, U.S. government securities or other high grade
debt obligations in a segregated account with its custodian bank.
When the Fund writes or sells covered call options, it will receive a cash
premium which can be used in whatever way is felt to be most beneficial to the
Fund. The risks associated with covered option writing are that in the event of
a price rise on the underlying security which would likely trigger the exercise
of the call option, the Fund will not participate in the increase in price
beyond the exercise price. It will generally be the Fund's policy, in order to
avoid the exercise of a call option written by it, to cancel its obligation
under the call option by entering into a "closing purchase transaction," if
available, unless it is determined to be in the Fund's interest to deliver the
underlying securities from its portfolio. A closing purchase transaction
consists of the Fund purchasing an option having the same terms as the option
written by the Fund, and has the effect of cancelling the Fund's position as a
writer. The premium which the Fund will pay in executing a closing purchase
transaction may be higher or lower than the premium it received when writing
the option, depending in large part upon the relative price of the underlying
security at the time of each transaction.
One risk involved in both the purchase and sale of options is that the Fund may
not be able to effect a closing purchase transaction at a time when it wishes
to do so (or at an advantageous price). There is no assurance that a liquid
market will exist for a given contract or option at any particular time. To
mitigate this risk, the Fund will ordinarily purchase and write options only if
a secondary market for the option exists on a national securities exchange or
in the over-the-counter market. Another risk is that during the option period,
if the Fund has written a covered call option, it will have given up the
opportunity to profit from a price increase in the underlying securities above
the exercise price in return for the premium on the option (although, of
course, the premium can be used to offset any losses or add to the Fund's
income) but, as long as its obligation as a writer continues, the Fund will
have retained the risk of loss should the price of the underlying security
decline. In addition, the Fund has no control over
7
<PAGE>
the time when it may be required to fulfill its obligation as a writer of the
option; once the Fund has received an exercise notice, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. The aggregate
premiums paid on all such options which are held at any time will not exceed
any applicable state regulations which may limit the aggregate value of
securities underlying outstanding options.
The Fund may also purchase put options on common stock that it owns or may
acquire through the conversion or exchange of other securities to protect
against a decline in the market value of the underlying security or to protect
the unrealized gain in an appreciated security in its portfolio without
actually selling the security. A put option gives the holder the right to sell
the underlying security at the option exercise price at any time during the
option period. The Fund may pay for a put either separately or by paying a
higher price for securities which are purchased subject to a put, thus
increasing the cost of the securities and reducing the yield otherwise
available from the same securities.
In the case of put options, any gain realized by the Fund will be reduced by
the amount of the premium and transaction costs it paid and may be offset by a
decline in the value of its portfolio securities. If the value of the
underlying stock exceeds the exercise price (or never declines below the
exercise price), the Fund may suffer a loss equal to the amount of the premium
it paid plus transaction costs. The Fund may also close out its option
positions before they expire by entering into a closing purchase transaction as
discussed above and subject to the same risks. To the extent that the Fund does
invest in options, it may be limited by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company. Such investments may also be subject to special tax rules
that may affect the amount, character and timing of income earned by the Fund
and distributed to shareholders. For more information, see the tax section of
the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Fund might also incur disposition costs in liquidating the collateral.
However, the Fund intends to enter into repurchase agreements only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Fund to the seller,
collateralized by the underlying security. The U.S. government security subject
to resale (the collateral) will be held pursuant to a written agreement and the
Fund's custodian will take title to, or actual delivery of, the security.
Borrowing. The Fund may not borrow money or mortgage or pledge any of the
assets of the Fund except that it may borrow from banks for temporary or
emergency purposes up to 5% of its total assets and pledge up to 5% of its
total assets in connection therewith.
8
<PAGE>
Lending of Portfolio Securities. With approval of the Board of Trustees and
subject to the following conditions, the Fund may lend its portfolio securities
to qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of the Fund's total assets at the
time of the most recent loan, and further provided that the borrower deposits
and maintains 102% cash collateral for the benefit of the Fund. The lending of
securities is a common practice in the securities industry. The Fund will
engage in security loan arrangements with the primary objective of increasing
the Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
The Fund will continue to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially.
Foreign Securities. The Fund will ordinarily purchase foreign securities which
are traded in the U.S. or purchase American Depositary Receipts ("ADRs") which
are certificates issued by U.S. banks representing the right to receive
securities of a foreign issuer deposited with that bank or a correspondent
bank. However, the Fund may purchase the securities of foreign issuers directly
in foreign markets.
Investments in foreign securities where delivery takes place outside the U.S.
will involve risks that are different from investments in U.S. securities.
These risks may include future unfavorable political and economic developments,
possible withholding taxes, seizure of foreign deposits, currency controls,
higher transactional costs due to a lack of negotiated commissions, or other
governmental restrictions which might affect the amount and types of foreign
investments made or the payment of principal or interest on securities the Fund
holds. In addition, there may be less information available about these
securities and it may be more difficult to obtain or enforce a court judgment
in the event of a lawsuit. Fluctuations in currency convertibility or exchange
rates could result in investment losses for the Fund.
Investment in foreign securities may also subject the Fund to losses due to
nationalization, expropriation or differing accounting practices and
treatments. Investments may be in securities of foreign issuers, whether
located in developed or undeveloped countries, but investments will not be made
in any securities issued without stock certificates or comparable stock
documents. Securities which are acquired by the Fund outside the U.S. and which
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 them 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. The Fund may invest up to
30% of its net assets in foreign securities not publicly traded in the U.S.
Other Policies. It is the policy of the Fund that illiquid securities (a term
which means securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which the Fund has
valued the securities) may not constitute, at the time of purchase or at any
time, more than 10% of the value of the total net assets of the Fund.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders,
9
<PAGE>
which limit its activities to some extent. For a list of these restrictions and
more information concerning the policies discussed herein, please see the
Statement of Additional Information.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly owned holding company, the principal
shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R.
Martin Wiskemann, who own approximately 20%, 16% and 10%, respectively, of
Resources' outstanding shares. Through its subsidiaries, Resources is engaged
in various aspects of the financial services industry. Advisers acts as
investment manager to 34 U.S. registered investment companies (110 separate
series) with aggregate assets of over $75 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the nine months ended October 31, 1993, annualized fees totaling 0.63%
of the average net assets of the Fund would have accrued to Advisers. Total
operating expenses, including management fees, would have represented 0.87% of
the average net assets of the Fund. Pursuant to an agreement by Advisers to
limit its fees, management fees paid by the Fund, on an annualized basis,
represented 0.01% of the average net assets of the Fund annualized with total
operating expenses of 0.25%. This arrangement may be terminated by the
investment manager at any time.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the
Statement of Additional Information.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date") the Fund adopted a plan pursuant
to Rule 12b-1 under the 1940 Act (the "Plan"), as approved by shareholders at a
special meeting held on April 13, 1994. Under the Plan, the Fund may reimburse
Distributors or others for all expenses incurred by Distributors or others in
the promotion and distribution of the Fund's shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
10
<PAGE>
distribution of Fund shares, as well as any distribution or service fees paid
to securities dealers or their firms or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such distribution expenses
is 0.25% per annum of the average daily net assets of the Fund, payable on a
quarterly basis. All expenses of distribution and marketing in excess of 0.25%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Fund. The Plan also covers any payments to or by
the Fund, Distributors, or other parties on behalf of the Fund or Distributors,
to the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within
the context of Rule 12b-1. The payments under the Plan are included in the
maximum operating expenses which may be borne by the Fund.
In implementing the Plan, the Board has determined that the annual fees payable
thereunder will be equal to the sum of: (i) the amount obtained by multiplying
0.25% by the average daily net assets represented by shares of the Fund that
were acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average
daily net assets represented by shares of the Fund that were acquired before
the Effective Date of the Plan ("Old Assets"). Such fees will be paid to the
current securities dealer of record on the shareholder's account. In addition,
until such time as the maximum payment of 0.15% is reached on a yearly basis,
up to an additional 0.02% will be paid to Distributors under the Plan. The
payments to be made to Distributors will be used by Distributors to defray
other marketing expenses that have been incurred in accordance with the Plan,
such as advertising.
The fee is a Fund expense so that all shareholders regardless of when they
purchased their shares will bear 12b-1 expenses at the same rate. That rate
initially will be at least 0.17% (0.15% plus 0.02%) of such average daily net
assets and, as Fund shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Fund shares purchased on or
after the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the proposed Plan will also increase
(but will not exceed 0.25% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Plan, the Plan
permits the Fund's directors to allow the Fund to pay a full 0.25% on all
assets at any time. The approval of the Fund's Board of Trustees would be
required to change the calculation of the payments to be made under the Plan.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends,
interest and other income derived from its investments. This income, less the
expenses incurred in the Fund's operations, is its net investment income from
which income dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) will
generally be made once a year in December and will reflect the net short-term
and net long-term capi-
11
<PAGE>
tal gains realized by the Fund as of October 31, its fiscal year-end. The Fund
reserves the right to make more than one distribution derived from net
short-term and net long-term capital gains in any year or to adjust the timing
of these distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Fund's Board of Trustees, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends monthly for shareholders of record generally on the first
business day preceding the 15th day of the month, payable on or about the last
business day of that month. The amount of income dividend payments by the Fund
is dependent upon the amount of net income received by the Fund from its
portfolio holdings, is not guaranteed and is subject to the discretion of the
Fund's Board of Trustees. Fund shares are quoted ex-dividend on the business
day following the record date. The Fund does not pay "interest" or guarantee
any fixed rate of return on an investment in its shares.
In order to be entitled to a dividend, the investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the investor's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and any capital gain distributions, will be automatically reinvested
in the shareholder's account in the form of additional shares, valued at the
closing net asset value (without sales charge) on the dividend reinvestment
date. Shareholders have the right to change their election with respect to the
receipt of distributions by notifying the Fund, but any such change will be
effective only as to distributions for which the record date is seven or more
business days after the Fund has been notified. See the Statement of Additional
Information for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund
12
<PAGE>
transfers may be obtained from Franklin's Shareholder Services Department.
Income dividend and capital gain distributions directed to another fund in the
Franklin Group of Funds or the Templeton Group are eligible for investment at
net asset value.
Effective June 1, 1994, shareholders may be able to change their dividend
options by telephone. See the section entitled "Telephone Transactions."
HOW SHAREHOLDERS PARTICIPATE
IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund
decrease in value, the value of the shareholder's shares will also decline. In
this way, shareholders participate in any change in the value of the securities
owned by the Fund.
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations which affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the Statement of Additional
Information.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and qualified to be treated as a regulated
investment company under Subchapter M of the Code. By distributing all of its
net investment income and net realized short-term and long-term capital gain
for a fiscal year in accordance with the timing requirements imposed by the
Code and by meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares. Distributions derived from the excess of net long-term
capital gain over net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has owned Fund shares and
regardless of whether such distributions are received in cash or in additional
shares.
For corporate investors, dividends from net investment income will generally
qualify in part for the corporate dividends-received deduction. However, the
portion of the dividends so qualified depends on the aggregate qualifying
dividend income received by the Fund from domestic (U.S.) sources. For the nine
months ended October 31, 1993, 86.80% of the income dividends paid by the Fund
qualified for the corporate dividends-received deduction, subject to certain
holding period and debt financing restrictions imposed under the Code on the
corporation claiming the deduction. These restrictions are discussed in the
Statement of Additional Information.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated as if received by the
shareholder on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or ex-
13
<PAGE>
change of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are reinvested in the Fund or in another fund in the
Franklin/Templeton Group and a sales charge which would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment. Shareholders should consult with
their tax advisors concerning the tax rules applicable to the redemption or
exchange of Fund shares.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference however is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin providing for regular
periodic investments. The Fund and Distributors reserve the right to refuse any
order for the purchase of shares.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering price will be
calculated to four decimal places. On orders for less than 100,000 shares, the
offering price will be calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset value per share
is included under the caption "Valuation of Fund Shares."
Following are the two sales charge schedules:
14
<PAGE>
a) Currently in effect.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SALES CHARGE
-----------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.00% 4.17% 4.00%
$100,000 but less than $250,000 3.25% 3.36% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.50%
$500,000 but less than $1,000,000 2.00% 2.04% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
b) In effect as of July 1, 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SALES CHARGE
-----------------------------------------------------
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AS A PERCENTAGE OF NET AMOUNT AS A PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE INVESTED OF OFFERING PRICE*
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. If the entire amount of the sales charges on a
purchase is paid to the securities dealer involved in the trade, such
securities dealer may be deemed an "underwriter" under the Securities Act of
1933, as amended.
The size of a transaction which determines the applicable sales charge
on the purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of many of the
funds in the Franklin Group of Funds(R) and in the Templeton Group of
Funds. Included for these purposes are (a) the open-end investment companies in
the Franklin Group (except Franklin Valuemark II and Franklin Government
Securities Trust) (the "Franklin Group of Funds"), (b) other investment products
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant
15
<PAGE>
to a Letter of Intent for more than $2,500,000 will be at a 1% sales charge
until cumulative purchases reach $2,500,000 and at the incremental sales charge
on the excess over $2,500,000. Purchases pursuant to the Rights of Accumulation
will be at the applicable sales charge of 1% or more until the additional
purchase, plus the value of the account or the amount previously invested, less
redemptions, exceeds $2,500,000, in which event the sales charge on the excess
will be calculated as stated above. Sales charge reductions based upon
purchases in more than one of the funds in the Franklin Group or Templeton
Group (the "Franklin/Templeton Group") may be effective only after notification
to Distributors that the investment qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and
other funds in the Franklin Group of Funds or the Templeton Group. Compensation
may include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and programs regarding
one or more of the Franklin Group of Funds or the Templeton Group and other
dealer-sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have sold or
are expected to sell significant amounts of such shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the U.S. for meetings or seminars of
a business nature. Dealers may not use sales of the Fund's shares to qualify
for this compensation to the extent such may be prohibited by the laws of any
state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned additional compensation is
paid for by the Fund or its shareholders.
Certain officers and trustees of the Fund are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the
Franklin/Templeton Group may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount
16
<PAGE>
which if made at one time would qualify for a reduced sales charge. At any time
within 90 days after the first investment which the investor wants to qualify
for the reduced sales charge, a signed Shareholder Application, with the Letter
of Intent section completed, may be filed with the Fund. After the Letter of
Intent is filed, each additional investment made will be entitled to the sales
charge applicable to the level of investment indicated on the Letter of Intent
as described above. Sales charge reductions based upon purchases in more than
one company in the Franklin/Templeton Group will be effective only after
notification to Distributors that the investment qualifies for a discount. The
shareholder's holdings in the Franklin/Templeton Group acquired more than 90
days before the Letter of Intent is filed will be counted towards completion of
the Letter of Intent but will not be entitled to a retroactive downward
adjustment of sales charge. Any redemptions made by the shareholder during the
13-month period will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter of Intent have been
completed. If the Letter of Intent is not completed within the 13-month period,
there will be an upward adjustment of the sales charge as specified below,
depending upon the amount actually purchased (less redemptions) during the
period. An investor who executes a Letter of Intent prior to the change in the
sales charge structure for the Fund will be entitled to complete the Letter at
the lower of (i) the new sales charge structure; or (ii) the sales charge
structure in effect at the time the Letter was filed with the Fund.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not
be available for disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. If the total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in the name of the investor or delivered to the
investor or the investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the dealer through whom purchases were made pursuant
to the Letter of Intent (to reflect such further quantity discount) on
purchases made within 90 days before, and on those made after filing the
Letter. The resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to a single
purchase or the dollar amount of the total purchases. If the total purchases,
less redemptions, are less than the amount specified under the Letter, the
investor 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
which would have applied to the aggregate purchases if the total of such
purchases had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order.
If within 20 days after written request such difference in sales
17
<PAGE>
charge is not paid, the redemption of an appropriate number of reserved shares
to realize such difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption and the balance
will be forwarded to the investor. By completing the Letter of Intent section
of the Shareholder Application, an investor grants to Distributors a security
interest in the reserved shares and irrevocably appoints Distributors as
attorney-in-fact with full power of substitution to surrender for redemption
any or all shares for the purpose of paying any additional sales charge due.
Purchases under the Letter of Intent will conform with the requirements of Rule
22d-1 under the 1940 Act. The investor or the investor's securities dealer must
inform Investor Services or Distributors that this Letter is in effect each
time a purchase is made.
Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares
of the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.25% (3.75% after June 30, 1994). Information concerning the
current sales charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other materials related to the Fund in its publications and
mailings to members at reduced or no cost to Distributors, and must seek to
arrange for payroll deduction or other bulk transmission of investments to the
Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both
the check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without sales charge)
by employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, subject to
minimum requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently those criteria require that
the employer establishing the plan have 500 or more employees or that the
amount invested or to be invested during the subsequent
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13-month period in the Fund or another company or companies in the
Franklin/Templeton Group totals at least $1,000,000. Employee benefit plans not
qualified under Section 401 of the Code may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for qualified
groups previously described under Group Purchases which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses. If
investments by employee benefit plans at net asset value are made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make a payment, out of their own resources, to such
dealer in an amount not to exceed 0.25% of the amount invested. Contact
Franklin's Institutional Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted 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 such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer
who has executed a dealer agreement with Distributors, Distributors or one of
its affiliates may make payment, out of their own resources, to such dealer in
an amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120 days
do not begin to run, however, on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there has been a loss
on the redemption, the loss may be disallowed if a reinvestment is made within
a 30-day period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and in the
Statement of Additional Information.
Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees, directors and full-time employees of the Fund, or any fund in the
Franklin Group of Funds or the Templeton
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Group, the Manager and the Distributor and affiliates of such companies, if
they have been such for at least 90 days, and by their spouses and family
members, (2) former participants in the Franklin/Templeton Profit
Sharing/401(k) plan, who elect to make a direct rollover of all, or a portion
of, their eligible distribution account balance from such plan, (3) registered
securities dealers and their affiliates, for their investment account only, and
(4) registered personnel and employees of securities dealers and by their
spouses and family members, in accordance with the internal policies and
procedures of the employing securities dealer. Such sales are made upon the
written assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be transferred or resold except
through redemption or repurchase by or on behalf of the Fund. Employees of
securities dealers must obtain a special application from their employers or
from Franklin's Sales Department in order to qualify.
Shares of the Fund may also be purchased at net asset value by any state,
county, or city, or any instrumentality, department, authority or agency
thereof which has determined that the Fund is a legally permissible investment
and which is prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of shares of any
registered management investment company (an "eligible governmental
authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL
INVESTMENTS FOR THEM. Municipal investors considering investment of proceeds of
bond offerings into the Fund should consult with expert counsel to determine
the effect, if any, of various payments made by the Fund or its investment
manager on arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.
PURCHASING SHARES OF THE FUND IN
CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and institutions. The Fund may be
used as an investment vehicle for an already existing retirement plan or
Franklin Trust Company may provide the plan documents and trustee or custodian
services. A plan document must be adopted in order for a plan to be in
existence.
Franklin Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. The brochures for each of the
plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and Internal Revenue Service ("IRS")
requirements.
The Franklin IRA is an individual retirement account in which the
contributions, which are for the most part still deductible for the majority of
wage earners, accumulate on a tax-deferred basis until withdrawn. Pursuant to
the Code, individu-
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als who are not active participants (and who do not have a spouse who is an
active participant) in an employer or joint employer/union-maintained
retirement plan may deduct their full amount of IRA contribution, the lesser of
$2,000 or 100% of compensation. For taxpayers who are active participants (or
whose spouse is an active participant) in such a retirement plan, the IRA
deduction is gradually phased out to the extent that their adjusted gross
incomes exceed certain specified limits.
For taxpayers filing a joint return, even if one spouse received less than $250
in compensation for the year, two IRAs, with an aggregate contribution not
exceeding the lesser of 100% of compensation or $2,250, may be established for
both spouses, provided that no more than $2,000 be contributed to either one.
The Franklin IRA Rollover account is designed to maintain the tax-deferred
status of lump-sum or qualifying partial distributions from an
employer-sponsored retirement plan which are eligible for rollover treatment.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small employers
(generally 25 or fewer employees) who want to make deductible retirement
contributions to an employee's IRA in an amount to be determined annually at
the discretion of the employer up to the lesser of $30,000 or 15% of
compensation per employee. The SAR-SEP allows employees to defer a pre-taxed
portion of their salary to an IRA through their employer in an amount
determined by the employee. The maximum annual salary deferral limit for a
SAR-SEP is the lesser of 15% of compensation (adjusted for deferrals) or $9,240
(1994 limit; indexed for inflation).
The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
educational and certain non-profit institutions [ss.501(c)(3) organizations].
The 403(b) Plan allows participants to determine the annual amount of salary
they wish to defer. The maximum annual salary deferral amount is generally the
lesser of 25% or $9,500. Franklin Trust Company may provide billing information
and other support services for the employer.
The Franklin Business Retirement Plans may be used individually, in
combination, or with custom designed features. The Profit Sharing Plan allows
an employer to make contributions, at its discretion, of up to the lesser of
$30,000 or 15% of compensation per employee each year. The Money Purchase
Pension Plan allows the employer to contribute up to the lesser of $30,000 or
25% of compensation per employee; however, a fixed contribution rate must be
elected by the employer at the outset. The Money Purchase Pension Plan may be
used in conjunction with a Profit Sharing Plan to achieve a combined
contribution rate of 25%, up to 15% in the Profit Sharing Plan and a fixed
contribution rate of 10% in the Money Purchase Pension Plan.
Franklin Trust Company can add optional provisions to the Profit Sharing and
Money Purchase Pension Plans described above and can also provide Defined
Benefit, Target Benefit, and 401(k) Plans on a custom designed basis. Business
Retirement Plans, whether standard or custom designed, may require an annual
report to be filed with the IRS.
Liquidations of any Franklin retirement accounts require the completion of
specific distribution forms to comply with IRS regulations. Please see "How to
Sell Shares of the Fund."
For additional information about the Franklin retirement plans, shareholders
may request brochures describing each of the plans from their securities
dealer, investment advisor or Distributors. The
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brochures contain more specific information about the retirement plans
available from Franklin. Individuals and employers should consult with a
competent tax or financial advisor before choosing a retirement plan.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A lost, stolen or destroyed certificate cannot
be replaced without obtaining a sufficient indemnity bond. The cost of such a
bond, which is generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the broker.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including the number of shares
in "plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT
Plan Under the Automatic Investment Plan, a shareholder may be able to arrange
to make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in
mind that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum
amount which the shareholder may withdraw is $50 per withdrawal transaction
although this is merely the minimum amount allowed under the plan and should
not be mistaken for a recommended amount. The plan may be established on a
monthly, quarterly, semiannual or annual basis. If the shareholder establishes
a plan, any capital gain distributions and income dividends paid by the Fund
will be reinvested for the
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shareholder's account in additional shares at net asset value. Payments will
then be made from the liquidation of shares at net asset value on the day of
the transaction (which is generally the first business day of the month in
which the payment is scheduled) with payment generally received by the
shareholder three to five days after the date of liquidation. By completing the
"Special Payment Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may direct the
selected withdrawals to another fund in the Franklin Group of Funds or the
Templeton Group, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days
for initial processing. Withdrawals which may be paid in the interim will be
sent to the address of record. Liquidation of shares may reduce or possibly
exhaust the shares in the shareholder's account, to the extent withdrawals
exceed shares earned through dividends and distributions, particularly in the
event of a market decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining balance will be sent to
the shareholder. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. Because the amount withdrawn
under the Plan may be more than the shareholder's actual yield or income, part
of the payment may be a return of capital.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in effect. A
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and schedule of
withdrawal payments or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
Payments under the Systematic Withdrawal Plan directed to funds which are sold
with a sales charge will be invested at the applicable offering price (which
includes the sales charge). Withdrawals under the plan are not considered
redemptions for purposes of the reinvestment at net asset value privilege.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact Franklin's Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of other mutual
funds in the Franklin Group of Funds or the Templeton
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Group (as defined under "How to Buy Shares of the Fund") which are eligible for
sale in the shareholder's state of residence and in conformity with such fund's
stated eligibility requirements and investment minimums. Exchanges may be made
in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.
EXCHANGES BY TELEPHONE
EFFECTIVE JUNE 1, 1994, SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF
RECORD, IF ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING
INVESTORS SERVICES AT 1-800/632-2301 OR THE AUTOMATED FRANKLIN TELEFACTS(R)
SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF THE SHAREHOLDER DOES NOT WISH THIS
PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES
SHOULD BE NOTIFIED. PRIOR TO JUNE 1, 1994, THIS PRIVILEGE IS ONLY AVAILABLE TO
PERSONS WHO HAVE SIGNED A "TELEPHONE EXCHANGE AUTHORIZATION" INCLUDED WITH THE
FUND'S APPLICATION.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please refer to "Telephone
Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the
other exchange procedures discussed in this section, including the procedures
for processing exchanges through securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Telephone Exchange Privilege" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in the shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a fee for handling an
exchange.
MISCELLANEOUS INFORMATION
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income and
capital gain dividends will be transferred to the fund
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<PAGE>
being exchanged into and will be invested at net asset value. Because the
exchange is considered a redemption and purchase of shares, the shareholder may
realize a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and in the Statement of Additional Information.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money
market instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
RETIREMENT ACCOUNTS
The equivalent of an exchange involving retirement accounts (including IRAs)
between the Franklin Group of Funds and the Templeton Group can be accomplished
through a trustee-to-trustee transfer and requires the completion of additional
documentation before it can be effected. Call 1-800/527-2020 for further
information and forms.
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective Prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
Effective September 1, 1994, the Fund will amend its policy in regard to Timing
Accounts to reflect the following:
The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing Account
or any person whose transactions seem to follow a timing pattern which: (i)
make an exchange request out of the Fund within two weeks of an earlier
exchange request out of the Fund, or (ii) make more than two exchanges out of
the Fund per calendar quarter, or (iii) exchange shares equal in value to at
least $5 million dollars, or more than 1/4 of 1% of the Fund's net assets.
Accounts under common ownership or control, including accounts administered so
as to redeem or purchase shares based upon certain predetermined market
indicators, will be aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment,
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<PAGE>
the Fund would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if
the Fund receives or anticipates simultaneous orders affecting significant
portions of the Fund's assets. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive to the Fund and
therefore may be refused.
The Fund and Distributor may also, as indicated in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at 1:00 p.m. Pacific time) each day that the New York
Stock Exchange (the "Exchange") is open for business will receive the price
calculated on the following business day. Shareholders are requested to provide
a telephone number(s) where they may be reached during business hours, or in
the evening if preferred. Investor Services's ability to contact a shareholder
promptly when necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF
THE REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934.
Generally, eligible guarantor institutions in-
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clude (1) national or state banks, savings associations, savings and loan
associations, trust companies, savings banks, industrial loan companies and
credit unions; (2) national securities exchanges, registered securities
associations and clearing agencies; (3) securities dealers which are members of
a national securities exchange or a clearing agency, or which have minimum net
capital of $100,000; or (4) institutions that participate in the Securities
Transfer Agent Medallion Program ("STAMP") or other recognized signature
guarantee medallion program. A notarized signature will not be sufficient for
the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction, require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the
authorized officer(s) of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s), and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Effective June 1, 1994, shareholders who file a Telephone Transaction
Application (the "Application") may redeem shares of the Fund by telephone,
subject to the Restricted Account exception noted under "Telephone Transactions
- - Restricted Accounts." THE APPLICATION MAY BE OBTAINED BY WRITING TO THE FUND
OR INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING
1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE
PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE.
SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED
UNDER "TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with a completed Application on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time
on any business day will be processed that same day. The redemption check will
be sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days
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<PAGE>
following an address change by telephone. In that case, a shareholder should
follow the other redemption procedures set forth in this Prospectus.
Institutional accounts (certain corporations, bank trust departments,
government entities, and qualified retirement plans which qualify to purchase
shares at net asset value pursuant to the terms of this Prospectus) which wish
to execute redemptions in excess of $50,000 must complete an Institutional
Telephone Privileges Agreement which is available from Franklin's Institutional
Services Department by telephoning 1-800/321-8563.
SELLING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a dealer
or similar agreement with Distributors. This is known as a repurchase. The
only difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the
Fund receives the shareholder's written request in proper form. These
documents, as described in the preceding section, are required even if the
shareholder's securities dealer has placed the repurchase order. After receipt
of a repurchase order from the dealer, the Fund will still require a signed
letter of instruction and all other documents set forth above. A shareholder's
letter should reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name. Details of the
dealer- ordered trade, such as trade date, confirmation number, and the amount
of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's
repurchase order and the date the redemption is processed upon receipt of all
documents necessary to settle the repurchase. Thus, it is in a shareholder's
best interest to have the required documentation completed and forwarded to the
Fund as soon as possible. The shareholder's dealer may charge a fee for
handling the order.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take
up to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available
for immediate redemption. In addition, the right of redemption may be suspended
or the date of payment postponed if the Exchange is closed (other than
customary closing) or upon the determination of the SEC that trading on the
Exchange is restricted or an emergency exists, or if the SEC permits it, by
order, for the protection of shareholders. Of course, the amount received may
be more or less than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement account, a shareholder or broker may call Franklin's Retirement
Plans Department to obtain the necessary forms.
28
<PAGE>
OTHER
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the broker may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
Effective June 1, 1994, shareholders of the Fund and their investment
representative of record, if any, may be able to execute various transactions
by calling Investor Services at 1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares
in one account to another identically registered account in the Fund, (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Application as described under "How to
Sell Shares of the Fund - Redemptions by Telephone" will be able to redeem
shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone, require
that the caller provide certain personal and/or account information requested
by the telephone service agent at the time of the call for the purpose of
establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone
are genuine, the requested transaction will not be executed, and neither the
Fund nor Investor Services will be liable for any losses which may occur
because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Trust Company ("FTC") or Templeton Funds Trust Company ("TFTC")
retirement accounts. To assure compliance with all applicable regulations,
special forms are required for any distribution, redemption, or dividend
payment. Although the telephone exchange privilege is extended to these
retirement accounts, a Franklin/Templeton Transfer Authorization Form must be
on file in order to transfer retirement plan assets between a Franklin fund and
a Templeton fund within the same plan type. Changes to dividend options must
also be made in writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, FTC retirement account shareholders may call
1-800/527-2020 (toll free), and TFTC retirement account shareholders may call
1-800/354-9191 (press "2") (also toll free).
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of
heavy telephone volume. In such situations, shareholders may wish to contact
their registered investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this Prospectus.
29
<PAGE>
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
The Statement of Additional Information contains more information on the
redemption of shares.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry
daily quotations of the prior trading day's closing "bid" (net asset value) and
"ask" (offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including without limitation the
current market value of any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves is deducted from the aggregate
gross value of all assets, and the difference is divided by the number of
shares of the Fund outstanding at the time. 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 for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which 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 the Manager. 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 sales price on the relevant exchange prior to the time when assets are
valued. Lacking any sales that day or if the last sale price is outside the bid
and ask prices, the options are valued within the range of the current closing
bid and ask prices, if such valuation is believed to fairly reflect the
contract's market value. 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 of
Trustees. All money market instruments with a maturity of more than 60 days are
valued at current market, as discussed above. All money market instruments with
a maturity of 60 days or less are valued at their amortized cost, which the
Board of Trustees has determined in good faith constitutes fair value for
purposes of complying with rules under the 1940 Act. This valuation method will
continue to be used until such time as the trustees determine that it does not
constitute fair value for such purposes. With the approval of trustees, the
Fund may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
30
<PAGE>
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price,
yield or performance information specific to a fund in the Franklin Group of
Funds(R) by calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 39 followed by the # sign, when requested to do so by the automated
operator.
To assist shareholders and brokers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
-----------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
PERFORMANCE
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five-
and ten-year periods, or portion thereof, to the extent applicable, through the
end of the most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations for other
periods, or based on investments at various sales charge levels or at net asset
value. For such purposes total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed
as a percentage of the purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield which is calculated according to a formula prescribed by the SEC (see the
Statement of Additional Information) is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate, which may be quoted to
31
<PAGE>
shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. Under certain circumstances, such as when there
has been a change in the amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
during the period such policies were in effect, rather than using the dividends
during the past 12 months. 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 gain, and is calculated over a different
period of time. Historic performance information will be restated to reflect
the Fund's current sales charge and the elimination of the sales charge on
reinvested dividends.
In each case performance figures are based upon past performance, reflect all
recurring charges against Fund income, and will assume the payment of the
maximum sales charge on the purchase of shares. When there has been a change in
the sales charge structure, the historical performance figures will be restated
to reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures
should not be considered to represent what an investment may earn in the future
or what the Fund's yield, distribution rate or total return may be in any
future period. Additional information is contained in the Trust's annual report
to shareholders, which is available without charge upon request.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share, in various series. All shares
have one vote and, when issued, are fully paid, non-assessable, and redeemable.
All shares of each fund have equal voting, dividend and liquidation rights.
Shares of each fund vote separately as to issues affecting that fund, or the
Trust, unless otherwise permitted under the 1940 Act. Shares of the Fund have
noncumulative voting rights, which means that in all elections of trustees, the
holders of more than 50% of the shares voting can elect 100% of the trustees if
they choose to do so and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of
Trustees.
The Trust does not intend to hold annual meetings; it may, however,
hold special shareholder meetings for such purposes as changing fundamental
policies, approving a new management agreement or any other matters which are
required to be acted on by shareholders under the 1940 Act. A meeting may also
be called by a majority of trustees or by shareholders holding at least 10% of
the shares entitled to vote at the meeting. Shareholders may receive assistance
in communicating with other shareholders in connection with the election or
removal of trustees such as that provided in Section 16(c) under the 1940 Act.
The Board of Trustees may from time to time establish other funds of the Trust,
the assets and liabilities of which will be separate and distinct from any
other fund.
The Fund reserves the right to redeem, at net asset value, shares
of any shareholder whose account has a value of less than $50, but only where
the value of such account has been reduced by the shareholder's prior voluntary
redemption of shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months,
32
<PAGE>
provided advance notice is given to the shareholder. More information is
included in the Statement of Additional Information.
Shares have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights; however, holders of shares of any fund may
reinvest all or any portion of the proceeds from the redemption or repurchase
of such shares into shares of any other fund as described in "Exchange
Privilege."
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's broker to a comparably
registered Fund account maintained by another securities dealer. Both the
delivering and receiving brokers must have executed dealer agreements on file
with Distributors. Unless a dealer agreement has been executed and is on file
with Distributors, the Fund will not process the transfer and will so inform
the shareholder's delivering broker. To effect the transfer, a shareholder
should instruct the broker to transfer the account to a receiving securities
dealer and sign any documents required by the broker(s) to evidence consent to
the transfer. Under current procedures the account transfer may be processed by
the delivering broker and the Fund after the Fund receives authorization in
proper form from the shareholder's delivering securities dealer. In the future
it may be possible to effect such transfers electronically through the services
of the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee,
or both. If
33
<PAGE>
a securities dealer or other representative is of record on an investor's
account, the investor will be deemed to have authorized the use of electronic
instructions on the account, including, without limitation, those initiated
through the services of the NSCC, to have adopted as instruction and signature
any such electronic instructions received by the Fund and the Shareholder
Services Agent, and to have authorized them to execute the instructions without
further inquiry. At the present time, such services which are available, or
which are anticipated to be made available in the near future, include the
NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt shareholders who
have not provided a correct taxpayer identification number ("TIN") and made
certain required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a broker
notifies the Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close
an account by redeeming its shares in full at the then-current net asset value
upon receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-to-day management
of the Fund's portfolio; Frank Felicelli and Howard M. McEldowney since its
inception and Doug Barton since July 1991.
Doug Barton
Portfolio Manager
Franklin Advisers, Inc.
Mr. Barton, a Chartered Financial Analyst, has a Master in Business
Administration from California State University in Hayward and a Bachelor of
Science degree from California State University in Chico. Mr. Barton joined
Franklin in July 1988.
Frank Felicelli
Executive Vice President
Franklin Management, Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Felicelli, a Chartered Financial Analyst, has a Master in Business
Administration from Golden Gate University and a Bachelor of Arts in economics
from the University of Illinois. Mr. Felicelli has been in the industry since
1980 and with Franklin since 1986. He is a member of several securities
industry-related committees and associations.
34
<PAGE>
Howard M. McEldowney
President
Franklin Management Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. McEldowney has a Master in Business Administration from Columbia
University School of Business and a Bachelor of Arts degree from Harvard
University. Mr. McEldowney has been in the industry since 1964 and with
Franklin since April 1984.
35
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN INVESTORS SECURITIES TRUST
DATED MARCH 1, 1994
AS AMENDED SEPTEMBER 8, 1994
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund, effective February 1, 1995:
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
2. MANAGEMENT OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND
a) The following is added at the end of the first paragraph:
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.
b) Substitute the following for the sales charge table and the ensuing two
paragraphs:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
----------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.................................... 4.50% 4.71% 4.00%
$100,000 but less than $250,000....................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000....................... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000..................... 2.25% 2.30% 2.00%
$1,000,000 or more ................................... none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, from its own
resources, to securities dealers who initiate and are responsible for
purchases of $1 million or more: 1.00% on sales of $1 million but less than
$2 million, plus 0.80% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares of
the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities
Trust (the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or
1
may not be subject to reduction) and (c) the U.S. mutual funds in the
Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). (Franklin
Funds and Templeton Funds are collectively referred to as the "Franklin
Templeton Funds.") Sales charge reductions based upon aggregate holdings of
(a), (b) and (c) above ("Franklin Templeton Investments") may be effective
only after notification to Distributors that the investment qualifies for a
discount. References throughout the Prospectus, for purposes of aggregating
assets or describing the exchange privilege, refer to the above descriptions.
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 1% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA rollovers), certain
non-designated plans, certain trust company and trust departments of banks
and certain retirement plans of organizations with collective retirement plan
assets of $10 million or more. See definitions under "Description of Special
Net Asset Value Purchases" and as set forth in the SAI.
c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officers, directors, trustees, and full-time employees of the
Trust, any of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2) companies exchanging
shares with or selling assets pursuant to a merger, acquisition or exchange
offer; (3) insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers
and their affiliates, for their investment account only; and (8) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who
have redeemed, within the previous 120 days, their shares of the Fund or
another of the Franklin Templeton Funds which were purchased with a front-end
sales charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the
shares redeemed, a new contingency period will begin. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however, do not begin to
run on redemption proceeds placed immediately after redemption in a Franklin
Bank Certificate of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled by a securities
dealer or other financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund is
made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such distribution. To
exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Addi-
2
tional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution. In
order to exercise this privilege a written order for the purchase of shares
of the Fund must be received by Franklin Templeton Trust Company (the "Trust
Company"), the Fund or Investor Services, within 120 days after the plan
distribution. A prospectus outlining the investment objectives and policies
of a fund in which the shareholder wishes to invest may be obtained by
calling toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any,
of various payments made by the Fund or its investment manager on arbitrage
rebate calculations. If an investment by an eligible governmental authority
at net asset value is made through a securities dealer who has executed a
dealer agreement with Distributors, Distributors or one of its affiliates may
make a payment, out of their own resources, to such securities dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES.
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the
employer establishing the plan have 200 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund
or in any of the Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under Section 401 of
the Code ("non-designated plans") may be afforded the same privilege if they
meet the above requirements as well as the uniform criteria for qualified
groups previously described under "Group Purchases" which enable Distributors
to realize economies of scale in its sales efforts and sales related
expenses.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of
3
purchase, which may be established by Distributors. Currently, those criteria
require that the amount invested or to be invested during the subsequent
13-month period in this Fund or any of the Franklin Templeton Investments
must total at least $1,000,000. Orders for such accounts will be accepted 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
such order.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested.
Refer to the SAI for further information.
4. EXCHANGE PRIVILEGE
(a) The following option is added to "Exchanges by Telephone":
The automatic TeleFACTS(R) system at 1-800/247-1753 is available for
processing exchanges (day or night). During periods of drastic economic or
market changes, however, this option may not be available, in which event the
shareholder should follow other exchange procedures discussed in this
Prospectus.
(b) Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or Templeton money
market fund. See also "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
5. HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period of
12 months of the calendar month following their purchase. The charge is 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) shares representing amounts attributable
to capital appreciation of those shares held less than 12 months; (ii) shares
purchased with reinvested dividends and capital gain distributions; and (iii)
other shares held longer than 12 months; and followed by any shares held less
than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; distributions
to participants in Trust Company retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and,
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.
Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares
will result in the applicable contingent deferred sales charge being deducted
from the total dollar amount redeemed.
4
FRANKLIN
CONVERTIBLE
SECURITIES FUND
Franklin Investors Securities Trust
PROSPECTUS MARCH 1, 1994
AS AMENDED SEPTEMBER 8, 1994
(LOGO)
FRANKLIN
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of both diversified and non-diversified separate
series. Each series of the Trust in effect represents a separate fund with its
own investment objectives and policies with varying possibilities for income or
capital appreciation, and subject to varying market risks. Through the
different series, the Trust attempts to satisfy different investment
objectives.
This Prospectus pertains only to the Franklin Convertible Securities Fund (the
"Fund"), a diversified series whose investment objective is to maximize total
return, consistent with reasonable risk, by seeking to optimize capital
appreciation and high current income under varying market conditions. The Fund
seeks to achieve this objective primarily through investing in convertible
securities as described in detail in this Prospectus. There can, of course, be
no assurance that the Fund's objectives will be achieved.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
THE FUND MAY INVEST UP TO 100% OF ITS ASSETS IN BONDS ISSUED BY BOTH U.S. AND
FOREIGN ISSUERS, RATED BELOW INVESTMENT GRADE, COMMONLY KNOWN AS "JUNK BONDS"
BY STANDARD & POOR'S CORPORATION ("S&P") OR MOODY'S INVESTOR SERVICE
("MOODY'S"), TWO NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS
("NRSROS") OR IN BONDS WHICH HAVE NOT BEEN RATED BY ANY NRSRO. BONDS RATED
BELOW INVESTMENT GRADE ENTAIL GREATER RISK, INCLUDING PRICE VOLATILITY AND RISK
OF DEFAULT, THAN INVESTMENTS IN HIGHER RATED SECURITIES. SEE "RISK
CONSIDERATIONS." INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH
AN INVESTMENT IN THE FUND IN LIGHT OF THE SECURITIES IN WHICH THE FUND INVESTS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
A Statement of Additional Information concerning the Fund and other series of
the Trust, dated March 1, 1994, as may be amended from time to time, provides a
further discussion of certain areas in this Prospectus and other matters which
may be of interest to some investors. It has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number listed above.
This Prospectus is not an offering of the securities herein described in any
state 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 the underwriter.
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table.................................... 2
Financial Highlights............................. 4
About the Trust.................................. 5
Investment Objective and
Policies of the Fund............................ 5
Risk Considerations.............................. 10
Management of the Fund........................... 13
Distributions to Shareholders.................... 14
Taxation of the Fund
and Its Shareholders............................ 16
How to Buy Shares of the Fund.................... 17
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments.............. 23
Other Programs and Privileges
Available to Fund Shareholders.................. 24
Exchange Privilege............................... 26
How to Sell Shares of the Fund................... 28
Telephone Transactions........................... 31
Valuation of Fund Shares......................... 32
How to Get Information
Regarding an Investment in the Fund............. 33
Performance...................................... 33
General Information.............................. 34
Account Registrations............................ 35
Important Notice Regarding
Taxpayer IRS Certifications..................... 36
Portfolio Operations............................. 37
Appendix ........................................ 37
</TABLE>
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder will bear directly or indirectly
in connection with an investment in the Fund. These figures are based on
restated operating expenses of the Fund for the fiscal year ended October 31,
1993.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ............................... 4.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ............... NONE*
Deferred Sales Charge .............................................. NONE
Redemption Fees .................................................... NONE
Exchange Fee (per transaction) ...................................... $ 5.00**
</TABLE>
2
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<TABLE>
<S> <C> <C>
Management Fees ................................................. 0.63%***
+12b-1 Fees ..................................................... 0.25%+
Other Expenses:
Reports to Shareholders..................... 0.09%
Shareholder Servicing Costs................. 0.05%
Other....................................... 0.09%
-----
Total Other Expenses ............................................ 0.23%
----------
Total Fund Operating Expenses.................................... 1.11%***,+
==========
</TABLE>
*The maximum sales charge imposed on purchases was increased from 4.00% to
4.50% and was eliminated for reinvestment of dividends.
**$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
***Represents the amount that would have been payable to the investment
manager, absent a fee reduction by the investment manager. The investment
manager limited its management fees and assumed responsibility for making
payments to offset certain operating expenses otherwise payable by the Fund.
With this reduction, management fees and total operating expenses paid by the
Fund represented 0.02% and 0.25%, respectively, of the average net assets of
the Fund. This arrangement may be terminated by the investment manager at any
time.
+A plan of distribution (the "12b-1 Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 became effective May 1, 1994 (the "Effective
Date"). Total operating expenses for the fiscal year ended October 31, 1993,
have been restated to reflect the maximum reimbursement allowed pursuant to the
12b-1 Plan, as though the 12b-1 Plan had been in effect for the entire fiscal
year. Consistent with National Association of Securities Dealers, Inc.'s rules,
it is possible that 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 those same
rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted in the table above,
the Fund charges no redemption fees:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$56 $79 $103 $174
THIS EXAMPLE IS BASED ON THE RESTATED ANNUAL OPERATING EXPENSES, INCLUDING FEES
SET BY CONTRACT, SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The
operating expenses are borne by the Fund, and only indirectly by shareholders
as a result of their investment in the Fund. In addition, federal regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%.
3
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund from the effective date of the registration statement through each of
the fiscal years ended January 31, 1993 and the nine months ended October 31,
1993. The information has been audited by Coopers & Lybrand, independent
auditors, whose audit report appears in the financial statements in the Trust's
Statement of Additional Information, a copy of which may be obtained as noted
on the front cover of this Prospectus. The remaining figures, which are also
audited, are not covered by the auditors' current report.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
- -------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END TOTAL
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR RETURN++
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $.58 $(1.168) $(.588) $(.312) $ -- $(.312) $9.10 (4.80)%
1989 9.10 .78 .404 1.184 (.684) -- (.684) 9.60 13.08
1990 9.60 .80 (.395) .405 (.695) -- (.695) 9.31 3.85
1991 9.31 .78 (.729) .051 (.831) -- (.831) 8.53 .37
1992 8.53 .44 2.194 2.634 (.684) -- (.684) 10.48 31.50
1993 10.48 .61 1.034 1.644 (.684) -- (.684) 11.44 16.12
1993(2) 11.44 .45 1.413 1.863 (.513) -- (.513) 12.79 16.50
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
AT END EXPENSES INCOME PORTFOLIO
PERIOD OF YEAR TO AVERAGE TO AVERAGE TURNOVER
ENDED (IN 000'S) NET ASSETS NET ASSETS RATE
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1988(1) $14,734 .15%* 6.82%* 148.67%
1989 17,290 .25 8.27 70.75
1990 14,774 .24 8.25 30.87
1991 15,843 .25 8.90 45.42
1992 20,282 .26 6.84 64.90
1993 28,307 .25 6.01 60.00
1993(2) 47,440 .25* 5.25* 31.05
</TABLE>
(1) For the period April 15, 1987 (effective date of registration) to January
31, 1988.
(2) For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value.
During the periods indicated, Franklin Advisers, Inc., the investment manager,
reduced its management fees and reimbursed other expenses incurred by the Funds
in the Trust. Had such action not been taken, the ratios of operating expenses
to average net assets would have been as follows:
<TABLE>
<S> <C>
1988(1)....................94%*
1989.......................90
1990.......................89
1991.......................84
1992.......................94
1993.......................81
1993(2)....................86*
</TABLE>
4
ABOUT THE TRUST
The Trust, which was organized as a Massachusetts business trust on December
16, 1986, is an open-end management investment company, or mutual fund, and is
registered with the SEC under the 1940 Act. The Fund and the additional
diversified and non-diversified series of the Trust each issue separate series
of shares of beneficial interest.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.5% to less than 1.0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")
INVESTMENT OBJECTIVE
AND POLICIES OF THE FUND
The Fund seeks to maximize total return, consistent with reasonable risk, by
seeking to optimize capital appreciation and high current income under varying
market conditions. The Fund pursues this investment objective by investing at
least 65% of its net assets (except when maintaining a temporary defensive
position) in convertible securities as described below, and common stock
received upon conversion or exchange of such securities and retained in the
Fund's portfolio to permit their orderly disposition. This investment objective
has been adopted as a fundamental policy of the Fund and may not be changed
without shareholder approval.
The balance of the Fund's net assets may be invested in other securities
(nonconvertible equity securities and corporate bonds, covered call options and
put options, securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, repurchase agreements [collateralized by U.S.
government securities], money market securities and securities of foreign
issuers), which, in the aggregate, are considered to be consistent with the
Fund's investment objective. In addition, the Fund may invest up to 10% of its
total assets in illiquid securities. As the value of the Fund's portfolio
securities fluctuates, its net asset value per share will also fluctuate. When
investing in convertible securities and in nonconvertible fixed-income debt
securities, the Fund may purchase both rated and unrated securities depending
upon prevailing market and economic conditions. (See the Appendix for a
description of these ratings.) These ratings, which represent the opinions of
the rating services with respect to the securities and are not absolute
standards of quality, will be considered in connection with the investments of
the Fund's assets but will not be a determining or limiting factor. Rather than
relying principally on the ratings assigned by rating services, the investment
analysis of securities being considered for the Fund's portfolio may also
include, among other things, consideration of relative values, based on such
factors as anticipated cash flow, interest or dividend coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements and the issuer's changing
financial condition and public recognition thereof. Higher yields are
ordinarily available from securities in the lower-rated categories or from
unrated securities of comparable quality. Convertible securities generally fall
within the lower-rated categories of the NRSROs (that is, securities rated Baa
or lower by Moody's or BBB or lower by S&P). The Fund may invest in convertible
and nonconvertible securities rated at least B or above by an NRSRO or in
securities which are not rated by any NRSRO but are deemed by the investment
manager to be of comparable quality. To the
5
extent the Fund acquires securities rated B or unrated securities of
comparable quality, such securities are regarded as speculative in nature and
there may be a greater risk, including the risk of bankruptcy or default by the
issuer, as to the timely repayment of the principal, and timely payment of
interest or dividends on such securities. The Fund will not invest in
securities which are felt by the investment manager to involve excessive risk.
In the event the rating on an issue held in the Fund's portfolio is changed by
the ratings service or the security goes into default, such event will be
considered by the Fund in its evaluation of the overall investment merits of
that security but will not generally result in an automatic sale of the
security. The Fund will not invest more than 25% of its net assets in any
particular industry. This limitation does not apply to U.S. government
securities and repurchase agreements secured by such government securities or
obligations.
When maintaining a temporary defensive position, the Fund may invest its assets
without limit in U.S. government securities and, subject to certain tax
diversification requirements, commercial paper (short-term debt securities of
large corporations), certificates of deposit and bankers' acceptances of banks
having total assets in excess of $5 billion, repurchase agreements and other
money market securities.
Convertible Securities. Convertible securities include preferred stock, bonds
or debentures, stock purchase warrants and other fixed-income securities which
may be exchanged or converted into a prescribed number of shares of the
issuer's underlying common stock at a specific price during a specified time
period.
Until they mature or are converted or exchanged, convertible securities retain
investment characteristics similar to those of nonconvertible fixed income
securities. Thus, the interest income and dividends from convertible bonds and
preferred stocks will generally provide a fixed stream of income with generally
higher yields than common stocks, but lower than nonconvertible securities of
similar quality. Such convertible bonds and preferred stocks are generally
senior securities and, therefore, have a claim to assets of the corporation
prior to the holders of common stock in the case of liquidation. However,
convertible securities are generally subordinate in their claim on assets to
similar nonconvertible securities of the same company.
Since a substantial portion of the Fund's portfolio at any particular time may
consist of convertible and other fixed-income securities, changes in the level
of interest rates, among other things, will likely affect the market value of
the Fund's holdings and thus the value of a shareholder's investment. As the
level of interest rates increases, the market value of convertible securities
may decline and, conversely, as interest rates decline, the market value of
convertible securities may increase. The unique investment characteristic of
convertible securities, i.e., the right to be exchanged for the issuer's common
stock, generally causes the market value of convertible securities to increase
when the market value of the underlying common stock increases. However, since
securities prices fluctuate, there can be no assurance of capital appreciation
and most convertible securities will not reflect the same level of capital
appreciation as their underlying common stocks. When the underlying common
stock is experiencing a decline, the value of the convertible security tends to
decline to a level approximating the yield-to-maturity basis of straight
nonconvertible debt of similar quality, often called "investment value," and
may not experience the same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares
6
of common stock to be received upon conversion multiplied by the current
market price of the stock). This premium represents the price investors are
willing to pay for the privilege of purchasing a fixed-income security with a
possibility of capital appreciation due to the conversion privilege. If this
appreciation potential is not realized, the premium may not be recovered. Such
securities tend to have a lesser income element than other convertibles which
trade closer to their investment value.
Warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's
capital stock at a set price for a specified period of time.
The Fund limits its investments in warrants, valued at the lower of cost or
market, to 5% of the Fund's net assets or to warrants attached to securities.
Options on Equity Securities. In seeking to achieve its investment objective of
maximizing total return, the Fund may write covered call options on securities
it actually owns which are listed for trading on a national securities exchange
and it may also purchase listed call options provided that the value of call
options purchased will not exceed 5% of the Fund's net assets.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the purchaser of the option the right to buy and
obligates the writer to sell the underlying security at the exercise price at
any time during the option period, regardless of the market price of the
underlying security. The purchaser of an option pays a cash premium, which
typically reflects, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the
remaining term of the option, supply and demand factors and interest rates.
Call options written by the Fund give the holder the right to buy the
underlying security from the Fund at a stated exercise price upon exercising
the option at any time prior to its expiration. A call option written by the
Fund is "covered" if the Fund owns or has an absolute right (such as by
conversion) to the underlying security covered by the call. 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 and 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, government securities or other high grade debt
obligations in a segregated account with its custodian.
When the Fund sells covered call options, it will receive the cash premium
which can be used in whatever way is felt to be most beneficial to the Fund.
The risks associated with covered option writing are that in the event of a
price rise on the underlying security which would likely trigger the exercise
of the call option, the Fund will not participate in the increase in price
beyond the exercise price. It will generally be the Fund's policy, in order to
avoid the exercise of a call option written by it, to cancel its obligation
under the call option by entering into a "closing purchase transaction," if
available, unless it is determined to be in the Fund's interest to deliver the
underlying securities from its portfolio. A closing purchase transaction
consists of the Fund purchasing an option having the same terms as the option
written by the Fund, and has the effect of cancelling the Fund's position as a
writer. The premium which the Fund will pay in executing a closing purchase
transaction may be higher or lower than the premium it received when writing
the option, depending in large part upon the relative price of the underlying
security at the time of each transac-
7
tion. However, the aggregate premiums paid on all such options which are held
at any time will not exceed 20% of the Fund's total net assets. At the date of
this Prospectus, certain state regulations limit the aggregate value of
securities underlying outstanding options.
The Fund may also purchase put options on common stock that it owns or may
acquire through the conversion or exchange of other securities to protect
against a decline in the market value of the underlying security or to protect
the unrealized gain in an appreciated security in its portfolio without
actually selling the security. A put option gives the holder the right to sell
the underlying security at the option exercise price at any time during the
option period. The Fund may pay for a put either separately or by paying a
higher price for securities which are purchased subject to a put, thus
increasing the cost of the securities and reducing the yield otherwise
available from the same securities.
To the extent that the Fund does invest in options, it may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company. Such investments may also be
subject to special tax rules that may affect the amount, character and timing
of income earned by the Fund and distributed to shareholders. For more
information, see the tax section of the Statement of Additional Information.
OTHER INVESTMENT POLICIES OF THE FUND
The Fund's policies permit investment in convertible and fixed-income
securities without restrictions as to a specified range of maturities. The Fund
may also invest in securities which are obligations of the U.S. government or
its agencies or instrumentalities. Such U.S. government securities include, but
are not limited to, U.S. Treasury bonds, notes and bills, Treasury Certificates
of Indebtedness and securities issued by instrumentalities of the U.S.
government. Although participation certificates of the Government National
Mortgage Association ("GNMAs") are guaranteed as to principal and interest by
the U.S. government, the market value of these securities may fluctuate based
upon such factors as changing interest rates. In addition, mortgages underlying
GNMA obligations are subject to repayment prior to maturity, and in times of
falling mortgage interest rates such premature repayments may be more likely.
To the extent GNMA obligations held by the Fund are prepaid, the returned
principal will be reinvested in new obligations at then-prevailing interest
rates which may be lower than those of previously held obligations.
Repurchase Agreements. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or
delay in the liquidation of the collateral securing the repurchase agreement.
The Fund might also incur disposition costs in liquidating the collateral.
However, the Fund intends to enter into repurchase agreements only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Fund to the seller,
collateralized by the underlying security. The U.S. government se-
8
curity subject to resale (the collateral) will be held pursuant to a written
agreement and the Fund's custodian will take title to, or actual delivery of,
the security.
Short Sales Against the Box. The Fund may make short sales of common stocks,
provided the Fund owns an equal amount of such securities or owns securities
that are convertible or exchangeable, without payment of further consideration,
into an equal amount of such common stock. In a short sale the Fund does not
immediately deliver the securities sold and does not receive the proceeds from
the sale. The Fund is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds
of the sale. To secure its obligation to deliver the securities sold short, the
Fund will deposit collateral with its custodian bank which collateral will
generally consist of an equal amount of such securities or securities
convertible into or exchangeable for at least an equal amount of such
securities. The Fund may make a short sale when the investment manager believes
the price of the stock may decline and when, for tax or other reasons, the
investment manager does not want to currently sell the stock or convertible
security it owns. In such case, any decline in the value of the Funds'
portfolio securities would be reduced by a gain in the short sale transaction.
Conversely, any increase in the value of the Funds' portfolio securities would
be reduced by a loss in the short sale transaction. The Fund may not make short
sales or maintain a short position unless, at all times when a short position
is open, not more than 20% of its total assets (taken at current value) is held
as collateral for such sales.
Borrowing. The Fund does not borrow money or mortgage or pledge any of the
assets of the Fund except that it may borrow from banks for temporary or
emergency purposes up to 5% of its total assets and pledge up to 5% of its
total assets in connection therewith.
Loans of Portfolio Securities. As approved by the Board of Trustees and subject
to the following conditions, the Fund may lend its portfolio securities to
qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of the Fund's total assets at the
time of the most recent loan, and further provided that the borrower deposits
and maintains 102% cash collateral for the benefit of the Fund. The lending of
securities is a common practice in the securities industry. The Fund will
engage in security loan arrangements with the primary objective of increasing
the Fund's income either through investing the cash collateral in short-term,
interest bearing obligations or by receiving loan premiums from the borrower.
The Fund will continue to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially.
Foreign Securities. The Fund will ordinarily purchase foreign securities which
are traded in the United States or purchase American Depository Receipts
("ADRs") which are certificates issued by U.S. banks representing the right to
receive securities of a foreign issuer deposited with that bank or a
correspondent bank. However, the Fund may purchase the securities of foreign
issuers directly in foreign markets.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by the Fund outside the United States and
9
which are publicly traded in the United States or on a foreign securities
exchange or in a foreign securities market are not considered by the Fund to be
an illiquid asset so long as the Fund acquires and holds the security with the
intention of re-selling the security in the foreign trading market, the Fund
reasonably believes it can readily dispose of the security for cash in the U.S.
or foreign market and current market quotations are readily available. The Fund
presently has no intention of investing more than 30% of its net assets in
foreign securities not publicly traded in the United States.
Other Policies. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase or at any time, more
than 10% of the value of the total net assets of the Fund.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more
information concerning the policies discussed herein, please see the Statement
of Additional Information.
The holding of foreign securities, however, may be limited by the Fund to avoid
investment in certain Passive Foreign Investment Companies ("PFIC") and the
imposition of a PFIC tax on the Fund resulting from such investments.
RISK CONSIDERATIONS
High Yield Securities. The Fund may invest a substantial portion of its assets
in lower rated, fixed-income securities and unrated securities of comparable
quality. The market values of such securities tend to reflect individual
corporate developments to a greater extent than do higher rated securities,
which react primarily to fluctuations in the general level of interest rates.
Such lower rated securities also tend to be more sensitive to economic
conditions than higher rated securities. These lower rated fixed-income
securities are considered by S&P and Moody's, on balance, to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher rating categories. Even
securities rated BBB or Baa by S&P and Moody's, ratings which are considered
investment grade, possess some speculative characteristics.
Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers is generally greater than is the case with higher-rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, such issuers may not have sufficient
cash flow to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities, because such securities are generally unsecured
and are often subordinated to other creditors of the issuer. The default by an
issuer of securities held by the Fund will adversely affect the Fund by
lowering its net asset value (as the fair value of a security generally
declines prior to and at default) and by decreasing the amount of income
available to the Fund from which dividends may be paid. In addition, if an
issuer defaults after the Fund has paid out dividends based upon accrued
income, rever-
10
sal of such accrual may result in the Fund having a return of capital to its
shareholders.
On October 31, 1993, no securities in the Fund's portfolio were in default on
their contractual provisions.
The Fund may be required under the Code and Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of 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.
High yielding, fixed-income securities frequently have call or buy-back
features which would permit an issuer to call or repurchase the security from
the Fund. Although such securities are typically not callable for a period from
three to five years after their issuance, if a call were exercised by the
issuer during periods of declining interest rates, the Fund would likely have
to replace such called security with a lower yielding security, thus decreasing
the net investment income to the Fund and dividends to shareholders. The
premature disposition of a high yielding security due to a call or buy-back
feature, the deterioration of the issuer's creditworthiness, or a default may
also make it more difficult for the Fund to manage the timing of its receipt of
income, which may have tax implications. Further information is included under
"Taxation of the Fund and Its Shareholders."
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other
institutional buyers, rather than individuals.
To the extent a secondary trading market for high yielding, fixed-income
securities does exist, it is generally not as liquid as the secondary market
for higher-rated securities. Reduced liquidity in the secondary market may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues, when necessary, to meet the Fund's liquidity needs or in
response to a specific economic event, such as the deterioration in the
creditworthiness of the issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for the Fund to obtain
market quotations based on actual trades for purposes of valuing the Fund's
portfolio. Current values for these high yield issues are obtained from pricing
services and/or a limited number of dealers and may be based upon factors other
than actual sales. (See "Valuation of Fund Shares.")
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many recent high yielding securities have
been sold with registration rights, covenants and penalty provisions for
delayed registration, if the Fund is required to sell such restricted
securities before the securities have been registered, it may be deemed an
underwriter of such securities as defined in the Securities Act of 1933, which
entails special responsibilities and liabilities. The Fund may incur special
costs in disposing of such securities; however, the Fund will generally incur
no costs when the issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. Such se-
11
curities involve special risks because they are new issues. The Fund has no
arrangement with its underwriters or any other person concerning the
acquisition of such securities, and the investment manager will carefully
review the credit and other characteristics pertinent to such new issues.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lower-rated bonds, which appeared during 1989 and 1990, along with
highly publicized defaults of some high yield issuers, and concerns regarding
a sluggish economy which continued in 1993, depressed the market for any such
securities. The Fund may also incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or
interest on its portfolio holdings. The Fund will rely on the investment
manager's judgment, analysis and experience in evaluating the creditworthiness
of an issuer. In this evaluation, the investment manager will take 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.
For fiscal year ended October 31, 1993, the Fund's portfolio contained 55.92%
in convertible bonds and convertible preferred stocks which had been rated
below investment grade (Ba or BB or lower) by Moody's and/or S&P and in bonds
which had not been rated by any NRSRO but which were considered by the
investment manager to have comparable credit characteristics. A credit rating
by an NRSRO evaluates only the safety of principal and interest of the
security, and does not consider the market value risk associated with an
investment in such a bond. It should be noted that current ratings are not
necessarily indicative of the ratings of bonds at the time of purchase. The
table below shows the percentage invested in each of the specific rating
categories by the NRSROs and those that are not rated by any NRSRO. The
information was prepared based on a dollar weighted average of the Fund's
portfolio composition based on month-end assets for each of the 12 months in
the fiscal year ended October 31, 1993. The appendix includes a description of
each rating category.
<TABLE>
<CAPTION>
Ratings by Moody's Percentage of Bonds Percentage of Stocks
and/or S&P in Portfolio in Portfolio
- ------------------ ------------------- --------------------
<S> <C> <C>
Aaa/AAA .............................. 0.00% 0.00%
Aa/AA ................................ 0.64% 0.00%
A .................................... 4.80% 5.21%
Baa/BBB .............................. 10.35% 7.63%
Ba/BB ................................ 12.41% 5.56%
B .................................... 17.30% 10.72%
Caa/CCC .............................. 1.32% 1.38%
Ca/CC ................................ 0.14% 0.00%
C .................................... 0.01% 0.00%
Not Rated ............................ 3.64% 3.44%
</TABLE>
Foreign Securities. Investments in foreign securities where delivery takes
place outside the U.S. will involve risks that are different from investments
in U.S. securities. These risks may include future unfavorable political and
economic developments, possible withholding taxes, seizure of foreign deposits,
currency controls, higher transactional costs due to a lack of negotiated
commissions, or other governmental restrictions which might affect the amount
and types of foreign investments made or the payment of principal or interest
on securities the Fund holds. In addition, there may be less information
available about these securities and it may be more difficult to obtain or
enforce a court judgment in the event of a lawsuit. Fluctuations in currency
convertibility or exchange rates could result in investment losses for the
Fund. Investment in foreign securities may also subject the Fund to losses due
to nationalization, expropriation or differing accounting practices and
treatments.
12
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Resources"), a publicly-owned holding company, the principal
shareholders of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R.
Martin Wiskemann, who own approximately 20%, 16% and 10%, respectively, of
Resources' outstanding shares. Through its subsidiaries, Resources is engaged
in various aspects of the financial services industry. Advisers acts as
investment manager to 34 U.S. registered investment companies (112 separate
series) with aggregate assets of over $74 billion. Pursuant to the management
agreement, the Manager supervises and implements the Fund's investment
activities and provides certain administrative services and facilities which
are necessary to conduct the Fund's business.
During the period ended October 31, 1993, fees totalling 0.63% (annualized as a
result of a change in fiscal year end from January to October) of the average
daily net assets of the Fund would have accrued to Advisers. Total operating
expenses, including management fees, would have represented 0.86% (annualized)
of the average net assets of the Fund. Pursuant to an agreement by advisers to
limit its fees, the Fund paid management fees totaling 0.02% (annualized) of
the average net assets of the Fund and operating expenses totaling 0.25%
(annualized). This arrangement may be terminated by Advisers at any time.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Fund's Policies Regarding Brokers Used on Portfolio Transactions" in the
Statement of Additional Information.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
PLAN OF DISTRIBUTION
Shareholders of the Fund approved the adoption of a plan of distribution (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan provides for the
reimbursement by the Fund to Distributors or others for all expenses incurred
by Distributors or others in the promotion and distribution of the Fund's
shares, including, but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares, as well as any distribution or
service fees paid to securities dealers or their firms or others who have
executed a servicing agreement with the Fund, Distributors or its affiliates.
The maximum amount which the Fund may pay to Distributors or others for such
distribution expenses is 0.25% per annum of the average daily net assets of the
Fund, payable on a quarterly basis. All expenses of distribution
13
and marketing in excess of 0.25% per annum will be borne by Distributors
without reimbursement from the Fund. The Plan also covers any payments to or by
the Fund, Distributors, or other parties on behalf of the Fund or Distributors,
to the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within
the context of Rule 12b-1. The payments under the Plan are included in the
maximum operating expenses which may be borne by the Fund.
In implementing the 12b-1 Plan, the Board has determined that initially, the
annual fees payable thereunder will be equal to the sum of: (i) the amount
obtained by multiplying 0.25% by the average daily net assets represented by
shares of the Fund that were acquired by investors on or after the Effective
Date of the 12b-1 Plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.15% by the average daily net assets represented by shares of the
Fund that were acquired before the Effective Date of the 12b-1 Plan ("Old
Assets"). In addition, until such time as the maximum payment of 0.25% is
reached on a yearly basis, up to an additional 0.05% will be paid to
Distributors under the 12b-1 Plan. The payments to be made to Distributors will
be used by Distributors to defray other marketing expenses that have been
incurred in accordance with the 12b-1 Plan, such as advertising.
While this is the currently anticipated method for calculating the 12b-1 fees
to be paid by the Fund, the fee is a Fund expense so that all shareholders
regardless of when they purchased their shares will bear 12b-1 expenses at the
same rate. That rate initially will be at least 0.20% (0.15% plus 0.05%) of
such average daily net assets and, as Fund shares are sold on or after the
Effective Date, will increase over time. Thus, as the proportion of Fund shares
purchased on or after the Effective Date to outstanding Fund shares increases,
the expenses attributable to payments under the 12b-1 Plan will also increase
(but will not exceed 0.25% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the 12b-1 Plan, the
12b-1 Plan permits the Fund's Trustees to allow the Fund to pay a full 0.25% on
all assets both Old and New at any time.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends,
interest and other income derived from its investments. This income, less the
expenses incurred in the Fund's operations, is its net investment income from
which income dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) will
generally be made once a year in December and will reflect the net short-term
and net long-term capital gains realized by the Fund as of October 31, its
fiscal year-end. The Fund reserves the right to make more than one distribution
derived from net short-term and net long-term capital gains in any year or to
adjust the timing of these distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Fund's Board of Trustees, without prior
notice to or approval by shareholders, the Fund's current policy is to declare
income dividends monthly for shareholders of record generally on the first
business day pre-
14
ceding the 15th day of the month, payable on or about the last business day of
the month. The amount of income dividend payments by the Fund is dependent upon
the amount of net income received by the Fund from its portfolio holdings, is
not guaranteed and is subject to the discretion of the Fund's Board of
Trustees. Fund shares are quoted ex-dividend on the first business day
following the record date. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the Statement
of Additional Information for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
HOW SHAREHOLDERS PARTICIPATE IN
THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund
decrease in value, the value of the shareholder's shares will also decline. In
this way, shareholders participate in any change in the value of the securities
owned by the Fund.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Investors may change their dividend options by telephone as
discussed under "Telephone Transactions." Dividends which may be paid in the
interim will be sent to the address of record. Additional information regarding
automated fund transfers may be obtained from Franklin's Shareholder Services
Department. Income dividend distributions directed to another fund in the
Franklin Group of Funds or the Templeton Group
15
are invested at the offering price which includes the sales charge, while
capital gain distributions are eligible for investment at net asset value.
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations which affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the Statement of Additional
Information.
Each Fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and qualified to be treated as a regulated
investment company under Subchapter M of the Code. By distributing all of its
net investment income and net realized short-term and long-term capital gain
for a fiscal year in accordance with the timing requirements imposed by the
Code and by meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will not be liable for
federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares. Distributions derived from the excess of net long-term
capital gain over net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has owned Fund shares and
regardless of whether such distributions are received in cash or in additional
shares.
For corporate investors, dividends from net investment income will generally
qualify in part for the corporate dividends received deduction. However, the
portion of the dividends so qualified depends on the aggregate qualifying
dividend income received by the Fund from domestic (U.S.) sources. For the
period ended October 31, 1993, 34.14% of the income dividends paid by the Fund
qualified for the corporate dividends-received deduction, subject to certain
holding period and debt financing restrictions imposed under the Code on the
corporation claiming the deduction.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated as if received by the
shareholder on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange
of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are reinvested in the Fund or in another fund in the Franklin Group of
Funds(R) and a sales charge which would otherwise apply to the reinvestment is
reduced or eliminated. Any portion of such sales charge excluded from the tax
basis of the shares sold will be added to the tax basis of the shares acquired
in the reinvestment. Shareholders should consult with their tax advisors
concerning the tax rules applicable to the redemption or exchange of Fund
shares.
16
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons, for purposes of federal income taxation,
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin providing for regular
periodic investments. The Fund and Distributors reserve the right to refuse any
order for the purchase of shares.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering price will be
calculated to four decimal places. On orders for less than 100,000 shares, the
offering price will be calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset value per share
is included under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Total Sales Charge
--------------------------------------------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
17
On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. All sales charges on purchases of $1,000,000 or
more are paid to the securities dealer, if any, involved in the trade, who may
therefore be deemed an "underwriter" under the Securities Act of 1933, as
amended.
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of many of the funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group
(except Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments
may not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on
the excess over $2,500,000. Purchases pursuant to the Rights of Accumulation
will be at the applicable sales charge of 1% or more until the additional
purchase, plus the value of the account or the amount previously invested, less
redemptions, exceeds $2,500,000, in which event the sales charge on the excess
will be calculated as stated above. Sales charge reductions based upon
purchases in more than one of the funds in the Franklin Group or Templeton
Group (the "Franklin/Templeton Group") may be effective only after notification
to Distributors that the investment qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and
other funds in the Franklin Group of Funds or the Templeton Group. Compensation
may include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and programs regarding
one or more of the Franklin Group of Funds or the Templeton Group and other
dealer-sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have sold or
are expected to sell significant amounts of such shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the U.S. for meetings or seminars of
a business nature. Dealers may not use sales of the Fund's shares to qualify
for this compensation to the extent such may be prohibited by the laws of any
state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned additional compensation is
paid for by the Fund or its shareholders.
Certain officers and trustees of the Fund are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.
18
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the
Franklin/Templeton Group may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the
Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment of sales
charge. Any redemptions made by the shareholder during the 13-month period will
be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased (less redemptions) during the period.
An investor who executes a Letter of Intent prior to a change in the sales
charge structure for the Fund will be entitled to complete the Letter at the
lower of (i) the new sales charge structure; or (ii) the sales charge structure
in effect at the time the Letter was filed with the Fund.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income dividends and capital gain distributions on the
reserved shares will be paid as directed by the in-
19
vestor. The reserved shares will not be available for disposal by the investor
until the Letter of Intent has been completed, or the higher sales charge paid.
If the total purchases, less redemptions, equal the amount specified under the
Letter, the reserved shares will be deposited to an account in the name of the
investor or delivered to the investor or the investor's order. If the total
purchases, less redemptions, exceed the amount specified under the Letter and
is an amount which would qualify for a further quantity discount, a retroactive
price adjustment will be made by Distributors and the dealer through whom
purchases were made pursuant to the Letter of Intent (to reflect such further
quantity discount) on purchases made within 90 days before, and on those made
after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable
to a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor 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 which would have applied to the aggregate purchases if the total
of such purchases had been made at a single time. Upon such remittance the
reserved shares held for the investor's account will be deposited to an account
in the name of the investor or delivered to the investor or to the investor's
order. If within 20 days after written request such difference in sales charge
is not paid, the redemption of an appropriate number of reserved shares to
realize such difference will be made. In the event of a total redemption of the
account prior to fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption, and the
balance will be forwarded to the investor. By completing the Letter of Intent
section of the Shareholder Application, an investor grants to Distributors a
security interest in the reserved shares and irrevocably appoints Distributors
as attorney-in-fact with full power of substitution to surrender for redemption
any or all shares for the purpose of paying any additional sales charge due.
Purchases under the Letter of Intent will conform with the requirements of Rule
22d-1 under the 1940 Act. The investor or the investor's securities dealer must
inform Investor Services or Distributors that this Letter is in effect each
time a purchase is made.
Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 3.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other materials related to the Fund in its publications and
mailings to mem-
20
bers at reduced or no cost to Distributors, and must seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both
the check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without sales charge)
by employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, subject to
minimum requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently those criteria require that
the employer establishing the plan have 500 or more employees or that the
amount invested or to be invested during the subsequent 13-month period in the
Fund or another company or companies in the Franklin/Templeton Group totals at
least $1,000,000. Employee benefit plans not qualified under Section 401 of the
Code may be afforded the same privilege if they meet the above requirements as
well as the uniform criteria for qualified groups previously described under
Group Purchases which enable Distributors to realize economies of scale in its
sales efforts and sales related expenses. If investments by employee benefit
plans at net asset value are made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of their own resources, to such dealer in an amount not to exceed
1% of the amount invested.
Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted 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 such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer
who has executed a dealer agreement with Distributors, Distributors or one of
its affiliates may make payment, out of their own resources, to such dealer in
an amount not to exceed 1% of the amount invested.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this
21
privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
the shareholder a fee for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there has been a loss
on the redemption, the loss may be disallowed if a reinvestment in the same
fund is made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the Statement of Additional Information.
Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees, directors and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors
and affiliates of such companies, if they have been such for at least 90 days,
and by their spouses and family members, (2) former participants in the
Franklin/Templeton Profit Sharing/401(k) plan, who elect to make a direct
rollover of all, or a portion of, their eligible distribution account balance
from such plan, (3) registered securities dealers and their affiliates, for
their investment account only, and (4) registered personnel and employees of
securities dealers and by their spouses and family members, in accordance with
the internal policies and procedures of the employing securities dealer. Such
sales are made upon the written assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be transferred or
resold except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from their
employers or from Franklin's Sales Department in order to qualify.
Dealers may place trades to purchase shares of the Fund at net asset value on
behalf of investors who have, within the past 60 days, redeemed an investment
in a registered management investment company which charges a contingent
deferred sales charge, and which has investment objectives similar to those of
the Fund.
Shares of the Fund may also be purchased at net asset value by any state,
county, or city, or any instrumentality, department, authority or agency
thereof which has determined that the Fund is a legally permissible investment
and which is prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of shares of any
registered management investment company ("an eligible governmental
authority"). SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL
INVESTMENTS FOR THEM. Municipal investors considering investment of proceeds of
bond offerings into the Fund should consult with expert counsel to determine
the effect, if any, of various payments made by the Fund or its investment
manager on arbitrage rebate calculations. If an investment by an eligible
governmental authority at net asset value is made through a dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources,
22
to such dealer in an amount not to exceed 0.25% of the amount invested. Contact
Franklin's Institutional Sales Department for additional information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.
PURCHASING SHARES OF THE FUND
IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund may be
used as an investment vehicle for an existing retirement plan, or Franklin
Trust Company may provide the plan documents and trustee or custodian services.
A plan document must be adopted in order for a plan to be in existence.
Franklin Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. Brochures for each of the plans
sponsored by Franklin contain important information regarding eligibility,
contribution limits and Internal Revenue Service ("IRS") requirements.
Please note that separate applications other than the one contained in this
prospectus must be used to establish a Franklin Trust Company retirement
account. To obtain a retirement plan brochure or application, call toll free
1-800/DIAL BEN (1-800/342-5236).
The Franklin IRA is an individual retirement account in which the
contributions, annually limited to the lesser of $2,000 or 100% of an
individual's earned compensation, accumulate on a tax-deferred basis until
withdrawn. Under the current tax law, individuals who (or whose spouses) are
covered by a company retirement plan (termed "active participants") may be
restricted in the amount they may claim as an IRA deduction on their returns.
The IRA deduction is gradually reduced to the extent that a taxpayer's adjusted
gross incomes exceed certain specified limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned compensation, may
be established by a married couple in which only one spouse is a wage earner.
The $2,250 may be split between the two IRAs, so long as no more than $2,000 is
contributed to either one for a given tax year.
A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying distribution from an employer-sponsored retirement plan, such
as a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the
distribution will be exempt from 20% mandatory federal withholding, a new
withholding law enacted in 1993.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small businesses
(generally 25 or fewer employees) to provide a retirement plan for their
employees and, at the same time, provide for a tax-deduction to the employer.
SEP-IRA contributions are made to an employee's IRA, at the discretion of the
employer, up to the lesser of $30,000 or 15% of compensation* per employee. The
SAR-SEP allows employees to contribute a portion of their salary to an IRA on a
pre-tax basis through salary deferrals. The maximum annual salary deferral
limit for a SAR-SEP is the lesser of 15% of compensation (adjusted for
deferrals) or $9,240 (1994 limit; indexed for inflation).
*The limit on compensation for determining SEP and qualified plan contributions
is reduced from $235,840 in 1993 to $150,000 in 1994. The new $150,000 limit
will be adjusted for inflation, but only in $10,000 increments.
23
The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
certain non-profit institutions [Section 501(c)(3) organizations and public
schools]. The 403(b) Plan allows participants to determine the annual amount of
salary they wish to defer. The maximum annual salary deferral amount is
generally the lesser of 25% of compensation (adjusted for deferrals) or $9,500.
The Franklin Business Retirement Plans provide employers with additional
retirement account options and may be used individually, in combination, or
with custom designed features. The Profit Sharing Plan allows an employer to
make contributions, at its discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension Plan allows
the employer to contribute up to the lesser of $30,000 or 25% of compensation*
per employee; however, contributions are required annually at the rate
(percentage) elected by the employer at the outset of the Plan. In order to
achieve a combined contribution rate of 25%, up to 15% in the Profit Sharing
Plan and a fixed contribution rate of 10% in the Money Purchase Pension Plan
may be used.
Franklin Trust Company can add optional provisions to the Profit Sharing and
Money Purchase Pension Plans described above and Defined Benefit, Target
Benefit, and 401(k) Plans on a custom designed basis. Business Retirement
Plans, whether standard or custom designed, may require an annual report (Form
5500) to be filed with the IRS.
Redemptions from any Franklin retirement Plan accounts require the completion
of specific distribution forms to comply with IRS regulations. Please see "How
to Sell Shares of the Fund."
*The limit on compensation for determining SEP and qualified plan contributions
is reduced from $235,840 in 1993 to $150,000 in 1994. The new $150,000 limit
will be adjusted for inflation, but only in $10,000 increments.
Individuals and employers should consult with a competent tax or financial
advisor before choosing a retirement plan.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A lost, stolen or destroyed certificate cannot
be replaced without obtaining a sufficient indemnity bond. The cost of such a
bond, which is generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including the number
24
of shares in "plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in
mind that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum
amount which the shareholder may withdraw is $50 per withdrawal transaction
although this is merely the minimum amount allowed under the plan and should
not be mistaken for a recommended amount. The plan may be established on a
monthly, quarterly, semiannual or annual basis. If the shareholder establishes
a plan, any capital gain distributions and income dividends paid by the Fund
will be reinvested for the shareholder's account in additional shares at net
asset value. Payments will then be made from the liquidation of shares at net
asset value on the day of the transaction (which is generally the first
business day of the month in which the payment is scheduled) with payment
generally received by the shareholder three to five days after the date of
liquidation. By completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this Prospectus, a
shareholder may direct the selected withdrawals to another fund in the Franklin
Group of Funds or the Templeton Group, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Withdrawals which may be
paid in the interim will be sent to the address of record. Liquidation of
shares may reduce or possibly exhaust the shares in the shareholder's account,
to the extent withdrawals exceed shares earned through dividends and
distributions, particularly in the event of a market decline. If the withdrawal
amount exceeds the total plan balance, the account will be closed and the
remaining balance will be sent to the shareholder. As with other redemptions, a
liquidation to make a withdrawal payment is a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than the
shareholder's actual yield or income, part of the payment may be a return of
the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional
25
investments of less than $5,000 or three times the annual withdrawals under
the plan during the time such a plan is in effect. A Systematic Withdrawal Plan
may be terminated on written notice by the shareholder or the Fund, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments or suspend one such
payment by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact Franklin's Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with varying investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of the other
mutual funds in the Franklin Group of Funds or the Templeton Group (as defined
under "How to Buy Shares of the Fund") which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY
EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT
1-800/632-2301. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please refer to "Telephone
Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.
26
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income
dividends and capital gain distributions will be transferred to the fund being
exchanged into and will be invested at net asset value.
Because the exchange is considered a redemption and purchase of shares, the
shareholder may realize a gain or loss for federal income tax purposes. Backup
withholding and information reporting may also apply. Information regarding the
possible tax consequences of such an exchange is included in the tax section in
this Prospectus and in the Statement of Additional Information.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money
market instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
RETIREMENT ACCOUNTS
Franklin/Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators
27
("Timing Accounts") will be charged a $5.00 administrative service fee per
each such exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing Account
or any person whose transactions seem to follow a timing pattern who: (i) make
an exchange request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) make more than two exchanges out of the Fund
per calendar quarter, or (iii) exchange shares equal in value to at least $5
million dollars, or more than 1% of the Fund's net assets. Accounts under
common ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected.
A shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (at 1:00 p.m. Pacific time) each day that the New York
Stock Exchange (the "Exchange") is open for business will receive the price
calculated on the following business day. Shareholders are requested to provide
a telephone number(s) where they may be reached during business hours, or in
the evening if preferred. Investor Services' ability to contact a shareholder
promptly when necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
28
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934.
Generally, eligible guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust companies, savings
banks, industrial loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing agencies; (3)
securities dealers which are members of a national securities exchange or a
clearing agency or which have minimum net capital of $100,000; or (4)
institutions that participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee medallion program. A
notarized signature will not be sufficient for the request to be in proper
form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the
authorized officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
29
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin/Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
INFORMATION ALSO MAY BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT
THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND
INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT
INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE
RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time
on any business day will be processed that same day. The redemption check will
be sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a dealer
or similar agreement with Distributors. This is known as a repurchase. The
only difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a securities dealer, the redemption price
will be the net asset value next calculated after the shareholder's securities
dealer receives the order which is promptly transmitted to the Fund, rather
than on the day the Fund receives the shareholder's written request in proper
form. These documents, as described in the preceding section, are required even
if the shareholder's securities dealer has placed the repurchase order. After
receipt of a repurchase order from the dealer, the Fund will still require a
signed letter of instruction and all other documents set forth above. A
shareholder's letter should reference the Fund, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's
repurchase order and the date the redemption is processed upon receipt of all
documents necessary to settle the repurchase. Thus, it is in a shareholder's
best interest to have the required documentation com-
30
pleted and forwarded to the Fund as soon as possible. The shareholder's dealer
may charge a fee for handling the order. The Statement of Additional
Information contains more information on the redemption of shares.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take
up to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available
for immediate redemption. In addition, the right of redemption may be suspended
or the date of payment postponed if the Exchange is closed (other than
customary closing) or upon the determination of the SEC that trading on the
Exchange is restricted or an emergency exists, or if the SEC permits it, by
order, for the protection of shareholders. Of course, the amount received may
be more or less than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or securities dealer may call Franklin's Retirement
Plans Department to obtain the necessary forms.
OTHER
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares
in one account to another identically registered account in the Fund, (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file as described under "How to Sell Shares of
the Fund - Redemptions by Telephone" will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the
purpose of establishing the caller's identification, and by sending a
confirmation statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the Fund and Investor
Services follow instructions communicated by telephone which were reasonably
believed to be genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges. In any instance where the
Fund or Investor Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction will not be
executed, and
31
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin/Templeton Trust Company or Templeton Funds Trust Company retirement
accounts. To assure compliance with all applicable regulations, special forms
are required for any distribution, redemption, or dividend payment. Currently,
the telephone exchange privilege is available for Franklin/Templeton IRA and
403(b) retirement accounts. Certain restrictions may apply to other types of
retirement plans. Changes to dividend options must also be made in writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, Franklin/Templeton retirement account
shareholders may call to speak to a Retirement Plan Specialist at
1-800/527-2020 for Franklin accounts or 1-800/354-9191 (press "2") for
Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to
the Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the
Fund at any time upon 60 days' written notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry
daily quotations of the prior trading day's closing "bid" (net asset value) and
"ask" (offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including, without limitation, the
current market value of any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves is deducted from the aggregate
gross value of all assets, and the difference is divided by the number of
shares of the Fund outstanding at the time. 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 for which market quotations are
readily available are valued within the range of the most recent bid and ask
prices as obtained from one or more dealers that make markets in the
securities. Portfolio securities which 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 the Manager. 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 sales price on the relevant exchange prior to the
32
time when assets are valued. Lacking any sales that day or if the last sale
price is outside the bid and ask prices, the options are valued at the mean
between the current closing bid and ask prices if such valuation is believed to
fairly reflect the contract's market value. 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 of Trustees. All money market instruments with a maturity
of more than 60 days are valued at current market, as discussed above. All
money market instruments with a maturity of 60 days or less are valued at their
amortized cost, which the Board of Trustees has determined in good faith
constitutes fair value for purposes of complying with the 1940 Act. This
valuation method will continue to be used until such time as the trustees
determine that it does not constitute fair value for such purposes. With the
approval of trustees, the Fund may utilize a pricing service, bank or
securities dealer to perform any of the above described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 37 followed by the # sign, when requested to do so by the automated
operator.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
----------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m.to 5:00 p.m.
</TABLE>
PERFORMANCE
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or risk. Average an-
33
nual total return figures as prescribed by the SEC represent the average
annual percentage change in value of $1,000 invested at the maximum public
offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations for other
periods, or based on investments at various sales charge levels or at net asset
value. For such purposes total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed
as a percentage of the purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield, which is calculated according to a formula prescribed by the SEC (see
the Statement of Additional Information), is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the amount of dividend
pay out, or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid during the period such policies
were in effect, rather than using the dividends during the past 12 months. 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
gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the
maximum sales charge on the purchase of shares. When there has been a change in
the sales charge structure, the historical performance figures will be restated
to reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures
should not be considered to represent what an investment may earn in the future
or what the Fund's yield, distribution rate or total return may be in any
future period.
GENERAL INFORMATION
REPORTS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the Statement of Additional Information.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per
34
share in various series. All shares have one vote and, when issued, are fully
paid, non-assessable, and redeemable.
Shares have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights; however, holders of shares of any fund may
reinvest all or any portion of the proceeds from the redemption or repurchase
of such shares into shares of any other fund as described in "Exchange
Privilege."
VOTING RIGHTS
All shares of each fund have equal voting, dividend and liquidation rights.
Shares of each fund vote separately as to issues affecting that fund, or the
Trust, unless otherwise permitted by the 1940 Act.
Shares of the Fund have noncumulative voting rights which means that in all
elections of trustees, the holders of more than 50% of the shares voting can
elect 100% of the trustees if they choose to do so, and in such event, the
holders of the remaining shares voting will not be able to elect any person or
persons to the Board of Trustees.
The Trust does not intend to hold annual meetings; it may, however, hold
special shareholder meetings for such purposes as changing fundamental
policies, approving a new management agreement or any other matters which are
required to be acted on by shareholders under the 1940 Act. A meeting may also
be called by a majority of the Board of Trustees or by shareholders holding at
least ten percent of the shares entitled to vote at the meeting. Shareholders
may receive assistance in communicating with other shareholders in connection
with the election or removal of trustees such as that provided in Section 16(c)
of the 1940 Act. The Board of Trustees may from time to time establish other
funds of the Trust, the assets and liabilities of which will be separate and
distinct from any other fund.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the
value of such account has been reduced by the shareholder's prior voluntary
redemption of shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided advance notice is
given to the shareholder. More information is included in the Statement of
Additional Information.
MISCELLANEOUS INFORMATION
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the
35
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's broker to a comparably
registered Fund account maintained by another securities dealer. Both the
delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealers. To
effect the transfer, a shareholder should instruct the securities dealers to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealers to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee,
or both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near
future, include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt shareholders who
have not provided a correct taxpayer identification number ("TIN") and made
certain required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a
securities dealer notifies the Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject to backup
withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN
36
along with the required certifications and (2) close an account by redeeming
its shares in full at the then current net asset value upon receipt of notice
from the IRS that the TIN certified as correct by the shareholder is in fact
incorrect or upon the failure of a shareholder who has completed an "awaiting
TIN" certification to provide the Fund with a certified TIN within 60 days
after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-to-day management
of the Fund's portfolio: Edward Jamieson since inception and Mitchell Cone
since January 1994.
Edward Jamieson, Senior Vice President of Advisers, holds a Bachelor of Arts
degree in sociology from Bucknell University and a master's degree in
accounting and finance from the University of Chicago Graduate School of
Business. He has been with Advisers since 1987 and for the two years prior
thereto, he was treasurer of Beatrice Consumer Products, Inc. and an executive
with Pepsico, Inc.'s Corporate Treasury where he served as Director of
International Treasury. He is a member of several securities industry-related
committees and associations.
Mitchell Cone, Portfolio Manager of Advisers, holds a Bachelor of Arts degree
in economics/sociology from the University of California, Berkeley. He has been
with Advisers since 1988. He has been in the securities industry since 1985 and
is a member of several securities industry-related committees and associations.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa - Bonds which are 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 by an 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 which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
37
B - Bonds which are 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 which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
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,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
38
38P SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS FOR
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN INVESTORS SECURITIES TRUST
DATED MARCH 1, 1994, AS AMENDED AUGUST 19, 1994
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund:
INVESTMENT OBJECTIVES AND POLICIES OF THE FUND
The following paragraph is added:
The Fund believes that its investment policies, as stated in its Prospectus and
in the Statement of Additional Information dated March 1, 1994, as may be
amended from time to time, make the Fund a permissible investment for federal
credit unions, based on the Fund's understanding of the laws and regulations
governing credit union regulations as of September 30, 1994. CREDIT UNION
INVESTORS ARE ADVISED TO CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE WHETHER
AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR
THEM. Please see the Statement of Additional Information ("The Fund's
Investment Objectives and Restrictions" -- "Credit Union Investment
Regulations") for details.
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund -- Contingent Deferred
Sales Charge."
2. ADMINISTRATION OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND
a) Add the following language as paragraph two:
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.
b) Substitute the following for the sales charge table and the ensuing three
paragraphs:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
---------------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000......................... 2.25% 2.30% 2.00%
$100,000 but less than $250,000............ 1.75% 1.78% 1.50%
$250,000 but less than $500,000............ 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000.......... 1.00% 1.00% 0.85%
$1,000,000 or more......................... none none (see below)**
</TABLE>
* Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
** The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares of
the Fund
1
<PAGE>
- - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(R) and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the Franklin Group of Funds
except Franklin Valuemark Funds and Franklin Government Securities Trust (the
"Franklin Funds"), (b) other investment products underwritten by Distributors
or its affiliates (although certain investments may not have the same schedule
of sales charges and/or may not be subject to reduction) and (c) the U.S.
mutual funds in the Templeton Group of Funds except Templeton American Trust,
Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund (the "Templeton Funds").
(Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment qualifies
for a discount. References throughout the Prospectus, for purposes of
aggregating assets or describing the exchange privilege, refer to the above
descriptions.
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 0.75% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
non-designated retirement plans, and up to 1% of the amount purchased to
securities dealers who initiate and are responsible for purchases made at net
asset value by certain designated retirement plans (excluding IRA and IRA
rollovers), certain trust company and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of $10
million or more. See definitions under "Descriptions of Special Net Asset Value
Purchases" and as set forth in the SAI.
c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or contingent deferred sales charge)
by (1) officers, directors, trustees and full-time employees of the Fund, any
of the Franklin Templeton Funds, or of the Franklin Templeton Group, and by
their spouses and family members; (2) companies exchanging shares with or
selling assets pursuant to a merger, acquisition or exchange offer; (3)
insurance company separate accounts for pension plan contracts; (4) accounts
managed by the Franklin Templeton Group; (5) Shareholders of Templeton
Institutional Funds, Inc. reinvesting redemption proceeds from that fund under
an employee benefit plan qualified under Section 401 of the Internal Revenue
Code of 1986, as amended, in shares of the Fund; (6) certain unit investment
trusts and unit holders of such trusts reinvesting their distributions from the
trusts in the Fund; (7) registered securities dealers and their affiliates, for
their investment account only, and (8) registered personnel and employees of
securities dealers and by their spouses and family members, in accordance with
the internal policies and procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another of
the Franklin Templeton Funds which were purchased with a front-end sales charge
or assessed a contingent deferred sales charge on redemption. An investor may
reinvest an amount not exceeding the redemption proceeds. While credit will be
given for any contingent deferred sales charge paid on the shares redeemed, a
new contingency period will begin. Shares of the Fund redeemed in connection
with an exchange into another fund (see "Exchange Privilege") are not
considered "redeemed" for this privilege. In order to exercise this privilege,
a written order for the purchase of shares of the Fund must be received by the
Fund or the Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on redemption proceeds
placed immediately after redemption in a Franklin Bank Certificate of Deposit
("CD") until the CD (including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a
2
<PAGE>
reinvestment in the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a reinvestment is included in
the tax section of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton Funds
at net asset value and without the imposition of a contingent deferred sales
charge within 120 days of the payment date of such distribution. To exercise
this privilege, a written request to reinvest the distribution must accompany
the purchase order. Additional information may be obtained from Shareholder
Services at 1-800/632-2301. See "Distributions in Cash" under "Distributions
to Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in an unaffiliated mutual fund which
charged the investor a contingent deferred sales charge upon redemption and
which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the Franklin
Templeton Funds (including former participants of the Franklin Templeton Profit
Sharing 401(k) plan), to the extent of such distribution. In order to exercise
this privilege a written order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust Company"), the Fund or
Investor Services, within 120 days after the plan distribution. A prospectus
outlining the investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll free at 1-800/DIAL
BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of their own resoruces, to such securities dealer in an amount not
to exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including, profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in the Fund or in any of
the Franklin Templeton investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases" which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise ex-
3
<PAGE>
exclusive discretionary investment authority and which are held in a fiduciary,
agency, advisory, custodial or similar capacity. Such purchases are subject to
minimum requirements with respect to amount of purchase, which may be
established by Distributors. Currently, those criteria require that the amount
invested or to be invested during the subsequent 13-month period in this Fund
or any of the Franklin Templeton Investments must total at least $1,000,000.
Orders for such accounts will be accepted 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 such order.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of organizations
with collective retirement plan assets of $10 million or more, without regard
to where such assets are currently invested.
Refer to the SAI for further information.
4. EXCHANGE PRIVILEGE
a) Add the following paragraph to the subsection "Exchanges by Telephone":
The automatic TeleFACTS(R) system at 1-800/247-1753 is available for processing
exchanges (day or night). During periods of drastic economic or market changes,
however, this option may not be available, in which event the shareholder
should follow other exchange procedures discussed in the section.
b) Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton money market
fund. See also "How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
5. HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period of 12
months of the calendar month following their purchase. The charge is 1% of the
lesser of the value of the shares redeemed (exclusive of reinvested dividends
and capital gain distributions) or the total cost of such shares, and is
retained by Distributors. In determining if a charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) Shares representing amounts attributable to capital
appreciation of those shares held less than 12 months; (ii) shares purchased
with reinvested dividends and capital gain distributions; and (iii) other
shares held longer than 12 months; and followed by any shares held less than 12
months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; distributions to
participants in Trust Company retirement plan accounts due to death, disability
or attainment of age 59-1/2; tax-free returns of excess contributions to
employee benefit plans; distributions from employee benefit plans, including
those due to plan termination or plan transfer; redemptions through a
Systematic Withdrawal Plan set up prior to February 1, 1995 and, for Systematic
Withdrawal Plans set up thereafter, redemptions of up to 1% monthly of an
account's net asset value (3% quarterly, 6% semiannually or 12% annually); and
redemptions initiated by the Fund due to a shareholder's account falling below
the minimum specified account size.
Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares will
result in the applicable contingent deferred sales charge being deducted from
the total dollar amount redeemed.
4
<PAGE>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT
SECURITIES FUND
Franklin Investors Securities Trust
PROSPECTUS MARCH 1, 1994
AS AMENDED AUGUST 19, 1994
[LOGO]
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of both diversified and non-diversified separate
series. Each series of the Trust in effect represents a separate fund with its
own investment objectives and policies, with varying possibilities for income
or capital appreciation, and subject to varying market risks. Through the
different series, the Trust attempts to satisfy different investment
objectives.
This Prospectus pertains only to the Franklin Adjustable U.S. Government
Securities Fund (the "Fund"), a diversified series, which seeks a high level of
current income, consistent with lower volatility of principal. THE FUND, UNLIKE
MOST FUNDS WHICH INVEST DIRECTLY IN SECURITIES, SEEKS TO ACHIEVE THIS OBJECTIVE
BY INVESTING ALL OF ITS ASSETS IN THE U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE
PORTFOLIO (THE "PORTFOLIO"), A SEPARATE SERIES OF ADJUSTABLE RATE SECURITIES
PORTFOLIOS WHOSE INVESTMENT OBJECTIVE IS THE SAME AS THAT OF THE FUND. The
Portfolio in turn invests primarily in mortgage-backed securities created from
pools of adjustable rate mortgages which are issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Fund is designed for
individuals as well as certain institutional investors. There can, of course,
be no assurance that the Fund's objective will be achieved.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which the prospective investor will find useful to have.
A Statement of Additional Information concerning the Trust, the Fund and
another series of the Trust, dated March 1, 1994, as may be amended from time
to time, provides a further discussion of certain areas in this Prospectus and
other matters which may be of interest to some investors. It has been filed
with the Securities and Exchange Commission ("SEC") and is incorporated herein
by reference. A copy is available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address or telephone number listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
This Prospectus is not an offering of the securities herein described in any
state in which the offering is not authorized. No sales representative, dealer,
or other person is authorized to give any information or make any
representations oter than those contained in this Prospectus. Further
information may be obtained from the underwriter.
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table.............................................. 2
Financial Highlights....................................... 4
About the Fund............................................. 5
Investment Objective and Policies
of the Fund............................................... 5
Administration of the Fund................................. 12
Distributions to Shareholders.............................. 13
Taxation of the Fund and
Its Shareholders.......................................... 15
How to Buy Shares of the Fund.............................. 16
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments........................ 22
Other Programs and Privileges
Available to Fund Shareholders............................ 23
Exchange Privilege......................................... 25
How to Sell Shares of the Fund............................. 27
Telephone Transactions..................................... 30
Valuation of Fund Shares................................... 31
How to Get Information Regarding
an Investment in the Fund................................. 32
Performance................................................ 32
General Information........................................ 33
Account Registrations...................................... 34
Important Notice Regarding
Taxpayer IRS Certifications............................... 35
Portfolio Operations....................................... 36
</TABLE>
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on
annualized aggregate operating expenses of the Fund, including fees set by
contract, for the period ended October 31, 1993, and include the expenses of
the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................... 2.25%
Maximum Sales Charge Imposed on Reinvested Dividends.................. NONE
Deferred Sales Charge................................................. NONE
Redemption Fees....................................................... NONE
Exchange Fee (per transaction)........................................ $5.00*
</TABLE>
*$5.00 fee only imposed on Timing Accounts as described under "Exchange
Privilege." All other exchanges are without charge.
2
<PAGE>
<TABLE>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Portfolio Management Fees............................................. 0.39%**
Fund Administration Fees.............................................. 0.10%
12b-1 Fees............................................................ 0.24%***
Other Expenses:
Reports to Shareholders................................ 0.02%
Other Expenses of the Portfolio........................ 0.02%
Other Expenses of the Fund............................. 0.02%
----
Total Other Expenses.................................................. 0.06%
----
Total Fund Operating Expenses......................................... 0.79%**
----
</TABLE>
**Franklin Advisers, Inc. ("Advisers"), the Fund's administrator and the
Portfolio's investment manager voluntarily waived a portion of the Portfolio's
management fee. With this reduction, the Fund's share of the Portfolio's
management fee was 0.25% of the average net assets of the Fund and total
operating expenses of the Fund, including the Fund's proportionate share of
Portfolio expenses, were 0.65% of the Fund's average net assets. This
arrangement may be terminated by Advisers at any time.
***Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that 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 those same rules. Given the
Fund's maximum initial sales charge and the rate of the Fund's Rule 12b-1 fee,
however, it is estimated that this would take a substantial number of years.
Investors should be aware that the preceding table is not intended to reflect
in precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted in the table above,
the Fund charges no redemption fees:
<TABLE>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years
$30 $47 $65 $118
</TABLE>
THIS EXAMPLE IS BASED ON THE ANNUALIZED AGGREGATE OPERATING EXPENSES OF THE
FUND, INCLUDING FEES SET BY CONTRACT, AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES WHICH MAY BE MORE OR LESS THAN THOSE SHOWN.
The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. In addition, federal
regulations require the example to assume an annual return of 5%, but the
Fund's actual return may be more or less than 5%.
The above table summarizes the aggregate fees and expenses incurred by both the
Fund and the Portfolio. The Board of Trustees of the Trust considered the
aggregate fees and expenses to be paid by both the Fund and the Portfolio under
the Fund's policy of investing all of its assets in shares of the Portfolio,
and such fees and expenses the Fund would have paid if it continued to invest
directly in mortgage-backed
3
<PAGE>
securities. Because this arrangement enables eligible institutional investors,
including the Fund and other investment companies, to pool their assets, which
may be expected to result in the achievement of a variety of operating
economies, the Board concluded that the aggregate expenses of the Fund and the
Portfolio were expected to be lower than the expenses that would be incurred by
the Fund if it continued to invest directly in mortgage-backed securities,
although there is no guarantee or assurance that asset growth and lower
expenses will be recognized. Advisers has agreed to limit expenses so that in
no event will shareholders of the Fund incur higher expenses than if it
continued to invest directly in mortgage-backed securities. Further information
regarding the Fund's and the Portfolio's fees and expenses is included under
"Administration of the Fund."
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights or a share of
the Fund throughout the periods from the effective date of registration (April
15, 1987) to January 31, 1993 and for the nine-month period from February 1,
1993 to October 31, 1993. The information for each of the periods indicated has
been audited by Coopers & Lybrand, independent auditors, whose audit report
appears in the financial statements in the Trust's Statement of Additional
Information, a copy of which may be obtained as noted on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance+
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets Net Realized Distributions Net Assets
Values at Net or Unrealized Total From From Net Distributions Values
Year Beginning Investment Gains (Losses) Investment Investment From Total at End
Ended of Year Income on Securities Operations Income Capital Gains Distributions of Year
- ----- ---------- ---------- -------------- ---------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $.08 $ .09 $.17 $ - $ - $ - $10.17
1989 10.17 .82 (.229) .591 (.691) - (.691) 10.07
1990 10.07 .94 .034 .974 (.994) - (.994) 10.05
1991 10.05 .88 .066 .946 (1.006) - (1.006) 9.99
1992 9.99 .74 .027 .767 (.777) - (.777) 9.98
1993 9.98 .51 (.105) .405 (.522) (.003) (.525) 9.86
1993(2) 9.86 .28 (.086) .194 (.284) - (.284) 9.77
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
- -----------------------------------------------------------------------------
Ratio of Net
Net Assets Ratio of Investment
at End Expenses Income Portfolio
Total of Year to Average to Average Turnover
Refund++ (in 000's) Net Assets** Net Assets Rate
-------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1988(1) 1.7% $ 1,803 -%* 8.88%* .39%
1989 5.99 45,250 .44 7.92 48.39
1990 10.16 82,257 .39 9.03 76.32
1991 9.91 1,173,486 .30 8.23 96.50
1992 7.96 3,513,415 .37 7.10 30.89
1993 4.16 2,971,424 .36 5.10 30.36
1993(2) 1.99 1,813,504 .38* 3.92* 6.97
</TABLE>
(1) For the period October 6, 1987 (effective date of registration) to
January 31, 1988.
(2) For the nine months ended October 31, resulting from a change in fiscal
year from January 31.
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends and capital gains at net asset value.
**During the periods indicated, Advisers reduced its management fees and
reimbursed other expenses incurred by the Fund. Had such action not been taken,
the ratios of operating expenses to average net assets would have been as
follows:
<TABLE>
<S> <C>
Franklin Adjustable U.S.
Government Securities Fund
1988(1)................... .87%*
1989...................... .96
1990...................... .87
1991...................... .82
1992...................... .48
1993...................... .38 *
</TABLE>
4
<PAGE>
ABOUT THE FUND
The Trust, which was organized as a Massachusetts business trust on December
16, 1986, is an open-end management investment company, or mutual fund, and has
registered with the SEC under the Investment Company Act of 1940 (the "1940
Act"). The Fund and the additional separate diversified and non-diversified
series of the Trust each issue a separate series of shares of beneficial
interest. From inception until March 13, 1990, the Fund was known as the
Franklin Adjustable Rate Mortgage Fund. The Board of Trustees changed the name
of the Fund to its current name on that date. Shares of the Fund may be
purchased (minimum investment of $100 initially and $25 thereafter) at the
current public offering price which is equal to the Fund's net asset value (see
"Valuation of Fund Shares") plus a sales charge based upon a variable
percentage (ranging from 2.25% to 0% of the offering price) depending upon the
amount invested (see "How to Buy Shares of the Fund"). The Fund has adopted a
Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act whereby it will
pay up to a maximum of 0.25% per annum of its average daily net assets to
Distributors or others as reimbursement for expenses incurred in the
distribution of the Fund's shares.
INVESTMENT OBJECTIVE AND
POLICIES OF THE FUND
The investment objective of the Fund is to seek a high level of current income,
consistent with lower volatility of principal. The Fund pursues its investment
objective by investing all of its assets in the Portfolio which has the same
investment objective and policies as the Fund. The Portfolio is a separate
diversified series of the Adjustable Rate Securities Portfolios, an open-end
management investment company managed by Advisers. Shares of the Portfolio are
acquired by the Fund at net asset value with no sales charge. Accordingly, an
investment in the Fund is an indirect investment in the Portfolio.
The Portfolio pursues its objective by investing primarily (at least 65% of its
total assets) in adjustable rate mortgage securities ("ARMS") or other
securities collateralized by or representing an interest in mortgages
(collectively, "mortgage securities"), which have interest rates which reset at
periodic intervals. All such mortgage securities in which the Fund, through the
Portfolio, invests will be issued or guaranteed by the United States ("U.S.")
government, its agencies or instrumentalities. In addition to these mortgage
securities, the Fund may invest through the Portfolio up to 35% of its total
assets in (1) notes, bonds and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association ("FNMA"), Government National Mortgage Association
("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), and Small Business
Administration, (2) obligations of or guaranteed by the full faith and credit
of the United States and repurchase agreements collateralized by such
obligations, and (3) time and savings deposits in commercial or savings banks
or in institutions whose accounts are insured by the FDIC.
There is, of course, no assurance that the Fund's investment objective will be
achieved. As the value of the Portfolio's portfolio securities fluctuate, the
Portfolio's net asset value per share will also fluctuate.
THE ADVANTAGES OF INVESTING IN THE FUND
The Fund enables its shareholders to invest easily in the mortgage securities
which are issued or guaranteed by the U.S. government, its agencies or
instrumentalities by allowing an initial investment of as low as $100. Any such
guarantee will extend to the payment of interest and principal due on the
mortgage securities and will not provide any protection from fluctuations in
the market value of such
5
<PAGE>
mortgage securities. The Fund believes that by investing in the Portfolio,
which in turn invests primarily in mortgage securities which provide for
variable rates of interest, it will achieve a higher, more consistent and less
volatile net asset value than is characteristic of mutual funds that invest
primarily in mortgage securities paying a fixed rate of interest.
The dividends from the Fund's net investment income are declared and
distributed monthly. Some change in the net asset value per share during the
month may be expected due to the accumulation of undistributed income and the
pay out of such income once a month as a dividend (see "Valuation of Fund
Shares"). Principal payments received on the Portfolio's mortgage securities
will be reinvested by the Portfolio in other securities. Such securities may
have a higher or lower yield than the mortgage securities already held by the
Portfolio, depending upon market conditions. An investment in the Fund provides
liquidity for the investor who may redeem shares of the Fund at current net
asset value at any time in accordance with procedures described under the
caption "How to Sell Shares of the Fund" in this Prospectus. An investment in
the Fund may be a permissible investment for national banks, federal credit
unions, federally chartered savings and loan associations, and some state
savings and loan associations. Any regulated institution considering an
investment in the Fund should refer to the applicable laws and regulations
governing its operations in order to determine if the Fund is a permissible
investment. Municipal investors considering investment of proceeds of bond
offerings into the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund, Advisers or the Fund's
principal underwriter on arbitrage rebate calculations.
SPECIAL INFORMATION REGARDING THE FUND'S
MASTER/FEEDER FUND STRUCTURE
The investment objectives of both the Fund and the Portfolio are fundamental
and may not be changed without shareholder approval. The investment policies
described herein include those followed by the Portfolio in which the Fund
invests. The Fund's investment of all of its assets in the Portfolio was
previously approved by shareholders of the Fund. Information on administration
and expenses is included under "Administration of the Fund." See the Statement
of Additional Information for further information regarding the Fund's and the
Portfolio's investment restrictions.
An investment in the Fund may be subject to certain risks due to the Fund's
structure, such as the potential that upon redemption by other future
shareholders in the Portfolio, the Fund's expenses may increase or the
economies of scale which have been achieved as a result of the structure may be
diminished. Institutional investors in the Portfolio that have a greater pro
rata ownership interest in the Portfolio than the Fund could have effective
voting control over the operation of the Portfolio. Further, in the event that
the shareholders of the Fund do not approve a proposed future change in the
Fund's objective or fundamental policies, which has been approved for the
Portfolio, the Fund may be forced to withdraw its investment from the Portfolio
and seek another investment company with the same objective and policies. In
addition, the Fund may withdraw its investment in the Portfolio at any time, if
the Board of Trustees of the Trust considers that it is in the best interests
of the Fund to do so. Upon any such withdrawal, the Board of Trustees of the
Trust would consider what action to take, including the investment of all of
the assets of the Fund in another pooled investment entity having the same
investment objective and policies as the Fund or
6
<PAGE>
the hiring of an investment adviser to manage the Fund's investments. Such
circumstances may cause an increase in Fund expenses. Further, the Fund's
structure is a relatively new format, which often results in certain
operational and other complexities. The Franklin organization was one of the
first mutual fund complexes in the country to implement such a structure and
the trustees do not believe that the additional complexities outweigh the
benefits to be gained by shareholders.
The Franklin Group of Funds(R) has another fund which may invest in the
Portfolio and which is designed for institutional investors only. It is
possible that in the future other funds may be created which may likewise
invest in the Portfolio or existing funds may be restructured so that they may
invest in the Portfolio. The Fund or Distributors will forward to any
interested shareholder additional information, including a prospectus and
statement of additional information, if requested, regarding such other
investment companies through which they may make investments in the Portfolio.
Any such fund may be offered at the same or a different public offering price;
thus, an investor in such fund may experience a different return from an
investor in another investment company which invests exclusively in the
Portfolio. Investors interested in obtaining information about such funds may
contact the departments listed under "How to Get Information Regarding an
Investment in the Fund." The Portfolio is a series of Adjustable Rate
Securities Portfolios, a management investment company and a Delaware business
trust, organized on February 15, 1991. Adjustable Rate Securities Portfolios is
authorized to issue an unlimited number of shares of beneficial interest with a
par value of $.01 per share. All shares have one vote and, when issued, are
fully paid, non-assessable, and redeemable. Currently, Adjustable Rate
Securities Portfolios issues shares in two separate series; however, additional
series may be added in the future by the Board of Trustees of the Adjustable
Rate Securities Portfolios, the assets and liabilities of which will be
separate and distinct from any other series.
Whenever the Fund, as an investor in the Portfolio, is asked to vote on a
matter relating to the Portfolio, the Trust, on behalf of the Fund, will hold a
meeting of the Fund's shareholders and will cast its votes in the same
proportions as the Fund's shareholders have voted.
THE CHARACTERISTICS OF THE MORTGAGE SECURITIES
IN WHICH THE PORTFOLIO INVESTS
Adjustable Rate Mortgage Securities. ARMS, like a traditional mortgage
security, is an interest in a pool of mortgage loans. Most mortgage securities
are pass-through securities, which means that they provide investors with
payments consisting of both principal and interest as mortgages in the
underlying mortgage pool are paid off by the borrower. The dominant issuers or
guarantors of mortgage securities today are GNMA, FNMA, and FHLMC. GNMA creates
mortgage securities from pools of government guaranteed or insured (Federal
Housing Authority or Veterans Administration) mortgages originated by mortgage
bankers, commercial banks, and savings and loan associations. FNMA and FHLMC
issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks,
credit unions, and mortgage bankers.
The adjustable interest rate feature of the mortgages underlying the mortgage
securities in which the Portfolio invests generally will act as a buffer to
reduce sharp changes in the Portfolio's net asset value in response to normal
interest rate fluctuations. As the interest rates on the mortgages underlying
the Portfolio's investments are reset periodically,
7
<PAGE>
yields of portfolio securities will gradually align themselves to reflect
changes in market rates so that the market value of the Portfolio's portfolio
securities will remain relatively stable as compared to fixed-rate instruments
and should cause the net asset value of the Fund to fluctuate less
significantly than it would if the Portfolio invested in more traditional
long-term, fixed-rate debt securities. During periods of rising interest rates,
changes in the coupon rate lag behind changes in the market rate, resulting in
possibly a lower net asset value until the coupon resets to market rates. Thus,
investors could suffer some principal loss if they sold their shares of the
Fund before the interest rates on the underlying mortgages are adjusted to
reflect current market rates. During periods of extreme fluctuation in interest
rates, the Fund's net asset value will fluctuate as well. Since most mortgage
securities in the Portfolio's portfolio will generally have annual reset caps
of 100 to 200 basis points, short-term fluctuation in interest rates above
these levels could cause such mortgage securities to "cap out" and to behave
more like long-term, fixed-rate debt securities.
Unlike fixed-rate mortgages, which generally decline in value during periods of
rising interest rates, adjustable rate mortgage securities allow the Portfolio
to participate in increases in interest rates through periodic adjustments in
the coupons of the underlying mortgage, resulting in both higher current yields
and lower price fluctuations. Furthermore, if prepayments of principal are made
on the underlying mortgages during periods of rising interest rates, the
Portfolio generally will be able to reinvest such amounts in securities with a
higher current rate of return. The Portfolio, however, will not benefit from
increases in interest rates to the extent that interest rates rise to the point
where they cause the current coupon of adjustable rate mortgage securities held
as investments by the Portfolio to exceed the maximum allowable annual or
lifetime reset limits (or "cap rates") for a particular mortgage. Also, the
Portfolio's net asset value could vary to the extent that current yields on
mortgage-backed securities are different than market yields during interim
periods between coupon reset dates.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Fund. Further, because of
this feature, the value of ARMS are unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments. As with
other mortgage backed securities, interest rate declines may result in
accelerated prepayment of mortgages and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates.
One additional difference between ARMS and fixed-rate mortgages is that for
certain types of ARMS, the rate of amortization of principal, as well as
interest payments, can and does change in accordance with movements in a
particular, pre-specified, published interest rate index. The amount of
interest due to an ARMS holder is calculated by adding a specified additional
amount, the "margin," to the index, subject to limitations or "caps" on the
maximum and minimum interest that is charged to the mortgagor during the life
of the mortgage or to maximum and minimum changes to that interest rate during
a given period. It is these special characteristics which are unique to
adjustable rate mortgages that the Fund believes make them attractive
investments in seeking to accomplish the Fund's objective.
The mortgage securities which are issued or guaranteed by GNMA, FHLMC, or FNMA
("Certificates") are called pass-through Certificates because a pro rata share
of both regular interest and principal payments (less GNMA's, FHLMC's, or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly
to the
8
<PAGE>
holder of the Certificate (i.e., the Portfolio). The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. FNMA guarantees full and timely payment of
all interest and principal, while FHLMC guarantees timely payment of interest
and ultimate collection of principal. Mortgage securities from FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government; however,
they are generally considered to offer minimal credit risks. The yields
provided by these mortgage securities have historically exceeded the yields on
other types of U.S. government securities with comparable maturities in large
measure due to the prepayment risk. (See "Risks of Mortgage Securities").
Collateralized Mortgage Obligations ("CMOs"). The Portfolio may also invest in
CMOs issued and guaranteed by U.S. government agencies. A CMO is a
mortgage-backed security that separates mortgage pools into short-, medium- and
long-term components. Each component pays a fixed rate of interest at regular
intervals. These components enable an investor such as the Portfolio to more
accurately predict the pace at which principal is returned. The Portfolio will
not invest in privately issued CMOs except to the extent that it invests in the
securities of entities that are instrumentalities of the U.S. government. CMOs
purchased by the Portfolio may be:
(1) collateralized by pools of mortgages in which each mortgage is guaranteed
as to payment of principal and interest by an agency or instrumentality of the
U.S. government;
(2) collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and the guarantee is collateralized by
U.S. government securities; or
(3) securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest are supported by the
credit of an agency or instrumentality of the U.S. government.
Resets. The interest rates paid on the ARMS and CMOs in which the Portfolio
invests generally are readjusted at intervals of one year or less to an
increment over some predetermined interest rate index. There are three main
categories of indices: those based on U.S. Treasury securities and those
derived from a calculated measure such as a cost of funds index or a moving
average of mortgage rates. Commonly utilized indices include the one, three-
and five-year constant maturity Treasury rates, the three-month Treasury bill
rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities,
the 11th District Federal Home Loan Bank Cost of Funds, the National Median
Cost of Funds, the one-, three-, six-month or one-year London Interbank Offered
Rate (LIBOR), the prime rate of a specific bank, or commercial paper rates.
Some indices, such as the one-year constant maturity Treasury rate, closely
mirror changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Funds index, tend to lag behind changes in
market rate levels and tend to be somewhat less volatile.
Caps and Floors. The underlying mortgages which collateralize the ARMS and CMOs
in which the Portfolio invests will frequently have caps and floors which limit
the maximum amount by which the loan rate to the residential borrower may
change up or down (1) per reset or adjustment interval, and (2) over the life
of the loan. Some residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and interest payments
rather than limiting interest rate changes. These payment caps may result in
negative amortization.
9
<PAGE>
Stripped Mortgage Securities. The Portfolio may also invest in stripped
mortgage securities, which are derivative multiclass mortgage securities. The
stripped mortgage securities in which the Portfolio may invest will be issued
and guaranteed by agencies or instrumentalities of the U.S. government.
Stripped mortgage securities have greater market volatility than other types of
mortgage securities in which the Portfolio invests.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and
the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Fund's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Portfolio may fail to fully recoup its initial
investment in these securities even if the securities are rated in the highest
rating categories, AAA or Aaa, by Standard & Poor's Corporation or Moody's
Investors Service, respectively.
Stripped mortgage securities are purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. As these
securities were only recently developed, traditional trading markets have not
yet been established for all such securities. Accordingly, some of these
securities may generally be illiquid. The staff of the SEC (the "Staff") has
indicated that only government-issued IO or PO securities backed by fixed-rate
mortgages may be deemed to be liquid, if procedures with respect to determining
liquidity are established by a fund's board. The Board of Trustees may, in the
future, adopt procedures which would permit the Fund to acquire, hold, and
treat as liquid government-issued IO and PO securities. At the present time,
however, all such securities will continue to be treated as illiquid and will,
together with any other illiquid investments, not exceed 10% of the Fund's net
assets. Such position may be changed in the future, without notice to
shareholders, in response to the Staff's continued reassessment of this matter
as well as to changing market conditions.
RISKS OF MORTGAGE SECURITIES
The mortgage securities in which the Portfolio principally invests differ from
conventional bonds in that principal is paid back over the life of the mortgage
security rather than at maturity. As a result, the holder of the mortgage
securities (i.e., the Portfolio) receives monthly scheduled payments of
principal and interest and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. When the holder reinvests
the payments and any unscheduled prepayments of principal it receives, it may
receive a rate of interest which is lower than the rate on the existing
mortgage securities. For this reason, mortgage securities may be less effective
than other types of U.S. government securities as a means of "locking in"
long-term interest rates.
The market value of mortgage securities, like other U.S. government securities,
will generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest
10
<PAGE>
rates decline. Mortgage securities, while having less risk of a decline during
periods of rapidly rising rates, may also have less potential for capital
appreciation than other investments of comparable maturities due to the
likelihood of increased prepayments of mortgages as interest rates decline. In
addition, to the extent mortgage securities are purchased at a premium,
mortgage foreclosures and unscheduled principal prepayments may result in some
loss of the holder's principal investment to the extent of the premium paid. On
the other hand, if mortgage securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal will
increase current and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be taxable as ordinary
income.
OTHER INVESTMENT POLICIES OF THE PORTFOLIO
(AND THE FUND)
Repurchase Agreements. The Portfolio may engage in repurchase transactions in
which the Portfolio purchases a U.S. government security subject to resale to a
bank or dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Portfolio in each agreement, with the value
of the underlying security marked to market daily to maintain coverage of at
least 100%. The repurchase agreements in which the Portfolio may invest are
limited to those agreements having terms of one year or less. A default by the
seller might cause the Portfolio to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Portfolio
might also incur disposition costs in liquidating the collateral. The
Portfolio, however, intends to enter into repurchase agreements only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Portfolio to the seller,
collateralized by the underlying security. The U.S. government security subject
to resale (the collateral) will be held pursuant to a written agreement and the
Portfolio's custodian will take title to, or actual delivery of, the security.
When-Issued and Delayed Delivery Transactions. The Portfolio may purchase U.S.
government obligations on a "when-issued" or "delayed delivery" basis. These
transactions are arrangements under which the Portfolio purchases securities
with payment and delivery scheduled for a future time, generally within two
weeks. Purchases of U.S. government securities on a when-issued or delayed
delivery basis are subject to market fluctuation and are subject to the risk
that the value or yields at delivery may be more or less than the purchase
price or the yields available when the transaction was entered into. Although
the Portfolio will generally purchase U.S. government securities on a
when-issued basis with the intention of acquiring such securities, it may sell
such securities before the settlement date if it is deemed advisable. When the
Portfolio is the buyer in such a transaction, it will maintain, in a segregated
account with its custodian, cash or high-grade marketable securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. To the extent the Portfolio engages in when-issued and delayed
delivery transactions, it will do so only for the purpose of acquiring
portfolio securities consistent with the Portfolio's investment objective and
policies, and not for the purpose of investment leverage. In when-issued and
delayed delivery transactions, the Portfolio relies on the seller to complete
the transaction. The other party's failure may cause the Portfolio to miss
11
<PAGE>
a price or yield considered advantageous. Securities purchased on a when-issued
or delayed delivery basis do not generally earn interest until their scheduled
delivery date. The Portfolio is not subject to any percentage limit on the
amount of its assets which may be invested in when-issued purchase obligations.
Illiquid Investments. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements of more than
seven days duration) may not constitute, at the time of purchase or at any
time, more than 10% of the value of the total net assets of the Fund.
Other Permitted Investments. Other investments permitted by the Portfolio
include: obligations of the U.S. government; notes, bonds, and discount notes
of the following U.S. government agencies or instrumentalities: Federal Home
Loan Banks, FNMA, GNMA, FHLMC, Small Business Administration; and time and
savings deposits (including fixed or adjustable rate certificates of deposit)
in commercial or savings banks or in institutions whose accounts are insured by
the FDIC. The Portfolio's investments in savings deposits are generally deemed
to be illiquid and will, together with any other illiquid investments, not
exceed 10% of the Portfolio's total net assets. The Portfolio's investments in
time deposits will not exceed 10% of its total assets.
Temporary Defensive Positions. When maintaining a temporary defensive position,
the Portfolio may invest its assets, without limit, in U.S. government
securities, certificates of deposit of banks having total assets in excess of
$5 billion, and repurchase agreements.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of additional investment restrictions, some of
which have been adopted as fundamental policies of the Fund and may be changed
only with the approval of a majority of the outstanding voting securities of
the Fund. A list of these restrictions and more information concerning the
policies are discussed in the Statement of Additional Information.
ADMINISTRATION OF THE FUND
The Board of Trustees has the primary responsibility for the overall management
of the Fund and for electing the officers of the Trust who are responsible for
administering the day-to-day operations of the Trust and the Fund. The
Statement of Additional Information, under the discussion "Officers and
Trustees," lists the officers and trustees of the Trust and the Adjustable Rate
Securities Portfolios and contains a brief discussion of their principal
occupations. The Board of Trustees, with all disinterested trustees as well as
the interested trustees voting in favor, has adopted written procedures
designed to deal with potential conflicts of interest which may arise from
having the same persons serving on each trust's Board of Trustees. The
procedures call for an annual review of the Fund's relationship with the
Portfolio, and in the event a conflict is deemed to exist, the Board of
Trustees may take action, up to and including the establishment of a new Board
of Trustees. The Board of Trustees has determined that there are no conflicts
of interest presented by this arrangement at the present time. A detailed
description is included in the Statement of Additional Information.
Advisers serves as the Fund's administrator and as the Portfolio's investment
manager. Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company, the principal shareholders of
which are Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann,
who own approximately 20%, 16%
12
<PAGE>
and 10%, respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the financial services
industry. Advisers acts as investment manager or administrator to 34 U.S.
registered investment companies (112 separate series) with aggregate assets of
over $74 billion.
Pursuant to the administration agreement, Advisers provides the Fund with
various statistical and other services in return for an administration fee.
Pursuant to the management agreement with the Portfolio, Advisers supervises
and implements the Portfolio's investment activities and provides certain
administrative services and facilities which are necessary to conduct the
Portfolio's business.
Fund shareholders will bear a portion of the Portfolio's operating expenses,
including its management fee, to the extent that the Fund, as a shareholder of
the Portfolio, bears such expenses. The portion of the Portfolio's expenses
borne by the Fund is dependent upon the number of other shareholders of the
Portfolio, if any.
Advisers may, but is not obligated to, waive all or any portion of the
management fee due from the Portfolio or the administration fee due from the
Fund. During the period ended October 31, 1993, these fees were annualized as a
result of a change in fiscal year end from January 31 to October 31.
Administration fees totaling 0.10% of the Fund's daily net assets, were paid to
Advisers. The Fund's proportionate share of the Portfolio's management fees was
0.39%. Advisers, however, waived a portion of the Portfolio's management fee.
With this reduction, the Fund's proportionate share of the Portfolio's
management fees was 0.25%. Total operating expenses including administration
fees and the Fund's proportionate share of the Portfolio's expenses, would have
totaled 0.79%. Since Advisers waived a portion of the Portfolio's management
fee, total operating expenses of the Fund, including its proportionate share of
the Portfolio's operating expenses, totaled 0.65%. See "Expense Table" at the
front of the Prospectus.
It is not anticipated that the Portfolio or the Fund will incur a significant
amount of brokerage expenses because adjustable rate securities are generally
traded on a "net" basis, that is, in principal transactions without the
addition or deduction of brokerage commissions. To the extent that the
Portfolio does participate in transactions involving brokerage commissions, it
is Advisers' responsibility to select brokers through which such transactions
will be effected.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income primarily in the form of income
dividends paid by the Portfolio. This income, less the expenses incurred in
the Fund's operations, is its net investment income from which income dividends
may be distributed. Thus, the amount of dividends paid per share may vary with
each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) will
generally be made once a year in December and will reflect the net short-term
and net long-term capital gains realized by the Fund as of October 31, its
fiscal
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year-end. The Fund reserves the right to make more than one distribution
derived from net short-term and net long-term capital gains in any year or to
adjust the timing of these distributions for operational or other reasons.
Further information on the taxation of distributions is included under
"Taxation of the Fund and Its Shareholders."
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends monthly for shareholders of record generally on the first business
day preceding the 15th of the month, payable on or about the last business day
of the month. The amount of income dividend payments by the Fund is dependent
upon the amount of net income received by the Fund from the Portfolio (and the
amount of income received by the Portfolio from its investments), is not
guaranteed and is subject to the discretion of the Board of Trustees. Fund
shares are quoted ex-dividend on the first business day following the record
date. The Fund does not pay "interest" or guarantee any fixed rate of return on
an investment in its shares.
In order to be entitled to a dividend, the investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
HOW SHAREHOLDERS PARTICIPATE IN THE
RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in the Portfolio, the assets of which are
continuously being invested in portfolio securities. If the securities owned by
the Portfolio increase in value, the value of the Fund shares which the
shareholder owns will increase. If the securities owned by the Portfolio
decrease in value, the value of the shareholder's shares will also decline. In
this way, shareholders participate in any change in the value of the securities
owned by the Fund and the Portfolio.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the Statement
of Additional Information for more information. Many of the Fund's shareholders
receive their distributions in the form of additional shares. This is a
convenient way to accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so acquired remain at market
risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this
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<PAGE>
Prospectus, a shareholder may direct the selected distributions to another fund
in the Franklin Group of Funds(R) or the Templeton Group, to another person, or
directly to a checking account. If the bank at which the account is maintained
is a member of the Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last option is requested,
the shareholder should allow at least 15 days for initial processing. Dividends
which may be paid in the interim will be sent to the address of record.
Additional information regarding automated fund transfers may be obtained from
Franklin's Shareholder Services Department. Dividend and capital gain
distributions are eligible for investment in another fund in the Franklin Group
of Funds(R) or the Templeton Group at net asset value.
Effective June 1, 1994, shareholders may be able to change their dividend
options by telephone. See the section entitled "Telephone Transactions."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the Statement of Additional
Information.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
qualified as such, and intends to continue to so qualify. By distributing all
of its net investment income and net realized short-term and long-term capital
gain in accordance with the timing requirements imposed by the Code and by
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income
or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares. Distributions derived from the excess of net long-term
capital gain over net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has owned Fund shares and
regardless of whether such distributions are received in cash or in additional
shares.
None of the distributions paid by the Fund for the fiscal year ended October
31, 1993, qualified for the corporate dividends-received deduction and it is
not expected that distributions for the current fiscal year will so qualify.
Pursuant to the Code, certain distributions which are declared in October,
November or December, but which, for operational reasons, may not be paid to
the shareholder until the following January, will be treated as if received by
the shareholder on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange
of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are
15
<PAGE>
reinvested in the Fund or in another fund as described under "Exchange
Privilege" and a sales charge which would otherwise apply to the reinvestment
is reduced or eliminated. Any portion of such sales charge excluded from the
tax basis of the shares sold will be added to the tax basis of the shares
acquired in the reinvestment. Shareholders should consult with their tax
advisors concerning the tax rules applicable to the redemption and exchange of
Fund shares. The Fund will inform shareholders of the source of their dividends
and distributions at the time they are paid and will promptly after the close
of each calendar year advise shareholders of the tax status for federal income
tax purposes of such dividends and distributions.
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the Fund from direct obligations of
the U.S. government, none of the distributions of the Fund during fiscal year
ending October 31, 1993 qualified for such tax-free treatment. Investments in
mortgage-backed securities (including GNMA, FNMA and FHLMC securities) and
repurchase agreements collateralized by U.S. government securities do not
qualify as direct federal obligations in most states. Shareholders should
consult with their own tax advisors with respect to the applicability of state
and local intangible property or income taxes to their shares of the Fund and
distributions and redemption proceeds received from the Fund.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding taxes to distributions received by them from the Fund and
the application of foreign tax laws to these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin providing for regular
periodic investments. The Fund and Distributors reserve the right to refuse any
order for the purchase of shares.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price, depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering price will be
calculated to four decimal places. On orders for less than 100,000 shares, the
offering price will be calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset value per share
is included under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions:
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<PAGE>
<TABLE>
<CAPTION>
Total Sales Charge
----------------------------------------------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
- ------------------- ----------------- --------------- ------------------
<S> <C> <C> <C>
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.00% 0.85%
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
There is no sales charge on purchases of $1,000,000 or more.
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of many of the funds in the
Franklin Group of Funds and in the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group
(except Franklin Valuemark II and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction) (the
products in subparagraphs (a) and (b) are referred to as the "Franklin Group")
and (c) the open-end U.S. registered investment companies in the Templeton
Group of Funds except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton Variable
Products Series Fund (the "Templeton Group"). Purchases of the Fund pursuant to
a Letter of Intent for $1,000,000 or more will bear no sales charge. Purchases
of the Fund pursuant to the Rights of Accumulation will be at the applicable
sales charge of 1% or more until the additional purchase, plus the value of the
account or the amount previously invested, less redemptions, exceeds
$1,000,000. Sales charge reductions based upon purchases in more than one of
the funds in the Franklin Group or Templeton Group (the "Franklin/Templeton
Group") may be effective only after notification to Distributors that the
investment qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and
other funds in the Franklin Group of Funds or the Templeton Group. Compensation
may include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and programs regarding
one or more of the Franklin Group of Funds or the Templeton Group and other
dealer-sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have sold or
are expected to sell significant amounts of such shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the United States for meetings or
seminars of a business nature. Dealers may not use sales of the Fund's shares
to qualify for this compensation to the extent such may be prohibited
17
<PAGE>
by the laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned additional
compensation is paid for by the Fund or its shareholders.
Certain officers and trustees of the Fund are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.
DISTRIBUTION EXPENSES
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act whereby it may reimburse Distributors or others for expenses
actually incurred by Distributors or others in the promotion and distribution
of the Fund's shares, including but not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparation and
distribution of sales literature and related expenses, advertisements, and
other distribution-related expenses, including a prorated portion of
Distributors' overhead expenses attributable to the distribution of Fund
shares, and fees paid to securities dealers, their firms or others who have
executed a servicing agreement with the Fund, Distributors or its affiliates.
The maximum amount which the Fund may pay to Distributors or others for such
distribution expenses is 0.25% per annum of the average daily net assets of the
Fund, payable on a quarterly basis. All expenses of distribution and marketing
in excess of 0.25% per annum will be borne by Distributors without
reimbursement from the Fund. The Plan also covers any payments to or by the
Fund, Distributors, or other parties on behalf of the Fund or Distributors, to
the extent such payments are deemed to be for the financing of any activity
primarily intended to result in the sale of shares issued by the Fund within
the context of Rule 12b-1. The payments under the Plan are included in the
maximum operating expenses which may be borne by the Fund.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the
Franklin/Templeton Group may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made, will be entitled to the sales charge applicable to the
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<PAGE>
level of investment indicated on the Letter of Intent as described above. Sales
charge reductions based upon purchases in more than one company in the
Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment of sales
charge. Any redemptions made by the shareholder during the 13-month period will
be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased (less redemptions) during the period.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved shares will not
be available for disposal by the investor until the Letter of Intent has been
completed, or the higher sales charge paid. If the total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in the name of the investor or delivered to the
investor or the investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter and is an amount which would
qualify for a further quantity discount, a retroactive price adjustment will be
made by Distributors and the dealer through whom purchases were made pursuant
to the Letter of Intent (to reflect such further quantity discount) on
purchases made within 90 days before, and on those made after filing the
Letter. The resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to a single
purchase or the dollar amount of the total purchases. If the total purchases,
less redemptions, are less than the amount specified under the Letter, the
investor 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
which would have applied to the aggregate purchases if the total of such
purchases had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order.
If within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize
such difference will be made. In the event of a total redemption of the account
prior to fulfillment of the Letter of Intent, the additional sales charge due
will be deducted from the proceeds of the redemption and the balance will be
forwarded to the investor. By completing the Letter of Intent section of the
Shareholder Application, an investor grants to Distributors a security interest
in the reserved shares and irrevocably appoints Distributors as
attorney-in-fact with full power of substitution to surrender for redemption
any or all shares for the purpose of paying any additional sales charge due.
Purchases under the Letter of Intent will conform with the requirements of Rule
22d-1 under the 1940 Act. The investor or the investor's securities dealer must
inform
19
<PAGE>
Investor Services or Distributors that this Letter is in effect each time a
purchase is made. Additional terms concerning the offering of the Fund's shares
are included in the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 1.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other materials related to the Fund in its publications and
mailings to members at reduced or no cost to Distributors, and must seek to
arrange for payroll deduction or other bulk transmission of investments to the
Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both
the check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without sales charge)
by employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, subject to
minimum requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently those criteria require that
the employer establishing the plan have 500 or more employees or that the
amount invested or to be invested during the subsequent 13-month period in the
Fund or another company or companies in the Franklin/Templeton Group totals at
least $1,000,000. Employee benefit plans not qualified under Section 401 of the
Code may be afforded the same privilege if they meet the above requirements as
well as the uniform criteria for qualified groups previously described under
Group Purchases which enable Distributors to realize economies of scale in its
sales efforts and sales related expenses. If investments by employee benefit
plans at net asset value are made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of their own resources, to such dealer in an amount not to exceed
0.25% of the amount invested. Contact Franklin's Institutional Sales Department
for additional information.
Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
20
<PAGE>
requirements with respect to the amount of purchase, which may be established
by Distributors. Currently, those criteria require that the amount invested or
to be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted 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 such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer
who has executed a dealer agreement with Distributors, Distributors or one of
its affiliates may make payment, out of their own resources, to such dealer in
an amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. An investor may reinvest an amount not exceeding the
redemption proceeds. Shares of the Fund redeemed in connection with an exchange
into another fund (see "Exchange Privilege") are not considered "redeemed" for
this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the
Statement of Additional Information.
Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees, directors and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors
and affiliates of such companies, if they have been such for at least 90 days,
and by their spouses and family members, (2) former participants in the
Franklin/Templeton Profit Sharing/401(k) plan who elect to make a direct
rollover of all, or a portion of, their eligible distribution account balance
from such plan, (3) registered securities dealers and their affiliates, for
their investment account only, and (4) registered personnel and employees of
securities dealers, and by their spouses and family members, in accordance with
the internal policies and procedures of the employing securities dealer. Such
sales are made upon the written assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be transferred or
resold except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from their
employers or from Franklin's Sales Department in order to qualify.
Shares of the Fund may also be purchased at net asset value by any state,
county or city, or any instrumentality, department, authority or agency thereof
21
<PAGE>
which has determined that the Fund is a legally permissible investment and
which is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its administrator on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.
PURCHASING SHARES OF THE FUND
IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and institutions. The Fund may be
used as an investment vehicle for an already existing retirement plan or
Franklin Trust Company may provide the plan documents and trustee or custodian
services. A plan document must be adopted in order for a plan to be in
existence.
Franklin Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. The brochures for each of the
plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and Internal Revenue Service ("IRS")
requirements.
The Franklin IRA is an individual retirement account in which the
contributions, which are for the most part still deductible for the majority of
wage earners, accumulate on a tax-deferred basis until withdrawn. Pursuant to
the Code, individuals who are not active participants (and who do not have a
spouse who is an active participant) in an employer or joint
employer/union-maintained retirement plan may deduct their full amount of IRA
contribution, the lesser of $2,000 or 100% of compensation. For taxpayers who
are active participants (or whose spouse is an active participant) in such a
retirement plan, the IRA deduction is gradually phased out to the extent that
their adjusted gross incomes exceed certain specified limits.
For taxpayers filing a joint return, even if one spouse received less than $250
in compensation for the year, two IRAs, with an aggregate contribution not
exceeding the lesser of 100% of compensation or $2,250, may be established for
both spouses, provided that no more than $2,000 be contributed to either one.
The Franklin IRA Rollover account is designed to maintain the tax-deferred
status of lump-sum or qualifying partial distributions from an
employer-sponsored retirement plan which are eligible for rollover treatment.
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<PAGE>
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small employers
(generally 25 or fewer employees) who want to make deductible retirement
contributions to an employee's IRA in an amount to be determined annually at
the discretion of the employer up to the lesser of $30,000 or 15% of
compensation per employee. The SAR-SEP allows employees to defer a pre-taxed
portion of their salary to an IRA through their employer in an amount
determined by the employee. The maximum annual salary deferral limit for a
SAR-SEP is the lesser of 15% of compensation (adjusted for deferrals) or $9,240
(1994 limit; indexed for inflation).
The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
educational and certain non-profit institutions [ss.501(c)(3) organizations].
The 403(b) Plan allows participants to determine the annual amount of salary
they wish to defer. The maximum annual salary deferral amount is generally the
lesser of 25% or $9,500. Franklin Trust Company may provide billing information
and other support services for the employer.
The Franklin Business Retirement Plans may be used individually, in
combination, or with custom designed features. The Profit Sharing Plan allows
an employer to make contributions, at its discretion, of up to the lesser of
$30,000 or 15% of compensation per employee each year. The Money Purchase
Pension Plan allows the employer to contribute up to the lesser of $30,000 or
25% of compensation per employee; however, a fixed contribution rate must be
elected by the employer at the outset. The Money Purchase Pension Plan may be
used in conjunction with a Profit Sharing Plan to achieve a combined
contribution rate of 25%, up to 15% in the Profit Sharing Plan and a fixed
contribution rate of 10% in the Money Purchase Pension Plan.
Franklin Trust Company can add optional provisions to the Profit Sharing and
Money Purchase Pension Plans described above and can also provide Defined
Benefit, Target Benefit, and 401(k) Plans on a custom designed basis. Business
Retirement Plans, whether standard or custom designed, may require an annual
report to be filed with the IRS.
Liquidations of any Franklin retirement accounts require the completion of
specific distribution forms to comply with IRS regulations. Please see "How to
Sell Shares of the Fund."
For additional information about the Franklin retirement plans, shareholders
may request brochures describing each of the plans from their securities
dealer, investment advisor or Distributors. The brochures contain more specific
information about the retirement plans available from Franklin. Individuals and
employers should consult with a competent tax or financial advisor before
choosing a retirement plan.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate.
23
<PAGE>
Maintaining shares in uncertificated form (also known as "plan balance")
minimizes the risk of loss or theft of a share certificate. A lost, stolen or
destroyed certificate cannot be replaced without obtaining a sufficient
indemnity bond. The cost of such a bond, which is generally borne by the
shareholder, can be 2% or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested in writing by the
shareholder or by the broker.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including the number of shares
in "plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in
mind that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum
amount which the shareholder may withdraw is $50 per withdrawal transaction
although this is merely the minimum amount allowed under the plan and should
not be mistaken for a recommended amount. The plan may be established on a
monthly, quarterly, semiannual or annual basis. If the shareholder establishes
a plan, any capital gain distributions and income dividends paid by the Fund
will be reinvested for the shareholder's account in additional shares at net
asset value. Payments will then be made from the liquidation of shares at net
asset value on the day of the transaction (which is generally the first
business day of the month in which the payment is scheduled) with payment
generally received by the shareholder three to five days after the date of
liquidation. By completing the "Special Payment Instructions for Distributions"
section of the Shareholder Application included with this Prospectus, a
shareholder may direct the selected withdrawals to another fund in the Franklin
Group of Funds or the Templeton Group, to another person, or directly to a
checking account. If the bank at which the account is maintained is a member of
the Automated Clearing House, the payments may be made automatically by
electronic funds transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing. Withdrawals which may be
paid in the interim will be sent to the address of record. Liquidation of
shares may reduce
24
<PAGE>
or possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because
the amount withdrawn under the plan may be more than the shareholder's actual
yield or income, part of the payment may be a return of the shareholder's
investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual
withdrawals under the plan during the time such a plan is in effect. A
Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimums) and schedule of
withdrawal payments or suspend one such payment by giving written notice to
Investor Services at least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact Franklin's Institutional Services Department at 1/800-321-8563.
EXCHANGE PRIVILEGE
The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of the other
mutual funds in the Franklin Group of Funds or the Templeton Group (as defined
under "How to Buy Shares of the Fund") which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any
outstanding share certificates.
EXCHANGES BY TELEPHONE
Shareholders, or their investment representative of record, if any, may
exchange shares of the Fund by telephone by calling Investor Services at
1-800/632-2301. If the shareholder does not wish this privilege extended to a
particular account, the Fund or Investor Services should be notified.
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<PAGE>
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please refer to "Telephone
Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares,
Investor Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges by Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, [accrued but unpaid income
dividends and capital gain distributions will be reinvested in the Fund at the
net asset value on the date of the exchange, and then the entire share balance
will be exchanged into the new fund in accordance with the procedures set forth
above.] ["or" declared but unpaid income dividends and capital gain
distributions will be transferred to the fund being exchanged into and will be
invested at net asset value.] Because the exchange is considered a redemption
and purchase of shares, the shareholder may realize a gain or loss for federal
income tax purposes. Backup withholding and information reporting may also
apply. Information regarding the possible tax consequences of such an exchange
is included in the tax section in this Prospectus and in the Statement of
Additional Information.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money
market instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives
26
<PAGE>
exist immediately. Subsequently, this money will be withdrawn from such
short-term money market instruments and invested in portfolio securities in as
orderly a manner as is possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
RETIREMENT ACCOUNTS
Franklin/Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly after August 30, 1994. Certain restrictions may apply to other types
of retirement plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
Effective September 1, 1994, the Fund will amend its policy in regard to Timing
Accounts to reflect the following:
The Fund reserves the right to temporarily or permanently terminate the
exchange privilege or reject any specific purchase order for any Timing Account
or any person whose transactions seem to follow a timing pattern who: (i) make
an exchange request out of the Fund within two weeks of an earlier exchange
request out of the Fund, or (ii) make more than two exchanges out of the Fund
per calendar quarter, or (iii) exchange shares equal in value to at least $5
million or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits. The Fund reserves the right to
refuse the purchase side of exchange requests by any Timing Account, person, or
group if, in the Manager's judgment, the Fund would be unable to invest
effectively in accordance with its investment objectives and policies, or would
otherwise potentially be adversely affected. A shareholder's purchase exchanges
may be restricted or refused if the Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets. In particular, a
pattern of exchanges that coincide with a "market timing" strategy may be
disruptive to the Fund and therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the
27
<PAGE>
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated (at
1:00 p.m. Pacific time) each day that the New York Stock Exchange (the
"Exchange") is open for business will receive the price calculated on the
following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a dispute
or give inconsistent instructions to the Fund, (c) the Fund has been
notified of an adverse claim, (d) the instructions received by the Fund are
given by an agent, not the actual registered owner, (e) the Fund determines
that joint owners who are married to each other are separated or may be the
subject of divorce proceedings, or (f) the authority of a representative of
a corporation, partnership, association, or other entity has not been
established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934.
Generally, eligible guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust companies, savings
banks, industrial loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing agencies; (3)
securities dealers which are members of a national securities exchange or a
clearing agency or which have minimum net capital of $100,000; or (4)
institutions that participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee medallion program. A
notarized signature will not be sufficient for the request to be in proper
form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the
authorized officer(s) of the corporation and (2) a corporate resolution.
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<PAGE>
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who file a Telephone Redemption Authorization and Agreement (the
"Agreement") may redeem shares of the Fund by telephone, subject to the
Restricted Account exception noted under "Telephone Transactions - Restricted
Accounts." THE AGREEMENT MAY BE OBTAINED BY WRITING TO THE FUND OR INVESTOR
SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE
FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT
INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE
RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
For shareholder accounts with a completed Application on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time
on any business day will be processed that same day. The redemption check will
be sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a dealer
or similar agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the
Fund receives the shareholder's written request in proper form. These
documents, as described in the preceding section, are required even if the
shareholder's securities dealer has placed the repurchase order. After receipt
of a repurchase order from the dealer, the Fund will still require a signed
letter of instruction and all other
29
<PAGE>
documents set forth above. A shareholder's letter should reference the Fund,
the account number, the fact that the repurchase was ordered by a dealer and
the dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
the shareholder's redemption will be sent will begin when the Fund receives all
documents required to complete ("settle") the repurchase in proper form. The
redemption proceeds will not earn dividends or interest during the time between
receipt of the dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle the repurchase.
Thus, it is in a shareholder's best interest to have the required documentation
completed and forwarded to the Fund as soon as possible. The shareholder's
dealer may charge a fee for handling the order. The Statement of Additional
Information contains more information on the redemption of shares.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take
up to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available
for immediate redemption. In addition, the right of redemption may be suspended
or the date of payment postponed if the Exchange is closed (other than
customary closing) or upon the determination of the SEC that trading on the
Exchange is restricted or an emergency exists, or if the SEC permits it, by
order, for the protection of shareholders. Of course, the amount received may
be more or less than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or securities dealer may call Franklin's Retirement
Plans Department to obtain the necessary forms.
OTHER
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares
in one account to another identically registered account in the Fund, (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Application as described under "How to
Sell Shares of the Fund - Redemptions by Telephone" will be able to redeem
shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the
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<PAGE>
caller provide certain personal and/or account information requested by the
telephone service agent at the time of the call for the purpose of establishing
the caller's identification, and by sending a confirmation statement on
redemptions to the address of record each time account activity is initiated by
telephone. So long as the Fund and Investor Services follow instructions
communicated by telephone which were reasonably believed to be genuine at the
time of their receipt, neither they nor their affiliates will be liable for any
loss to the shareholder caused by an unauthorized transaction. Shareholders
are, of course, under no obligation to apply for or accept telephone
transaction privileges. In any instance where the Fund or Investor Services is
not reasonably satisfied that instructions received by telephone are genuine,
the requested transaction will not be executed, and neither the Fund nor
Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Trust Company ("FTC") or Templeton Funds Trust Company ("TFTC")
retirement accounts. To assure compliance with all applicable regulations,
special forms are required for any distribution, redemption, or dividend pay
ment. Currently, while the telephone exchange privilege is extended to these
retirement accounts, a Franklin/Templeton Transfer Authorization Form must be
on file in order to transfer retirement plan assets between a Franklin fund and
a Templeton fund within the same plan type. Effective September 1, 1994,
however, this authorization form will not be required for Franklin/Templeton
IRA and 403(b) retirement accounts. Certain restrictions may apply to other
types of retirement plans. Changes to dividend options must also be made in
writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call a
Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press 2 when prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to
the Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry
daily quotations of the prior trading day's closing "bid" (net asset value) and
"ask" (offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including accrued expenses and taxes
and any necessary reserves, is deducted from the aggregate gross value of all
assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the aggregate net
assets of the Fund, cash and
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<PAGE>
receivables are valued at their realizable amounts. Interest is recorded as
accrued. Under procedures approved by the Board of Trustees of Adjustable Rate
Securities Portfolios, the mortgage securities of the Portfolio (in which the
Fund invests all of its assets) are valued at current market value provided by
a pricing service, bank or securities dealer, when over-the-counter market
quotations are readily available. 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 of Trustees.
All money market instruments with a maturity of more than 60 days are valued at
current market, as discussed above. All money market instruments with a
maturity of 60 days or less are valued at their amortized cost, which the Board
of Trustees has determined in good faith constitutes fair value for purposes of
complying with the 1940 Act. This valuation method will continue to be used
until such time as the trustees determine that it does not constitute fair
value for such purposes. With the approval of trustees, the Portfolio may
utilize a pricing service, bank or securities dealer to perform any of the
above described functions. The Portfolio advises the Fund of the net asset
value of the Portfolio shares which is used to calculate the net asset value of
the Fund's shares.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 38 followed by the # sign, when requested to do so by the automated
operator.
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call.
The same numbers may be used when calling from a rotary phone:
<TABLE>
<CAPTION>
HOURS OF OPERATION (PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
- --------------- ------------- ---------------------------------
<S> <C> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
PERFORMANCE
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or risk.
32
<PAGE>
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five-
and ten-year periods, or portion thereof, to the extent applicable, through the
end of the most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed
as a percentage of the purchase price. Current yield reflects the income per
share earned by the Fund's portfolio investments; it is calculated by dividing
the Fund's net investment income per share during a recent 30-day period by the
maximum public offering price on the last day of that period and annualizing
the result.
Yield, which is calculated according to a formula prescribed by the SEC (see
the Statement of Additional Information), is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. 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 short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the
maximum sales charge on the purchase of shares. The investment results of the
Fund, like all other investment companies, will fluctuate over time; thus,
performance figures should not be considered to represent what an investment
may earn in the future or what the Fund's yield, distribution rate or total
return may be in any future period. Additional information is contained in the
Fund's annual report, which is available without charge upon request.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series. All shares have
one vote and, when issued, are fully paid, non-assessable, and redeemable.
Currently, the Trust issues shares in six separate and distinct series.
The Portfolio is a series of Adjustable Rate Securities Portfolios, a Delaware
business trust, organized on February 15, 1991. Adjustable Rate Securities
Portfolios is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share. All shares have one vote, and,
when issued, are fully paid, non-assessable, and redeemable. Currently,
Adjustable Rate Securities Portfolios issues shares in only two series;
however, additional series may be added in the future by the Board of Trustees,
the assets and liabilities of which will be separate and distinct from any
other series.
33
<PAGE>
All shares of each series of the Trust have equal voting, dividend and
liquidation rights. Shares of each series of the Trust vote separately as to
issues affecting that series or the Trust, unless otherwise permitted by the
1940 Act. The shares have noncumulative voting rights, which means that holders
of more than 50% of the shares voting for the election of trustees can elect
100% of the trustees if they choose to do so. The Trust does not intend to hold
annual meetings; it may, however, hold a meeting for such purposes as changing
fundamental investment restrictions, approving a new management agreement or
any other matters which are required to be acted on by shareholders under the
1940 Act. Whenever the Fund is requested to vote on a fundamental policy
pertaining to the Portfolio, it will hold a special meeting of Fund
shareholders and will cast its vote in the same proportion as the shareholders'
votes received. A meeting may also be called by a majority of the Board of
Trustees or by shareholders holding at least 10% of the shares entitled to vote
at the meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of trustees, such as
that provided in Section 16(c) of the 1940 Act. The Board of Trustees may from
time to time establish other series of the Trust, the assets and liabilities of
which will be separate and distinct from any other series.
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the
value of such account has been reduced by the shareholder's prior voluntary
redemption of shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided advance notice is
given to the shareholder. More information is included in the Statement of
Additional Information.
Shares have no preemptive or subscription rights and are fully transferable.
There are no conversion rights; however, holders of shares of any fund may
reinvest all or any portion of the proceeds from the redemption or repurchase
of such shares into shares of another fund as described in "Exchange
Privilege."
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust
34
<PAGE>
document may cause difficulties and require court action for transfer or
redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's broker to a comparably
registered Fund account maintained by another securities dealer. Both the
delivering and receiving brokers must have executed dealer agreements on file
with Distributors. Unless a dealer agreement has been executed and is on file
with Distributors, the Fund will not process the transfer and will so inform
the shareholder's delivering broker. To effect the transfer, a shareholder
should instruct the broker to transfer the account to a receiving securities
dealer and sign any documents required by the broker(s) to evidence consent to
the transfer. Under current procedures the account transfer may be processed by
the delivering broker and the Fund after the Fund receives authorization in
proper form from the shareholder's delivering securities dealer. In the future
it may be possible to effect such transfers electronically through the services
of the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee,
or both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near
future, include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt shareholders who
have not provided a correct taxpayer identification number ("TIN") and made
certain required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a broker
notifies the Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close
an account by redeeming its shares in full at the then-current net asset value
upon receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
35
<PAGE>
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day to day portfolio
management of the Portfolio in which the Fund invests: Tony Coffey since 1989,
Roger Bayston since 1991 and Jack Lemein since inception.
Tony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey holds a Master of Business Administration from the University of
California at Los Angeles. He earned his Bachelor of Arts degree from Harvard
University. Prior to joining Franklin, Mr. Coffey was an associate with the
Analysis Group. He is a member of several securities industry associations and
joined Franklin in 1989.
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. Prior to
joining Franklin, Mr. Bayston was an Assistant Treasurer for Bankers Trust
Company. Following completion of the Masters degree program, Mr. Bayston joined
Franklin in 1991.
Jack Lemein
Senior Vice President
Franklin Advisers, Inc.
Mr. Lemein holds a bachelor of science degree in finance from the University of
Illinois. Mr. Lemein has been in the securities industry since 1967. He is a
member of several securities industry associations. Mr. Lemein joined Franklin
in 1984.
36
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS FOR
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
FRANKLIN INVESTORS SECURITIES TRUST
DATED MARCH 1, 1994
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund:
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
2. ADMINISTRATION OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND
a) Add the following language as paragraph two:
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.
b) Substitute the following for the sales charge table and the ensuing two
paragraphs:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
---------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.................................... 2.25% 2.30% 2.00%
$100,000 but less than $250,000....................... 1.75% 1.78% 1.50%
$250,000 but less than $500,000....................... 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000..................... 1.00% 1.00% 0.85%
$1,000,000 or more.................................... none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors from its own
resources to securities dealers who initiate and are responsible for
purchases of $1 million or more: 0.75% on sales of $1 million but less than
$2 million, plus 0.60% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares of
the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds in
the Franklin Group of Funds(R) and the Templeton Group of Funds. Included for
these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities
Trust (the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction) and
(c) the U.S. mutual funds in the Templeton Group of Funds except Templeton
American Trust, Inc., Templeton Capital Accumulator Fund, Inc., Templeton
Variable Annuity Fund, and Templeton Variable Products Series Fund (the
"Templeton Funds"). (Franklin Funds and Templeton Funds are collectively
referred to as the "Franklin Templeton Funds.")
1
Sales charge reductions based upon aggregate holdings of (a), (b) and (c)
above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
References throughout the Prospectus, for purposes of aggregating assets or
describing the exchange privilege, refer to the above descriptions.
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 0.75% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
non-designated retirement plans, and up to 1% of the amount purchased to
securities dealers who initiate and are responsible for purchases made at net
asset value by certain designated retirement plans (excluding IRA and IRA
rollovers), certain trust company and trust departments of banks and certain
retirement plans of organizations with collective retirement plan assets of
$10 million or more. See definitions under "Description of Special Net Asset
Value Purchases" as described under "Purchases at Net Asset Value" and as set
forth in the SAI.
c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officer, trustees, directors, and full-time employees of the
Fund, any of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2) companies exchanging
shares with or selling assets pursuant to a merger, acquisition or exchange
offer; (3) insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5) Shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers
and their affiliates, for their investment account only, and (8) registered
personnel and employees of securities dealers, and by their spouses and
family members, in accordance with the internal policies and procedures of
the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the
shares redeemed, a new contingency period will begin. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however, do not begin to
run on redemption proceeds placed immediately after redemption in a Franklin
Bank Certificate of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled by a securities
dealer or other financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund is
made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such distribution. To
exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions in Cash" under
"Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supple-
2
mental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution. In
order to exercise this privilege a written order for the purchase of shares
of the Fund must be received by Franklin Templeton Trust Company (the "Trust
Company"), the Fund or Investor Services, within 120 days after the plan
distribution. A prospectus outlining the investment objectives and policies
of a fund in which the shareholder wishes to invest may be obtained by
calling toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any,
of various payments made by the Fund or its investment manager on arbitrage
rebate calculations. If an investment by an eligible governmental authority
at net asset value is made through a securities dealer who has executed a
dealer agreement with Distributors, Distributors or one of its affiliates may
make a payment, out of their own resources, to such securities dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently those criteria require that the
employer establishing the plan have 200 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund
or in any of the Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under Section 401 of
the Code ("non-designated plans") may be afforded the same privilege if they
meet the above requirements as well as the uniform criteria for qualified
groups previously described under "Group Purchases" which enable Distributors
to realize economies of scale in its sales efforts and sales related
expenses.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or
to be invested during the subsequent 13-month period in this Fund or any of
the Franklin Templeton Investments must total at least $1,000,000. Orders for
such accounts will be accepted 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 such order.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested.
Refer to the SAI for further information.
3
4. EXCHANGE PRIVILEGE
a) Add the following subsection:
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds
do not accept or may place differing limitations than those below on
exchanges by Timing Accounts.
The Fund reserves the right to refuse the purchase side of exchange requests
by any Timing Account, person, or group if, in the Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if
the Fund receives or anticipates simultaneous orders affecting significant
portions of the Fund's assets. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive to the Fund and
therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the
Fund," reserve the right to refuse any order for the purchase of shares.
b) Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or Templeton money
market fund. See also "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
5. HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period of
12 months of the calendar month following their purchase. The charge is 1% of
the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) Shares representing amounts attributable
to capital appreciation of those shares held less than 12 months; (ii) shares
purchased with reinvested dividends and capital gain distributions; and (iii)
other shares held longer than 12 months; and followed by any shares held less
than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; distributions
to participants in Trust Company retirement plan accounts due to death,
disability or attainment of age 591/2; tax-free returns of excess
contributions to employee benefit plans, distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and,
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.
Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares
will result in the applicable contingent deferred sales charge being deducted
from the total dollar amount redeemed.
6. TELEPHONE TRANSACTIONS
Add the following paragraph to the subsection "Exchanges by Telephone":
The automatic TeleFACTS(R) system at 1-800/247-1753 is available for
processing exchanges (day or night.) During periods of drastic economic or
market changes, however, this option may not be available, in which event the
shareholder should follow other exchange procedures discussed under "Exchange
Privilege."
4
FRANKLIN
ADJUSTABLE RATE
SECURITIES FUND
Franklin Investors Securities Trust
PROSPECTUS March 1, 1994
[FRANKLIN LOGO]
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of both diversified and non-diversified separate
series. Each series of the Trust in effect represents a separate fund with its
own investment objectives and policies, with varying possibilities for income
or capital appreciation, and subject to varying market risks. Through the
different series, the Trust attempts to satisfy different investment
objectives.
This Prospectus pertains only to the Franklin Adjustable Rate Securities Fund
(the "Fund"), a diversified series, which seeks a high level of current income,
with lower volatility of principal than a fund which invests in fixed-rate
securities. THE FUND, UNLIKE MOST FUNDS WHICH INVEST DIRECTLY IN SECURITIES,
SEEKS TO ACHIEVE THIS OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN THE
ADJUSTABLE RATE SECURITIES PORTFOLIO (THE "PORTFOLIO"), A SEPARATE SERIES OF
THE ADJUSTABLE RATE SECURITIES PORTFOLIOS, WHOSE INVESTMENT OBJECTIVE IS THE
SAME AS THAT OF THE FUND. The Portfolio in turn invests primarily in adjustable
rate securities, including adjustable rate mortgage-backed securities which are
issued or guaranteed by private institutions or by the United States ("U.S.")
government, its agencies or instrumentalities, collateralized by or
representing an interest in mortgages created from pools of adjustable rate
mortgages, and other adjustable rate asset-backed securities. All securities
purchased by the Portfolio will be rated at least AA by Standard & Poor's
Corporation ("S&P") or Aa by Moody's Investors Service ("Moody's") or, if
unrated, will be deemed to be of comparable quality by the Portfolio's
investment manager. The Fund is designed for individuals as well as certain
institutional investors. There can, of course, be no assurance that the Fund's
objective will be achieved.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER
AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which the prospective investor will find useful to have.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
A Statement of Additional Information concerning the Trust, the Fund and
another series of the Trust,
1
dated March 1, 1994, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be
of interest to some investors. It has been filed with the Securities and
Exchange Commission ("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number listed above.
This Prospectus is not an offering of the securities herein described in any
state 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 the underwriter.
<TABLE>
Contents Page
<S> <C>
Expense Table................................... 2
Financial Highlights............................ 4
About the Fund.................................. 5
Investment Objective
and Policies of the Fund....................... 5
Administration of the Fund...................... 17
Distributions to Shareholders................... 18
Taxation of the Fund
and Its Shareholders........................... 19
How to Buy Shares of the Fund................... 21
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments............. 27
Other Programs and Privileges
Available to Fund Shareholders................. 28
Exchange Privilege.............................. 30
How to Sell Shares of the Fund.................. 32
Valuation of Fund Shares........................ 34
How to Get Information
Regarding an Investment in the Fund............ 35
Performance..................................... 36
General Information............................. 36
Account Registrations........................... 37
Important Notice Regarding
Taxpayer IRS Certifications.................... 38
Portfolio Operations............................ 39
Telephone Transactions.......................... 39
</TABLE>
Expense Table
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on
annualized aggregate operating expenses of the Fund, including fees set by
contract, for the period ended October 31, 1993, and include the expenses of
the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................................. 2.25%
Maximum Sales Charge Imposed on Reinvested Dividends................. NONE
Deferred Sales Charge................................................ NONE
Redemption Fees...................................................... NONE
Exchange Fee (per transaction)....................................... $5.00*
*$5.00 fee only imposed on Timing Accounts as described under "Exchange
Privilege." All other exchanges are without charge.
2
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Portfolio Management Fees......................................... 0.40%**
Fund Administration Fees.......................................... 0.10%**
12b-1 Fees........................................................ 0.25%***
Other Expenses:
Reports to Shareholders............................... 0.03%
Other expenses of the Portfolio....................... 0.07%
Other Expenses of the Fund............................ 0.16%
--------
Total Other Expenses............................................ 0.26%
-----------
Total Fund Operating Expenses................................... 1.01%**
===========
**Franklin Advisers, Inc. ("Advisers"), the Fund's administrator and the
Portfolio's investment manager voluntarily waived the entire administration fee
and a portion of the Portfolio's management fee. With this reduction, the
Fund's share of the Portfolio's management fee was 0.04% of the average net
assets of the Fund and total operating expenses of the Fund, including the
Fund's proportionate share of Portfolio expenses, were 0.11% of the Fund's
average net assets.
***Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that 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 those same rules. Given the
Fund's maximum initial sales charge and the rate of the Fund's Rule 12b-1 fee,
however, it is estimated that this would take a substantial number of years.
Investors should be aware that the preceding table is not intended to reflect
in precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by regulations of the SEC, the following example illustrates the
expenses, including the initial sales charge, that apply to a $1,000 investment
in the Fund over various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted in the preceding
table, the Fund charges no redemption fees:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$33 $54 $77 $143
THIS EXAMPLE IS BASED ON THE ANNUALIZED AGGREGATE OPERATING EXPENSES OF THE
fUND, INCLUDING FEES SET BY CONTRACT, AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN.
The operating expenses are borne by the Fund and only indirectly by
shareholders as a result of their investment in the Fund. In addition, federal
regulations require the example to assume an annual return of 5%, but the
Fund's actual return may be more or less than 5%.
The above table summarizes the aggregate fees and expenses incurred by
both the Fund and the Portfolio. The Board of Trustees considered the aggregate
fees and expenses to be paid by both the Fund and the Portfolio under the
Fund's policy of investing all of its assets in shares of the Portfolio and
such fees
3
and expenses the Fund would pay if it invested directly in adjustable rate
securities. Because this arrangement enables various institutional investors,
including the Fund, to pool their assets, which may be expected to result in
the achievement of a variety of operating economies, the Board of Trustees
concluded that the aggregate expenses of the Fund and the Portfolio were
expected to be lower than the expenses that would be incurred by the Fund if it
invested directly in adjustable rate securities, although there is no guarantee
or assurance that asset growth and lower expenses will be recognized. Advisers
has agreed to limit expenses so that in no event will shareholders of the Fund
incur higher expenses than if it invested directly in adjustable rate
securities. Further information regarding the Fund's and the Portfolio's fees
and expenses is included under "Administration of the Fund."
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund throughout the periods from the effective date of registration (April
15, 1987) to January 31, 1993 and for the nine-month period from February 1,
1993 to October 31, 1993. The information for each of the periods indicated has
been audited by Coopers & Lybrand, independent auditors, whose audit report
appears in the financial statements in the Trust's Statement of Additional
Information, a copy of which may be obtained as noted on the front cover of
this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance+
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Net Realized Distributions Net Asset
Values at Net & Unrealized Total From From Net Distributions Values
Year Beginning Investment Gains on Investment Investment From Total at End
Ended of Year Income Securities Operations Income Capital Gains Distributions of Year
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992(1) $ 10.00 $ -- $ -- $ -- $ -- $ -- $ -- $ 10.00
1993 10.00 .60 .031 .631 (.601) -- (.601) 10.03
1993(2) 10.00 .37 .009 .379 (.369) -- (.369) 10.04
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------
Ratio of Net
Net Assets Ratio of Investments
at End Expenses Income Portfolio
Year Total of Year to Average to Average Turnover
Ended Return++ (in 000's) Net Assets** Net Assets Rate
- ----------------------------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
<S> <C> <C> <C> <C> <C>
1992(1) -- % $ -- -- % -- % -- %
1993 6.48 12,521 -- 5.84 48.95
1993(2) 3.83 37,809 -- 4.69* 49.11
</TABLE>
(1)For the period December 26, 1991 (effective date of registration) to January
31, 1992.
(2)For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends and capital gains at net asset value.
**During the periods indicated, Advisers reduced its management fees and
reimbursed other expenses incurred by the Fund. Had such action not been taken,
the ratios of operating expenses to average net assets would have been as
follows:
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
1992(1)..................... -%
1993........................ 1.27
1993(2)..................... .54*
4
ABOUT THE FUND
The Trust, which was organized as a Massachusetts business trust on December
16, 1986, is an open-end management investment company, or mutual fund, and has
registered with the SEC under the Investment Company Act of 1940 (the "1940
Act"). The Fund and the additional separate diversified and non-diversified
series of the Trust each issue a separate series of shares of beneficial
interest. Shares of the Fund may be purchased (minimum investment of $100
initially and $25 thereafter) at the current public offering price which is
equal to the Fund's net asset value (see "Valuation of Fund Shares") plus a
sales charge based upon a variable percentage (ranging from 2.25% to 0% of the
offering price) depending upon the amount invested (see "How to Buy Shares of
the Fund"). The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act whereby it will pay up to a maximum of 0.25% per annum of
its average daily net assets to Distributors or others as reimbursement for
expenses incurred in the distribution of the Fund's shares.
INVESTMENT OBJECTIVE
AND POLICIES OF THE FUND
The investment objective of the Fund is to seek a high level of current income,
with lower volatility of principal than a fund which invests in fixed-rate
securities. The Fund pursues its investment objective by investing all of its
assets in the Portfolio, which has the same investment objective and
substantially similar policies as the Fund. The Portfolio is a separate
diversified series of the Adjustable Rate Securities Portfolios, an open-end
management investment company, managed by Franklin Advisers, Inc. Shares of the
Portfolio are acquired by the Fund at net asset value with no sales charge.
Accordingly, an investment in the Fund is an indirect investment in the
Portfolio.
The Portfolio pursues its objective by investing primarily (at least 65% of its
total assets) in adjustable rate securities, including adjustable rate mortgage
securities which are issued or guaranteed by private institutions or by the
U.S. government, its agencies or instrumentalities, collateralized by or
representing an interest in mortgages, and other adjustable rate asset-backed
securities (collectively, "ARS," or, with respect only to adjustable rate
mortgage securities, "ARMS") which have interest rates which reset at periodic
intervals. All securities in which the Portfolio invests will be rated at least
AA or Aa by S&P or Moody's, respectively, or if unrated, will be deemed to be
of comparable quality by the Portfolio's investment manager. Non-governmental
issuers of the ARMS in which the Fund may invest through the Portfolio include
commercial banks, savings and loan institutions, insurance companies, including
private mortgage insurance companies, mortgage bankers, mortgage conduits of
investment banks, finance companies, real estate companies and private
corporations and others ("private mortgage securities"), so long as they are
consistent with the Portfolio's (and the Fund's) investment objective. Such
private mortgage securities which are not issued or guaranteed by the U.S.
government are generally structured with one or more types of credit
enhancement. The Portfolio may from time to time increase its investments by
borrowing from banks (see "Borrowing" for further information). In addition,
the Fund may invest through the Portfolio up to 35% of its total assets in the
following fixed-rate securities: (a) notes, bonds and discount notes of the
following U.S. government agencies or instrumentalities: Federal Home Loan
Banks, Federal National Mortgage Associa-
5
tion ("FNMA"), Government National Mortgage Association ("GNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC"), and Small Business Administration;
(b) obligations of or guaranteed by the full faith and credit of the U. S.
government and repurchase agreements collateralized by such obligations; (c)
asset-backed securities; and (d) time and savings deposits in commercial or
savings banks or in institutions whose accounts are insured by the FDIC.
Investments in savings deposits are considered illiquid and are further
restricted as noted under "Other Permitted Investments." Investments in
fixed-rate securities generally decline in value during periods of rising
interest rates and conversely, increase in value when interest rates fall. To
the extent any Portfolio assets are invested in such fixed-rate securities, the
Portfolio's (and the Fund's) values will be more sensitive to interest rate
changes than if it were fully invested in adjustable rate securities.
There is, of course, no assurance that the Fund's investment objective will be
achieved. As the value of the securities held by the Portfolio fluctuate, the
Portfolio's net asset value per share will also fluctuate.
ADVANTAGES OF INVESTING IN THE FUND
The Fund enables its shareholders to invest easily in ARS which are rated at
least AA by S&P or Aa by Moody's or, if unrated, will be deemed to be of
comparable quality by the Portfolio's investment manager, or such ARS which are
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
by allowing an initial investment of as low as $100. The Fund believes that by
investing in the Portfolio, which in turn invests primarily in ARS which
provide for variable rates of interest, it will achieve a more consistent and
less volatile net asset value than is characteristic of mutual funds that
invest primarily in securities paying a fixed rate of interest.
SPECIAL INFORMATION REGARDING THE
FUND'S MASTER/FEEDER FUND STRUCTURE
The investment objectives of both the Fund and the Portfolio are fundamental
and may not be changed without shareholder approval. The investment policies
described herein include those followed by the Portfolio in which the Fund
invests. Information on administration and expenses is included under
"Administration of the Fund." See the Statement of Additional Information for
further information regarding the Fund's and the Portfolio's investment
restrictions.
An investment in the Fund may be subject to certain risks due to the Fund's
structure, such as the potential that upon redemption by other future
shareholders in the Portfolio, the Fund's expenses may increase or the
economies of scale which have been achieved as a result of the structure may be
diminished. Institutional investors in the Portfolio that have a greater pro
rata ownership interest in the Portfolio than the Fund could have effective
voting control over the operation of the Portfolio. Further, in the event that
the shareholders of the Fund do not approve a proposed future change in the
Fund's objective or fundamental policies, which has been approved for the
Portfolio, the Fund may be forced to withdraw its investment from the Portfolio
and seek another investment company with the same objective and policies. In
addition, the Fund may withdraw its investment in the Portfolio at any time if
the Board of Trustees of the Trust considers that it is in the best interests
of the Fund to do so. Upon any such withdrawal, the Board of Trustees of the
Trust would consider what action to take, including the investment of all of
the assets of the Fund in another pooled investment entity having the
6
same investment objectives and policies as the Fund or the hiring of an
investment adviser to manage the Fund's investments. Such circumstances may
cause an increase in Fund expenses. Further, the Fund's structure is a
relatively new format which often results in certain operational and other
complexities. The Franklin organization was one of the first mutual fund
complexes in the country to implement such a structure, and the trustees do not
believe that the additional complexities outweigh the benefits to be gained by
shareholders.
The Franklin Group of Funds(R) has another fund which may invest in the
Portfolio and which is designed for institutional investors only. It is
possible that in the future other funds may be created which may likewise
invest in the Portfolio or existing funds may be restructured so that they may
invest in the Portfolio. If and when that happens, the Fund or Advisers will
forward to any interested shareholder additional information, including a
prospectus and statement of additional information, if requested, regarding
such other institutions through which they may make investments in the
Portfolio. Any such fund may be offered at the same or a different public
offering price; thus, an investor in such fund may experience a different
return from an investor in another investment company which invests exclusively
in the Portfolio. Investors interested in obtaining information about such
funds may contact the departments listed under "How to Get Information
Regarding an Investment in the Fund." The Portfolio is a series of Adjustable
Rate Securities Portfolios, a management investment company and a Delaware
business trust, organized on February 15, 1991. Adjustable Rate Securities
Portfolios is authorized to issue an unlimited number of shares of beneficial
interest with a par value of $.01 per share. All shares have one vote and, when
issued, are fully paid, non-assessable, and redeemable. Currently, Adjustable
Rate Securities Portfolios issues shares in two separate series; however,
additional series may be added in the future by the Board of Trustees of the
Adjustable Rate Securities Portfolios, the assets and liabilities of which will
be separate and distinct from any other series.
Whenever the Fund, as an investor in the Portfolio, is asked to vote on a
matter relating to the Portfolio, the Trust, on behalf of the Fund, will hold a
meeting of the Fund's shareholders and will cast its votes in the same
proportions as the Fund's shareholders have voted.
ADJUSTABLE RATE SECURITIES
Adjustable Rate Securities are debt securities with interest rates which,
rather than being fixed, are adjusted periodically pursuant to a pre-set
formula and interval. As stated above, the Portfolio will invest primarily in
ARS. The interest paid on ARS and, therefore, the current income earned by the
Portfolio by investing in such securities, will be a function primarily of the
indexes upon which adjustments are based and the applicable spread relating to
such securities. (See the discussion of "Resets" herein.)
The interest rates paid on ARS are generally readjusted periodically to an
increment over the chosen interest rate index. Such readjustments occur at
intervals ranging from one to thirty-six months. The degree of volatility in
the market value of the securities held by the Portfolio and of the net asset
value of Portfolio shares will be a function primarily of the length of the
adjustment period and the degree of volatility in the applicable indexes. It
will also be a function of the maximum increase or decrease of the interest
rate adjustment on any one adjustment date, in any one year and over the life
of the securities. These maxi-
7
mum increases and decreases are typically referred to as "caps" and "floors,"
respectively. The Portfolio does not seek to maintain an overall average cap or
floor, although the Portfolio's investment manager will consider caps or floors
in selecting ARS for the Portfolio.
While the Portfolio does not attempt to maintain a constant net asset value per
share, during periods in which short-term interest rates move within the caps
and floors of the securities held by the Portfolio, the fluctuation in market
value of the ARS in the portfolio is expected to be relatively limited, since
the interest rate on the portfolio will adjust to market rates within a short
period of time. In periods of substantial short-term volatility in short-term
interest rates, the value of the portfolio may fluctuate more substantially
since the caps and floors of the ARS in the portfolio may not permit the
interest rate to adjust to the full extent of the movements in short-term rates
during any one adjustment period. In the event of dramatic increases in
interest rates, the lifetime caps on the ARS may prevent such securities from
adjusting to prevailing rates over the term of the loan. In this circumstance,
the market value of the ARS may be substantially reduced with a corresponding
decline in the Portfolio's net asset value.
For a discussion of the Portfolio's investments in adjustable rate asset-backed
securities, including the risk of such investments, see "Investment Objective
and Policies of the Fund - Asset-Backed Securities" herein.
RISK OF ADJUSTABLE RATE SECURITIES
ARS have several characteristics that should be considered before investing in
the Fund. As indicated above, the interest rate reset features of ARS held by
the Portfolio will reduce the effect on the net asset value of Portfolio shares
caused by changes in market interest rates. The market value of ARS and,
therefore, the Portfolio's net asset value, however, may vary to the extent
that the current interest rate on such securities differs from market interest
rates during periods between the interest reset dates. A portion of the ARS in
which the Portfolio may invest may not reset for up to three years. These
variations in value occur inversely to changes in the market interest rates.
Thus, if market interest rates rise above the current rates on the securities,
the value of the securities will decrease; conversely, if market interest rates
fall below the current rate on the securities, the value of the securities will
rise. If investors in the Fund sold their shares during periods of rising rates
before an adjustment occurred, such investors may suffer some loss. The longer
the adjustment intervals on ARS held by the Portfolio, the greater the
potential for fluctuations in the Portfolio's net asset value.
Investors in the Fund will receive increased income as a result of upward
adjustments of the interest rates on ARS held by the Portfolio in response to
market interest rates. The Fund and its shareholders, however, will not benefit
from increases in market interest rates once such rates rise to the point where
they cause the rates on such ARS to reach their maximum adjustment date, annual
or lifetime caps. In addition, because of their interest rate adjustment
feature, ARS are not an effective means of "locking-in" attractive interest
rates for periods in excess of the adjustment period.
The largest class of ARS in which the Fund will invest is ARMS which possesses
unique risks. For example, in the case of privately issued ARMS where the
underlying mortgage assets carry no agency or instrumentality guarantee, the
mortgagors on the loans underlying ARMS are often qualified for such loans on
the basis of the original payment amounts. The mortgagor's income
8
may not be sufficient to enable them to continue making their loan payments as
such payments increase, resulting in a greater likelihood of default.
Conversely, any benefits to the Fund and its shareholders from an increase in
the Portfolio's net asset value caused by falling market interest rates is
reduced by the potential for a decline in the interest rates paid on ARS held
by the Portfolio. In this regard, the Fund is not designed for investors
seeking capital appreciation.
ADJUSTABLE RATE MORTGAGE SECURITIES
Adjustable Rate Mortgage Securities (ARMS), like a traditional mortgage
security, are interests in a pool of mortgage loans. Most mortgage securities
are pass-through securities, which means that they provide investors with
payments consisting of both principal and interest as mortgages in the
underlying mortgage pool are paid off by the borrower. The dominant issuers or
guarantors of mortgage securities today are GNMA, FNMA, and FHLMC. GNMA creates
mortgage securities from pools of government-guaranteed or insured (Federal
Housing Authority or Veterans Administration) mortgages originated by mortgage
bankers, commercial banks, and savings and loan associations. FNMA and FHLMC
issue mortgage securities from pools of conventional and federally insured
and/or guaranteed residential mortgages obtained from various entities,
including savings and loan associations, savings banks, commercial banks,
credit unions, and mortgage bankers. Non-governmental issuers of mortgage pools
may be the originators of the underlying mortgage loans as well as the
guarantors of the private mortgage securities.
The adjustable interest rate feature of the mortgages underlying the mortgage
securities in which the Portfolio invests generally will act as a buffer to
reduce sharp changes in the Portfolio's net asset value in response to normal
interest rate fluctuations. As the interest rates on the mortgages underlying
the Portfolio's investments are reset periodically, yields of portfolio
securities will gradually align themselves to reflect changes in market rates
so that the market value of the securities held by the Portfolio will remain
relatively stable as compared to fixed-rate instruments and should cause the
net asset value of the Fund to fluctuate less significantly than it would if
the Portfolio invested in more traditional long-term, fixed-rate debt
securities. During periods of rising interest rates, changes in the coupon rate
lag behind changes in the market rate, resulting in possibly a lower net asset
value until the coupon resets to market rates. Thus, investors could suffer
some principal loss if they sold their shares of the Fund before the interest
rates on the underlying mortgages are adjusted to reflect current market rates.
A portion of the ARMS in which the Portfolio may invest may not reset for up to
three years. During periods of extreme fluctuation in interest rates, the
Fund's net asset value will fluctuate as well. Since most mortgage securities
in the Portfolio's portfolio will generally have annual reset caps of 100 to
200 basis points, short-term fluctuation in interest rates above these levels
could cause such mortgage securities to "cap out" and to behave more like
long-term, fixed-rate debt securities.
Unlike fixed-rate mortgages, which generally decline in value during periods of
rising interest rates, adjustable rate mortgage securities allow the Portfolio
to participate in increases in interest rates through periodic adjustments in
the coupons of the underlying mortgages, resulting in both higher current
yields and lower price fluctuations. Furthermore, if prepayments of principal
are made on the underlying mortgages during periods of rising interest rates,
the Portfolio generally will
9
be able to reinvest such amounts in securities with a higher current rate of
return. The Portfolio, however, will not benefit from increases in interest
rates to the extent that interest rates rise to the point where they cause the
current coupon of adjustable rate mortgages held as investments by the
Portfolio to exceed the maximum allowable annual or lifetime reset limits (or
"cap rates") for a particular mortgage. Also, the Portfolio's net asset value
could vary to the extent that current yields on mortgage-backed securities are
different than market yields during interim periods between coupon reset dates.
During periods of declining interest rates, of course, the coupon rates may
readjust downward, resulting in lower yields to the Fund. Further, because of
this feature, the value of ARMS are unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate instruments. As with
other mortgage backed securities, interest rate declines may result in
accelerated prepayment of mortgages and the proceeds from such prepayments must
be reinvested at lower prevailing interest rates.
One additional difference between ARMS and fixed-rate mortgages is that for
certain types of ARMS, the rate of amortization of principal, as well as
interest payments, can and does change in accordance with movements in a
particular, pre-specified, published interest rate index. The amount of
interest due to an ARMS holder is calculated by adding a specified additional
amount, the "margin," to the index, subject to limitations or caps on the
maximum and minimum interest that is charged to the mortgagor during the life
of the mortgage or to maximum and minimum changes to that interest rate during
a given period. It is these special characteristics which are unique to
adjustable rate mortgages that the Fund believes make them attractive
investments in seeking to accomplish the Fund's objective.
The mortgage securities which are issued or guaranteed by GNMA, FHLMC, or FNMA
("Certificates") are called pass-through Certificates because a pro rata share
of both regular interest and principal payments (less GNMA's, FHLMC's, or
FNMA's fees and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly
to the holder of the Certificate (i.e., the Portfolio). The principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. FNMA guarantees full and timely payment of
all interest and principal, while FHLMC guarantees timely payment of interest
and ultimate collection of principal. Mortgage securities from FNMA and FHLMC
are not backed by the full faith and credit of the U.S. government; however,
they are generally considered to offer minimal credit risks. The yields
provided by these mortgage securities have historically exceeded the yields on
other types of U.S. government securities with comparable maturities in large
measure due to the prepayment risk. (See "Risks of Mortgage Securities.")
The Portfolio may also invest in pass-through certificates issued by
non-governmental issuers. Pools of conventional residential mortgage loans
created by such issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government guarantees of payment. Timely payment of interest and principal of
these pools is, however, generally supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance. The
insurance and guarantees are issued by government entities, private insurance
or the mortgage poolers. Such insur-
10
ance and guarantees and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security meets the
Portfolio's quality standards.
The Portfolio may buy mortgage-related securities without insurance or
guarantees if through an examination of the loan experience and practices of
the poolers, the investment manager determines that the securities meet the
Portfolio's quality standards. The Portfolio expects that governmental,
government-related or private entities may create mortgage loan pools offering
pass-through investments in addition to those described above. The mortgages
underlying these securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may vary or whose
terms to maturity may differ from customary long-term, fixed-rate mortgages. As
new types of mortgage-related securities are developed and offered to
investors, the investment manager will, consistent with the Portfolio's
objective, policies and quality standards, consider making investments in such
new types of securities.
Collateralized Mortgage Obligations ("CMOs") and Real Estate Mortgage
Investment Conduits ("REMICs") and Multi-Class Pass-Throughs. The Portfolio may
also invest in certain debt obligations which are collateralized by mortgage
loans or mortgage pass-through securities. Such securities may be issued or
guaranteed by U.S. government agencies or issued by certain financial
institutions and other mortgage lenders. CMOs and REMICs are debt instruments
issued by special purpose entities which are secured by pools of mortgage loans
or other mortgage-backed securities. Multi-class pass-through securities are
equity interests in a trust composed of mortgage loans or other mortgage-backed
securities. Payments of principal and interest on underlying collateral
provides the funds to pay debt service on the CMO or REMIC or make scheduled
distributions on the multi-class pass-through securities. CMOs, REMICs and
multi-class pass-through securities (collectively CMO unless the context
indicates otherwise) may be issued by agencies or instrumentalities of the U.S.
government or by private organizations.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche," is issued at a specified
coupon rate or adjustable rate tranche (which is discussed in the next
paragraph) and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturities or final distribution dates.
Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on the underlying mortgages may
be allocated among several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal prepayments,
on the underlying mortgages are applied to the classes of a series of a CMO in
the order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of a CMO until all other
classes having an earlier stated maturity or final distribution date have been
paid in full.
One or more tranches of a CMO or REMIC may have coupon rates which reset
periodically at a specified increment over an index such as the London
Interbank Offered Rate ("LIBOR"). These adjustable rate tranches, known as
"floating rate CMOs," will be deemed to be treated as ARMS by the Portfolio.
Floating rate CMOs may be backed by fixed-rate or adjustable rate mortgages; to
date, fixed-rate mortgages have been more commonly utilized for this purpose.
Floating rate CMOs are
11
typically issued with lifetime caps on the coupon rate thereon. These caps,
similar to the caps on adjustable rate mortgages, represent a ceiling beyond
which the coupon rate on a floating rate CMO may not be increased regardless of
increases in the interest rate index to which the floating rate CMO is geared.
REMICs, which are authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the mortgages which collateralize
the REMICs in which the Portfolio may invest include mortgages backed by GNMA
certificates or other mortgage pass-throughs issued or guaranteed by the U.S.
government, its agencies or instrumentalities or issued by private entities,
which are not guaranteed by any government agency.
Yields on privately issued CMOs as described above have been historically
higher than the yields on CMOs issued or guaranteed by U.S. government
agencies. The risk of loss due to default on such instruments, however, is
higher since they are not guaranteed by the U.S. government. The trustees of
the Portfolio believe that accepting the risk of loss relating to privately
issued CMOs that the Portfolio acquires is justified by the higher yield the
Portfolio will earn in light of the historic loss experience on such
instruments. The Portfolio will not invest in subordinated privately issued
CMOs.
To the extent any privately issued CMOs and REMICs in which the Portfolio
invests are considered by the SEC to be investment companies, the Portfolio
will limit its investments in such securities in a manner consistent with the
provisions of the 1940 Act.
Resets. The interest rates paid on the ARS in which the Portfolio invests
generally are readjusted at intervals of one year or less to an increment over
some predetermined interest rate index. There are three main categories of
indices: those based on U.S. Treasury securities; those derived from a
calculated measure such as a cost of funds index; or a moving average of
mortgage rates. Commonly utilized indices include the one-, three- and
five-year constant maturity Treasury rates, the three-month Treasury bill rate,
the six-month Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-, three-, six-month or one-year LIBOR, the prime rate of a
specific bank, or commercial paper rates. Some indices, such as the one-year
constant maturity Treasury rate, closely mirror changes in market interest rate
levels. Others, such as the 11th District Home Loan Bank Cost of Funds index,
tend to lag behind changes in market rate levels and tend to be somewhat less
volatile.
Caps and Floors. The underlying mortgages which collateralize the ARMS and the
floating rate CMOs in which the Portfolio invests will frequently have caps and
floors which limit the maximum amount by which the loan rate to the residential
borrower may change up or down (1) per reset or adjustment interval and (2)
over the life of the loan. Some residential mortgage loans restrict periodic
adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These payment
caps may result in negative amortization.
Stripped Mortgage Securities. The Portfolio may also invest in stripped
mortgage securities, which are derivative multiclass mortgage securities. The
stripped mortgage securities in which the Portfolio may invest will only be
issued or guaranteed
12
by the U.S. government, its agencies or instrumentalities. Stripped mortgage
securities have greater market volatility than other types of mortgage
securities in which the Portfolio invests.
Stripped mortgage securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and
the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will receive all of the principal (the principal-only or "PO" class). The
yield to maturity on an IO class is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the yield to maturity
of any such IOs held by the Portfolio. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Portfolio may
fail to fully recoup its initial investment in these securities even if the
securities are rated in the highest rating categories, AAA or Aaa, by S&P or
Moody's, respectively.
Although stripped mortgage securities are purchased and sold by institutional
investors through several investment banking firms acting as brokers or
dealers, these securities were only recently developed. As a result,
established trading markets have not yet been fully developed for all such
securities and, accordingly, some of these securities may generally be
illiquid. The staff of the SEC (the "Staff") had previously indicated that it
viewed all such securities as illiquid. More recently the Staff modified this
view and has indicated that a government-issued IO or PO backed by fixed-rate
mortgages may be deemed to be liquid pursuant to procedures established by the
Portfolio's Board of Trustees. Consistent with this change in policy, the
Portfolio's Board may adopt procedures pursuant to which the Portfolio may
purchase government-issued IOs and POs backed by fixed-rate mortgages deemed to
be liquid under such procedures and if such procedures are adopted, the
Portfolio would be able to purchase such securities and treat them as liquid.
At the present time all such securities continue to be treated as illiquid and
will, together with any other illiquid investments, not exceed 10% of the
Portfolio's net assets. Such position may be changed in response to the Staff's
continued reassessment of this matter, as well as to changing market
conditions.
RISKS OF MORTGAGE SECURITIES
The mortgage securities in which the Portfolio invests differ from conventional
bonds in that principal is paid back over the life of the mortgage security
rather than at maturity. As a result, the holder of the mortgage securities
(i.e., the Portfolio) receives monthly scheduled payments of principal and
interest, and may receive unscheduled principal payments representing
prepayments on the underlying mortgages. When the holder reinvests the payments
and any unscheduled prepayments of principal it receives, it may receive a rate
of interest which is lower than the rate on the existing mortgage securities.
For this reason, mortgage securities may be less effective than other types of
U.S. government securities as a means of "locking in" long-term interest rates.
The market value of mortgage securities, like other U.S. government securities,
will generally vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline. Mortgage
securities, however,
13
while having less risk of a decline during periods of rapidly rising rates,
may also have less potential for capital appreciation than other investments of
comparable maturities due to the likelihood of increased prepayments of
mortgages as interest rates decline. To the extent market interest rates
increase beyond the applicable cap or maximum rate on a mortgage security, the
market value of the mortgage security would likely decline to the same extent
as a conventional fixed-rate security.
In addition, to the extent mortgage securities are purchased at a premium,
mortgage foreclosures and unscheduled principal prepayments may result in some
loss of the holder's principal investment to the extent of the premium paid. On
the other hand, if mortgage securities are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal will
increase current and total returns and will accelerate the recognition of
income which when distributed to shareholders will be taxable as ordinary
income.
With respect to pass-through mortgage pools issued by non-governmental issuers,
there can be no assurance that the private insurers associated with such
securities, can meet their obligations under the policies. Although the market
for such non-governmentally issued or guaranteed mortgage securities is
becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. The purchase of such securities is
subject to the Portfolio's limit with respect to investment in illiquid
securities, as more fully described herein.
ASSET-BACKED SECURITIES
In addition to the above types of securities, the Fund may invest through the
Portfolio in asset-backed securities, including adjustable rate asset-backed
securities, which have interest rates that reset at periodic intervals.
Asset-backed securities are similar to mortgage-backed securities. The
underlying assets, however, include assets such as receivables on home equity
and credit card loans, and receivables regarding automobiles, mobile home and
recreational vehicle loans an leases. The assets are securitized either in a
pass-through structure (similar to a mortgage pass-through structure) or in a
pay-through structure (similar to the CMO structure). The Portfolio may invest
in these and other types of asset-backed securities is of a shorter maturity
than mortgage loans and historically has been less likely to experience
substantial prepayment.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of the same type of
security interests in the related collateral. Credit card receivables are
generally unsecured and a number of state and federal consumer credit laws give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables, there
is a risk that the holders may not have either a proper or first security
interest in all of the obligations backing such receivables due to the large
number of vehicles involved in a typical issuance and technical requirements
under state laws. Therefore, recoveries on repossessed collateral may not
always be available to support payments on the securities. For further
discussion concerning the risks of investing in asset-backed securities, see
the Statement of Additional Information.
OTHER INVESTMENT POLICIES
Repurchase Agreements. The Portfolio may engage in repurchase transactions, in
which the Portfolio purchases a U.S. government security subject to resale to a
bank or dealer at an agreed-upon price
14
and date. The transaction requires the collateralization of the seller's
obligation by the transfer of securities with an initial market value,
including accrued interest, equal to at least 102% of the dollar amount
invested by the Portfolio in each agreement, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. A
default by the seller might cause the Portfolio to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The
Portfolio might also incur disposition costs in liquidating the collateral. The
Portfolio, however, intends to enter into repurchase agreements only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System. Under the 1940 Act, a repurchase
agreement is deemed to be the loan of money by the Portfolio to the seller,
collateralized by the underlying security. The U.S. government security subject
to resale (the collateral) will be held pursuant to a written agreement and the
Portfolio's custodian will take title to, or actual delivery of, the security.
When-Issued and Delayed Delivery Transactions. The Portfolio may purchase any
securities for its portfolio on a "when-issued" or "delayed delivery" basis.
These transactions are arrangements under which the Portfolio purchases
securities with payment and delivery scheduled for a future time, generally
within two weeks. Purchases of securities on a when-issued or delayed delivery
basis are subject to market fluctuation and are subject to the risk that the
value or yields at delivery may be more or less than the purchase price or the
yields available when the transaction was effected. Although the Portfolio will
generally purchase securities on a when-issued basis with the intention of
holding such securities, it may sell such securities before the settlement date
if it is deemed advisable. When the Portfolio is the buyer in such a
transaction, it will maintain, in a segregated account with its custodian, cash
or high-grade marketable securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. To the extent the
Portfolio engages in when-issued and delayed delivery transactions, it will do
so only for the purpose of acquiring portfolio securities consistent with the
Portfolio's investment objective and policies, and not for the purpose of
investment leverage. In when-issued and delayed delivery transactions, the
Portfolio relies on the seller to complete the transaction. The other party's
failure to do so may cause the Portfolio to miss a price or yield considered
advantageous. Securities purchased on a when-issued or delayed delivery basis
do not generally earn interest until their scheduled delivery date. The
Portfolio is not subject to any percentage limit on the amount of its assets
which may be invested in when-issued purchase obligations.
Borrowing. The Fund does not borrow money or mortgage or pledge any of the
assets of the Fund except that it may borrow from banks for temporary or
emergency purposes up to 20% of its total assets and pledge its assets in
connection therewith. The Fund may not, however, purchase any portfolio
securities (additional shares of the Portfolio) while borrowings representing
more than 5% of its total assets are outstanding.
The Portfolio may from time to time increase its investments by borrowing from
banks. Borrowings may be secured or unsecured, and at fixed or variable rates
of interest. The Portfolio will borrow only to the extent that the value of its
assets, less its liabilities other than borrowings, is equal to at least 300%
of its borrowings. If the Portfolio does not meet the 300% test, it will be
required to reduce its debt within three business days to the ex-
15
tent necessary to meet that test. This may require the Portfolio to sell a
portion of its investments at a disadvantageous time.
The Portfolio will borrow when the investment manager believes it is
advantageous to do so. Borrowing for investment purposes is a speculative
investment technique known as leveraging. When the Portfolio leverages its
assets, the net asset value of the Portfolio may increase or decrease at a
greater rate than would be the case if the Portfolio were not leveraged. The
interest payable on the amount borrowed increases the Portfolio's expenses,
(and thus reduces the income to the Fund) and if the appreciation and income
produced by the investments purchased with the borrowings exceed the cost of
the borrowing, the investment performance of the Portfolio will be reduced by
leveraging.
Mortgage Dollar Rolls. The Portfolio may enter into mortgage "dollar rolls" in
which the Portfolio sells mortgage-backed securities for delivery in the
current month and simultaneously contracts to repurchase substantially similar
(name, type, coupon and maturity) securities on a specified future date. During
the roll period, the Portfolio forgoes principal and interest paid on the
mortgage-backed securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the "drop") as well as by the interest earned on
the cash proceeds of the initial sale. A covered roll is a specific type of
dollar roll for which there is an offsetting cash position or a cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. Dollar rolls that are not covered rolls will
constitute a borrowing and will be included in the calculation of the
Portfolio's borrowings. Covered rolls, however, are not treated as a borrowing
or other senior security and will be excluded from the calculation of the
Portfolio's borrowings and other senior securities.
Loans of Portfolio Securities. With the approval of their respective Boards of
Trustees and subject to various conditions which may be imposed from time to
time under applicable securities regulations, the Fund and the Portfolio may
lend their respective portfolio securities to qualified securities dealers or
other institutional investors, provided that such loans do not exceed 10% of
the value of their respective total assets at the time of the most recent loan,
and that the borrower deposits and maintains at least 102% cash collateral for
the benefit of the Fund. The lending of securities is a common practice in the
securities industry. The Fund or the Portfolio will engage in security loan
arrangements with the primary objective of increasing income through investment
of the cash collateral in short-term, interest bearing obligations, but will do
so only to the extent consistent with its tax status as a regulated investment
company. The Fund or the Portfolio will continue to be entitled to all interest
on any loaned securities. As with any extension of credit, there are risks of
delay in recovery of loaned securities and the possible loss of rights in the
collateral should the borrower fail financially.
Other Permitted Investments. Other investments permitted by the Fund and the
Portfolio consist of obligations of the U.S., notes, bonds, and discount notes
of the following U.S. government agencies or instrumentalities: Federal Home
Loan Banks, FNMA, GNMA and time and savings deposits (including fixed or
adjustable rate certificates of deposit) in commercial or savings banks or in
institutions whose accounts are insured by the FDIC and other securities which
are consistent with the Portfolio's investment objective. The Portfolio's
investments in savings deposits are generally deemed to be illiquid and will,
together
16
with any other illiquid investments, not exceed 10% of the Portfolio's
total net assets. The Portfolio's investments in time deposits will not exceed
10% of its total assets.
Illiquid Securities. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase agreements of more than
seven days duration) may not constitute, at the time of purchase or at any
time, more than 10% of the value of the total net assets of the Fund.
Temporary Defensive Positions. When maintaining a temporary defensive position,
the Portfolio may invest its assets without limit in U.S. government securities,
certificates of deposit of banks having total assets in excess of $5 billion,
and repurchase agreements.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of additional investment restrictions, some of
which have been adopted as fundamental policies of the Fund and may be changed
only with the approval of a majority of the outstanding voting securities of
the Fund. A list of these restrictions and more information concerning the
policies are discussed in the Statement of Additional Information.
ADMINISTRATION OF THE FUND
The Board of Trustees has the primary responsibility for the overall
management of the Fund and for electing the officers of the Trust who are
responsible for administering the day-to-day operations of the Trust and the
Fund. The Statement of Additional Information, under the discussion "Officers
and Trustees," lists the officers and trustees of the Trust and the Adjustable
Rate Securities Portfolios and contains a brief discussion of their principal
occupations. The Board of Trustees, with all disinterested trustees as well as
the interested trustees voting in favor, has adopted written procedures
designed to deal with potential conflicts of interest which may arise from
having the same persons serving on each trust's Board of Trustees. The
procedures call for an annual review of the Fund's relationship with the
Portfolio, and in the event a conflict is deemed to exist, the Board of
Trustees may take action, up to and including the establishment of a new board
of trustees. The Board of Trustees has determined that there are no conflicts
of interest presented by this arrangement at the present time. A detailed
description is included in the Statement of Additional Information. Advisers
serves as the Fund's administrator and as the Portfolio's investment manager.
Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company, the principal shareholders of
which are Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann,
who own approximately 20%, 16% and 10%, respectively, of Resources' outstanding
shares. Through its subsidiaries, Resources is engaged in various aspects of
the financial services industry. Advisers acts as investment manager or
administrator to 34 U.S. registered investment companies (110 separate series)
with aggregate assets of over $75 billion.
Pursuant to the administration agreement, Advisers provides the Fund with
various statistical and other services in return for an administration fee.
Pursuant to the management agreement with the Portfolio, Advisers supervises
and implements the Portfolio's investment activities and provides certain
administrative services and facilities which are necessary to conduct the
Portfolio's business.
17
Fund shareholders will bear a portion of the Portfolio's operating expenses,
including its management fee, to the extent that the Fund, as a shareholder of
the Portfolio, bears such expenses. The portion of the Portfolio's expenses
borne by the Fund is dependent upon the number of other shareholders of the
Portfolio, if any. Advisers may, but is not obligated to, waive all or any
portion of the management fee due from the Portfolio or the administration fee
due from the Fund. During the period ended October 31, 1993, these fees were
annualized as a result of a change in fiscal year end from January 31 to
October 31. The administration fee which would have accrued to Advisers totaled
0.10% of the Fund's daily net assets. Advisers, however, waived the entire
amount. The Fund's proportionate share of the Portfolio's management fees was
0.40%. Advisers, however, waived a portion of the Portfolio's management fee.
With this reduction, the Fund's proportionate share of the Portfolio's
management fees was 0.04%. Total operating expenses, including administration
fees and the Fund's proportionate share of the Portfolio's expenses, would have
totaled 1.01%. Since Advisers waived the administration fee and a portion of
the Portfolio's management fee, total operating expenses of the Fund, including
its proportionate share of the Portfolio's operating expenses, totaled 0.11%.
See "Expense Table" at the front of the Prospectus. This arrangement may be
terminated by Advisers at any time.
It is not anticipated that the Portfolio or the Fund will incur a significant
amount of brokerage expenses because adjustable rate securities are generally
traded on a "net" basis, that is, in principal transactions without the
addition or deduction of brokerage commissions. To the extent that the
Portfolio does participate in transactions involving brokerage commissions, it
is Advisers' responsibility to select brokers through which such transactions
will be effected.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income primarily in the form of income
dividends paid by the Portfolio. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which income dividends may
be distributed. Thus, the amount of dividends paid per share may vary with each
distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) will
generally be made once a year in December and will reflect the net short-term
and net long-term capital gains realized by the Fund as of October 31, its
fiscal year-end. The Fund reserves the right to make more than one distribution
derived from net short-term and net long-term capital gains in any year or to
adjust the timing of these distributions for operational or other reasons.
Further information on the taxation of distributions is included under
"Taxation of the Fund and Its Shareholders."
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders,
18
the Fund's current policy is to declare income dividends daily and pay them
monthly on or about the last business day of that month. The amount of income
dividend payments by the Fund is dependent upon the amount of net income
received by the Fund from the Portfolio (and the amount of income received by
the Portfolio from its investments), is not guaranteed and is subject to the
discretion of the Board of Trustees. THE FUND DOES NOT PAY "INTEREST" OR
GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application,
income dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the reinvestment
date is seven or more business days after the Fund has been notified. See the
Statement of Additional Information for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will be sent to the
address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Group at net asset value.
Effective June 1, 1994, shareholders may be able to change their dividend
options by telephone. See the section entitled "Telephone Transactions."
HOW SHAREHOLDERS PARTICIPATE IN
THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in the Portfolio, the assets of which are
continuously being invested in portfolio securities. If the securities owned by
the Portfolio increase in value, the value of the Fund shares which the
shareholder owns will increase. If the securities owned by the Portfolio
decrease in value, the value of the shareholder's shares will also decline. In
this way, shareholders participate in any change in the value of the securities
owned by the Fund and the Portfolio.
TAXATION OF THE fUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Infor-
19
mation Regarding Taxation" in the Statement of Additional Information.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund has elected and qualified to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By distributing all of its net investment income and net realized
short-term and long-term capital gain for a fiscal year in accordance with the
timing requirements imposed by the Code and by meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares. Distributions derived from the excess of net long-term
capital gain over net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has owned Fund shares and
regardless of whether such distributions are received in cash or in additional
shares.
None of the distributions paid by the Fund for the fiscal year ended October
31, 1993, qualified for the corporate dividends-received deduction and it is
not expected that distributions for the current fiscal year will so qualify.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following October, will be treated as if received by the
shareholder on December 31 of the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange
of the Fund's shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge incurred in
purchasing shares of the Fund will not be included in the federal tax basis of
such shares sold or exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such shares) if the sales
proceeds are reinvested in the Fund or in another fund in the
Franklin/Templeton Group and a sales charge which would otherwise apply to the
reinvestment is reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added to the tax basis
of the shares acquired in the reinvestment. Shareholders should consult with
their tax advisors concerning the tax rules applicable to the redemption and
exchange of fund shares.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will promptly after the close of
each calendar year advise shareholders of the tax status for federal income tax
purposes of such dividends and distributions.
While many states grant tax-free status to dividends paid to shareholders of
mutual funds from interest income earned by the Fund from direct obligations of
the U.S. government, none of the distributions of the Fund during fiscal year
ending October 31, 1993, qualified for such tax-free treatment. Investments in
mortgage-backed securities (including GNMA, FNMA and FHLMC securities) and
repurchase agreements collateralized
20
by U.S. government securities do not qualify as direct federal obligations in
most states. Shareholders should consult with their own tax advisors with
respect to the applicability of state and local intangible property or income
taxes to their shares of the Fund and distributions and redemption proceeds
received from the Fund.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding taxes to distributions received by them from the Fund and
the application of foreign tax laws to these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The minimum initial investment is $100 and subsequent investments must
be $25 or more. These minimums may be waived when the shares are purchased
through plans established at Franklin providing for regular periodic
investments. The Fund and Distributors reserve the right to refuse any order
for the purchase of shares.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share, plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly
transmitted to the Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a completed
Shareholder Application accompanied by a negotiable check). The sales charge is
a variable percentage of the offering price, depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering price will be
calculated to four decimal places. On orders for less than 100,000 shares, the
offering price will be calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset value per share
is included under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Total Sales Charge
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.00% 0.85%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
There is no sales charge on purchases of $1,000,000 or more.
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of many of the
21
funds in the Franklin Group of Funds(R) and in the Templeton Group of Funds.
Included for these purposes are (a) the open-end investment companies in the
Franklin Group (except Franklin Valuemark II and Franklin Government Securities
Trust) (the "Franklin Group of Funds"), (b) other investment products in the
Franklin Group underwritten by Distributors or its affiliates (although certain
investments may not have the same schedule of sales charges and/or may not be
subject to reduction) (the products in subparagraphs (a) and (b) are referred
to as the "Franklin Group") and (c) the open-end U.S. registered investment
companies in the Templeton Group of Funds except Templeton American Trust,
Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity
Fund, and Templeton Variable Products Series Fund (the "Templeton Group").
Purchases of the Fund pursuant to a Letter of Intent for $1,000,000 or more
will bear no sales charge. Purchases of the Fund pursuant to the Rights of
Accumulation will be at the applicable sales charge of 1% or more until the
additional purchase, plus the value of the account or the amount previously
invested, less redemptions, exceeds $1,000,000. Sales charge reductions based
upon purchases in more than one of the funds in the Franklin Group or Templeton
Group (the "Franklin/Templeton Group") may be effective only after notification
to Distributors that the investment qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and
other funds in the Franklin Group of Funds or the Templeton Group. Compensation
may include financial assistance to dealers in connection with conferences,
sales or training programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and programs regarding
one or more of the Franklin Group of Funds or the Templeton Group and other
dealer-sponsored programs or events. In some instances, this compensation may
be made available only to certain dealers whose representatives have sold or
are expected to sell significant amounts of such shares. Compensation may
include payment for travel expenses, including lodging, incurred in connection
with trips taken by invited registered representatives and members of their
families to locations within or outside of the United States for meetings or
seminars of a business nature. Dealers may not use sales of the Fund's shares
to qualify for this compensation to the extent such may be prohibited by the
laws of any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. None of the aforementioned additional
compensation is paid for by the Fund or its shareholders.
Certain officers and trustees of the Fund are also affiliated with
Distributors. A detailed description is included in the Statement of Additional
Information.
DISTRIBUTION EXPENSES
The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act whereby it may reimburse Distributors or others for expenses
actually incurred by Distributors or others in the promotion and distribution
of the Fund's shares, including but not limited to, the printing of
prospectuses and reports used for sales purposes, expenses of preparation and
distribution of sales literature and related expenses, advertisements, and
other distribution-related expenses, including a prorated portion of
Distributors' overhead expenses attributable to the distribution of Fund
shares, and fees paid to dealers or others as a distribution or service fee for
servicing shareholders of the Fund. The maximum amount which the Fund may pay
to Distributors or others for such distribution expenses is 0.25% per annum of
the average daily net assets of the Fund, payable on a
22
quarterly basis. All expenses of distribution and marketing in excess of 0.25%
per annum will be borne by Distributors without reimbursement from the Fund.
The Plan also covers any payments to or by the Fund, Distributors, or other
parties on behalf of the Fund or Distributors, to the extent such payments are
deemed to be for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of Rule 12b-1. The
payments under the Plan are included in the maximum operating expenses which
may be borne by the Fund.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the
Franklin/Templeton Group may be combined with those of the investor's spouse
and children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the
Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment of sales
charge. Any redemptions made by the shareholder during the 13-month period will
be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased (less redemptions) during the period.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE lETTER OF iNTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure
23
that the full applicable sales charge will be paid if the intended purchase is
not completed. The reserved shares will be included in the total shares owned
as reflected on periodic statements; income and capital gain distributions on
the reserved shares will be paid as directed by the investor. The reserved
shares will not be available for disposal by the investor until the Letter of
Intent has been completed or the higher sales charge paid. If the total
purchases, less redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the investor or
delivered to the investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount
which would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the dealer through whom purchases
were made pursuant to the Letter of Intent (to reflect such further quantity
discount) on purchases made within 90 days before, and on those made after
filing the Letter. The resulting difference in offering price will be applied
to the purchase of additional shares at the offering price applicable to a
single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor 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 which would have applied to the aggregate purchases if the total
of such purchases had been made at a single time. Upon such remittance the
reserved shares held for the investor's account will be deposited to an account
in the name of the investor or delivered to the investor or to the investor's
order. If within 20 days after written request such difference in sales charge
is not paid, the redemption of an appropriate number of reserved shares to
realize such difference will be made. In the event of a total redemption of the
account prior to fulfillment of the Letter of Intent, the additional sales
charge due will be deducted from the proceeds of the redemption and the balance
will be forwarded to the investor. By completing the Letter of Intent section
of the Shareholder Application, an investor grants to Distributors a security
interest in the reserved shares and irrevocably appoints Distributors as
attorney-in-fact with full power of substitution to surrender for redemption
any or all shares for the purpose of paying any additional sales charge due.
Purchases under the Letter of Intent will conform with the requirements of Rule
22d-1 under the 1940 Act. The investor or the investor's securities dealer must
inform Investor Services or Distributors that this Letter is in effect each
time a purchase is made.
Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and
still held $80,000 of Fund shares and now were investing $25,000, the sales
charge would be 1.75%. Information concerning the current sales charge
applicable to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a dis-
24
count and (iii) satisfies uniform criteria which enable Distributors to
realize economies of scale in its costs of distributing shares. A qualified
group must have more than 10 members, must be available to arrange for group
meetings between representatives of the Fund or Distributors and the members,
must agree to include sales and other materials related to the Fund in its
publications and mailings to members at reduced or no cost to Distributors, and
must seek to arrange for payroll deduction or other bulk transmission of
investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both
the check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without sales charge)
by employee benefit plans qualified under Section 401 of the Code, including
salary reduction plans qualified under Section 401(k) of the Code, subject to
minimum requirements with respect to number of employees or amount of purchase,
which may be established by Distributors. Currently those criteria require that
the employer establishing the plan have 500 or more employees or that the
amount invested or to be invested during the subsequent 13-month period in the
Fund or another company or companies in the Franklin/Templeton Group totals at
least $1,000,000. Employee benefit plans not qualified under Section 401 of the
Code may be afforded the same privilege if they meet the above requirements as
well as the uniform criteria for qualified groups previously described under
Group Purchases which enable Distributors to realize economies of scale in its
sales efforts and sales related expenses. If investments by employee benefit
plans at net asset value are made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of their own resources, to such dealer in an amount not to exceed
0.25% of the amount invested. Contact Franklin's Institutional Sales Department
for additional information.
Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to the amount of purchase, which may be established
by Distributors. Currently, those criteria require that the amount invested or
to be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted 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 such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer
who has executed a dealer agreement with Distributors, Distributors or one of
its affiliates may make payment, out of their own resources, to such dealer in
an amount
25
not to exceed 0.25% of the amount invested. Contact Franklin's Institutional
Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
fund in the Franklin Group of Funds or the Templeton Group which were purchased
with a sales charge. The amount which may be so reinvested is limited to an
amount up to, but not exceeding, the redemption proceeds (or to the nearest
full share if fractional shares are not purchased). Shares of the Fund redeemed
in connection with an exchange into another fund (see "Exchange Privilege") are
not eligible for this privilege. In order to exercise this privilege, a written
order for the purchase of shares of the Fund must be received by the Fund or
the Fund's Shareholder Services Agent within 120 days after the redemption. The
120 days, however, do not begin to run on redemption proceeds placed
immediately after redemption in a Franklin Bank Certificate of Deposit ("CD")
until the CD (including any rollover) matures. Reinvestment at net asset value
may also be handled by a securities dealer or other financial institution, who
may charge the shareholder a fee for this service. The use of the term
"securities dealer" shall include other financial institutions which, pursuant
to an agreement with Distributors (directly or through affiliates), handle
customer orders and accounts with the Fund. Such reference, however, is for
convenience only and does not indicate a legal conclusion of capacity. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment is made within a 30-day period. Information
regarding the possible tax consequences of such a reinvestment is included in
the tax section of this Prospectus and the Statement of Additional Information.
Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees, directors and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors
and affiliates of such companies, if they have been such for at least 90 days,
and by their spouses and family members, (2) registered securities dealers and
their affiliates, for their investment account only, and (3) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer. Such sales are made upon the written assurance of
the purchaser that the purchase is made for investment purposes and that the
securities will not be transferred or resold except through redemption or
repurchase by or on behalf of the Fund. Employees of securities dealers must
obtain a special application from their employers or from Franklin's Sales
Department in order to qualify.
Shares of the Fund may also be purchased at net asset value by any state,
county or city, or any instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible investment and
which is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
26
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its administrator on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a dealer who has executed a dealer agreement with
Distributors, Distributors or one of its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales Department for
additional information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers
pursuant to state law.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS INVOLVING
TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and institutions. The Fund may be
used as an investment vehicle for an already existing retirement plan, or
Franklin Trust Company may provide the plan documents and trustee or custodian
services. A plan document must be adopted in order for a plan to be in
existence.
Franklin Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for various types of retirement plans. The brochures for each of the
plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and Internal Revenue Service ("IRS")
requirements.
The Franklin IRA is an individual retirement account in which the
contributions, which are for the most part still deductible for the majority of
wage earners, accumulate on a tax-deferred basis until withdrawn. Pursuant to
the Code, individuals who are not active participants (and who do not have a
spouse who is an active participant) in an employer or joint
employer/union-maintained retirement plan may deduct their full amount of IRA
contribution, the lesser of $2,000 or 100% of compensation. For taxpayers who
are active participants (or whose spouse is an active participant) in such a
retirement plan, the IRA deduction is gradually phased out to the extent that
their adjusted gross incomes exceed certain specified limits.
For taxpayers filing a joint return, even if one spouse received less than $250
in compensation for the year, two IRAs, with an aggregate contribution not
exceeding the lesser of 100% of compensation or $2,250, may be established for
both spouses, provided that no more than $2,000 be contributed to either one.
The Franklin IRA Rollover account is designed to maintain the tax-deferred
status of lump-sum or qualifying partial distributions from an
employer-sponsored retirement plan which are eligible for rollover treatment.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small employers
(generally 25 or fewer employees) who want to make deductible retirement
contributions to an employee's IRA in an amount to be determined annually at
the discretion of the employer up to the lesser of $30,000 or 15% of
compensation per employee. The SAR-SEP allows employees to defer a pre-taxed
portion of their salary to an IRA through their employer in an amount
determined by the employee. The maximum annual salary deferral limit for a
SAR-SEP is the lesser of 5% of compensation (adjusted for deferrals) or $9,240
(1994 limit; indexed for inflation).
27
The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
educational and certain non-profit institutions [ss.501(c)(3) organizations].
The 403(b) Plan allows participants to determine the annual amount of salary
they wish to defer. The maximum annual salary deferral amount is generally the
lesser of 25% or $9,500. Franklin Trust Company may provide billing information
and other support services for the employer.
The Franklin Business Retirement Plans may be used individually, in
combination, or with custom designed features. The Profit Sharing Plan allows
an employer to make contributions, at its discretion, of up to the lesser of
$30,000 or 15% of compensation per employee each year. The Money Purchase
Pension Plan allows the employer to contribute up to the lesser of $30,000 or
25% of compensation per employee; however, a fixed contribution rate must be
elected by the employer at the outset. The Money Purchase Pension Plan may be
used in conjunction with a Profit Sharing Plan to achieve a combined
contribution rate of 25%, up to 15% in the Profit Sharing Plan and a fixed
contribution rate of 10% in the Money Purchase Pension Plan.
Franklin Trust Company can add optional provisions to the Profit Sharing and
Money Purchase Pension Plans described above and can also provide Defined
Benefit, Target Benefit, and 401(k) Plans on a custom designed basis. Business
Retirement Plans, whether standard or custom designed, may require an annual
report to be filed with the IRS.
Liquidations of any Franklin retirement accounts require the completion of
specific distribution forms to comply with IRS regulations. Please see "How to
Sell Shares of the Fund."
For additional information about the Franklin retirement plans, shareholders
may request brochures describing each of the plans from their securities
dealer, investment advisor or Distributors. The brochures contain more specific
information about the retirement plans available from Franklin. Individuals and
employers should consult with a competent tax or financial advisor before
choosing a retirement plan.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
Certain of the programs and privileges described in this section may not be
available directly from the Fund to shareholders whose shares are held, of
record, by a financial institution or in a "street name" account, or networked
account through the National Securities Clearing Corporation ("NSCC") (see the
section captioned "Account Registrations" in this Prospectus).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss
or theft of a share certificate. A lost, stolen or destroyed certificate cannot
be replaced without obtaining a sufficient indemnity bond. The cost of such a
bond, which is generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by his broker.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends
28
reinvested during that period and promptly after each other transaction which
affects the account. This statement will also show the total number of shares
owned by the shareholder, including the number of shares in "plan balance" for
the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in
mind that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account. It is suggested that the shareholder
maintain an account balance of $4,000 for quarterly or less frequent payments
or $10,000 for monthly payments. There are no service charges for establishing
or maintaining a Systematic Withdrawal Plan. The minimum amounts which the
shareholder may withdraw are: $100 per month, $300 per quarter, $600
semiannually or $1,200 annually (these are merely the minimum amounts allowed
under the plan and should not be mistaken for recommended amounts). Capital
gain distributions and income dividends to the shareholder's account are
received in additional shares at net asset value. Payments are then made from
the liquidation of shares at net asset value on the day of the liquidation
(which is generally the first business day of the month in which the
distribution is scheduled) to meet the specified withdrawals. Payments are
generally received three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another fund in the Franklin Group of Funds or the
Templeton Group, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days
for initial processing. Withdrawals which may be paid in the interim will be
sent to the address of record. Liquidation of shares may reduce or possibly
exhaust the shares in the shareholder's account, to the extent withdrawals
exceed shares earned through dividends and distributions, particularly in the
event of a market decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining balance will be sent to
the shareholder. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. The entire Systematic
Withdrawal Plan payment cannot be considered as actual yield or income since
part of such a Systematic Withdrawal Plan payment may be a return of capital.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of
29
the sales charge on the additional purchases. The shareholder should
ordinarily not make additional investments of less than $5,000 or three times
the annual withdrawals under the plan during the time such a plan is in effect.
A Systematic Withdrawal Plan may be terminated on written notice by the
shareholder or the Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimums) and schedule of
withdrawal payments or suspend such payments (for up to one month) by giving
written notice to Investor Services at least seven business days prior to the
end of the month preceding a scheduled payment. Share certificates may not be
issued while a Systematic Withdrawal Plan is in effect.
Payments under the Systematic Withdrawal Plan directed to funds which are sold
with a sales charge will be invested at the applicable offering price (which
includes the sales charge). Withdrawals under the plan are not considered
redemptions for purposes of the reinvestment at net asset value privilege.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact Franklin's Institutional Services Department at 1/800-321-8563.
EXCHANGE PRIVILEGE
The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of the other
mutual funds in the Franklin Group of Funds or the Templeton Group (as defined
under "How to Buy Shares of the Fund") which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Exchanges are made on the
basis of the net asset values of the funds involved, except as set forth below.
Exchanges of shares of the Fund which were purchased without a sales charge
will be charged a sales charge in accordance with the terms of the prospectus
of the fund being purchased, unless the investment on which no sales charge was
paid was transferred in from a fund on which the investor paid a sales charge.
Exchanges of shares of the Fund which were purchased with a lower sales charge
to a fund which has a higher sales charge will be charged the difference,
unless the shares were held in the Fund for at least six months prior to
executing the exchange. When an investor requests the exchange of the total
value of the Fund account, accrued but unpaid income dividends and capital gain
distributions will be reinvested in the Fund at the net asset value on the date
of the exchange, and then the entire share balance will be exchanged into the
new fund in accordance with the procedures set forth above. Because the
exchange is considered a redemption and purchase of shares, the shareholder may
realize a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and in the Statement of Additional Information.
30
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge. In addition, in accordance
with the terms of their respective prospectuses, certain funds do not accept,
or may place certain limitations on exchanges by Timing Accounts.
The equivalent of an exchange involving retirement accounts (including IRAs)
between the Franklin Group of Funds and the Templeton Group can be accomplished
through a trustee-to-trustee transfer and requires the completion of additional
documentation before it can be effected. Call 1-800/527-2020 for further
information and forms.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer. Exchanges will be effected upon receipt of written instructions
signed by all account owners and accompanied by any outstanding share
certificates properly endorsed.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
TELEPHONE EXCHANGE PRIVILEGE
Shareholders who elect to use the Telephone Exchange Privilege must first
complete the Telephone Exchange authorization portion of the Shareholder
Application or complete a separate authorization form available by calling
Franklin's Shareholder Services Department. The Telephone Exchange Privilege
allows a shareholder to effect exchanges from the Fund into an identically
registered account in one of the other available funds in the Franklin Group of
Funds or the Templeton Group by calling Franklin's Shareholder Services
Department at 1-800/632-2301. The Telephone Exchange Privilege is available
only for uncertificated shares or those which have previously been deposited in
the shareholder's account. The Telephone Exchange Privilege will not be
effective for outstanding certificated shares. Neither the Fund nor Investor
Services will be liable for following instructions communicated by telephone
reasonably believed to be genuine and a loss to the shareholder may result due
to an unauthorized transaction. The Fund and Investor Services will employ
reasonable procedures (which may include one or more of the following:
recording all telephone calls requesting telephone exchanges, verifying
authorization and requiring some form of personal identification prior to
acting upon instructions, and sending a statement each time a telephone
exchange is made) to confirm that instructions communicated by telephone are
genuine. The Fund and Investor Services may be liable for any losses due to
unauthorized or fraudulent instructions only if such reasonable procedures are
not followed. Of course, shareholders are not obligated in any way to execute a
Telephone Exchange Privilege form and may choose to make an exchange in
writing.
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.
The telephone exchange program is being modified effective June 1, 1994. See
section entitled "Telephone Transactions."
31
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, the
Shareholder Services Agent will accept exchange orders by telephone or other
means of electronic transmission from securities dealers who execute a dealer
or similar agreement with Distributors. Such a dealer-ordered exchange will be
effective only for uncertificated shares on deposit in the shareholder's
account or for which certificates have previously been deposited. A securities
dealer may charge a fee for handling an exchange. Use of the exchange privilege
in conjunction with market timing services offered through numerous securities
dealers has become increasingly popular as a means of capital management. In
the event that a substantial portion of the Fund's shareholders should, within
a short period, elect to redeem their shares of the Fund pursuant to the
exchange privilege, the Fund might have to liquidate 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 should occur, it is the
general policy of the Fund to initially invest this money in short-term,
interest-bearing money market instruments, unless it is felt that attractive
investment opportunities consistent with the Fund's investment objectives exist
immediately. Subsequently, this money will be withdrawn from such short-term
money market instruments and invested in portfolio securities in as orderly a
manner as is possible when attractive investment opportunities arise.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares by forwarding a written request, signed by all
registered owners, to Investor Services at the address shown on the back cover
of this Prospectus. The shareholder will then receive from the Fund the value
of the shares based upon the net asset value per share next computed after the
written request in proper form is received by the Shareholder Services Agent.
Redemption requests received after the time at which the net asset value is
calculated (at 1:00 p.m. Pacific time) each day that the New York Stock
Exchange (the "Exchange") is open for business will receive the price
calculated on the following business day. In order to be in proper form, the
shareholder's written request must be accompanied by any share certificates
which have been issued for the shares being redeemed, properly endorsed and in
order for transfer. Shareholders are requested to provide a telephone number(s)
where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.
Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or broker may call Franklin's Retirement Plans
Department to obtain the necessary forms.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's ad-
32
dress of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated
or may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934.
Generally, eligible guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust companies, savings
banks, industrial loan companies and credit unions; (2) national securities
exchanges, registered securities associations and clearing agencies; (3)
securities dealers which are members of a national securities exchange or a
clearing agency or which have minimum net capital of $100,000; or (4)
institutions that participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee medallion program. A
notarized signature will not be sufficient for the request to be in proper
form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the
authorized officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the broker may call
Franklin's Dealer Services Department.
33
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form, except that the Fund may delay the
mailing of the redemption check, or a portion thereof, until the clearance of
the check used to purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will generally reduce this
delay, shares purchased with these checks will also be held pending clearance.
Shares purchased by federal funds wire are available for immediate redemption.
In addition, the right of redemption may be suspended or the date of payment
postponed if the Exchange is closed (other than customary closing) or upon the
determination of the SEC that trading on the Exchange is restricted or an
emergency exists, or if the SEC permits it, by order, for the protection of
shareholders. Of course, the amount received may be more or less than the
amount invested by the shareholder, depending on fluctuations in the market
value of securities owned by the Fund.
SELLING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of
electronic transmission from securities dealers who have entered into a dealer
or similar agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the redemption price will be the
net asset value next calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the
Fund receives the shareholder's written request in proper form. These
documents, as described in the preceding section, are required even if the
shareholder's securities dealer has placed the repurchase order. After receipt
of a repurchase order from the dealer, the Fund will still require a signed
letter of instruction and all other documents set forth above. A shareholder's
letter should reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name. Details of the
dealer-ordered trade, such as trade date, confirmation number, and the amount
of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of the shareholder's redemption will
be sent will begin when the Fund receives all documents required to complete
("settle") the repurchase in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the dealer's
repurchase order and the date the redemption is processed upon receipt of all
documents necessary to settle the repurchase. Thus, it is in a shareholder's
best interest to have the required documentation completed and forwarded to the
Fund as soon as possible. The shareholder's dealer may charge a fee for
handling the order. The Statement of Additional Information contains further
information on the redemption of shares.
Effective June 1, 1994, most shareholders will be able to liquidate shares by
telephone, as noted under "Telephone Transactions."
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry
daily quotations of the prior trading day's closing "bid" (net asset value) and
"ask" (offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following
manner: The aggregate of all liabilities, including accrued expenses and
34
taxes and any necessary reserves, is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the
Fund outstanding at the time. 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. Under procedures approved by the
Board of Trustees of Adjustable Rate Securities Portfolios, the securities of
the Portfolio (in which the Fund invests all of its assets) are valued at
current market value provided by a pricing service, bank or securities dealer,
when over-the-counter market quotations are readily available. 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 of
Trustees.
All money market instruments with a maturity of more than 60 days are valued
at current market, as discussed above. All money market instruments with a
maturity of 60 days or less are valued at their amortized cost, which the Board
of Trustees has determined in good faith constitutes fair value for purposes of
complying with the 1940 Act. This valuation method will continue to be used
until such time as the trustees determine that it does not constitute fair
value for such purposes. With the approval of trustees, the Portfolio may
utilize a pricing service, bank or securities dealer to perform any of the
above described functions. The Portfolio advises the Fund of the net asset
value of the Portfolio shares which is used to calculate the net asset value of
the Fund's shares.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund
Code 51 followed by the # sign, when requested to do so by the automated
operator.
To assist shareholders and brokers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder Services 1-800/632-2301 6:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
35
PERFORMANCE
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five-
and ten-year periods, or portion thereof, to the extent applicable, through the
end of the most recent calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return quotations for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed
as a percentage of the purchase price. Current yield reflects the income per
share earned by the Fund's portfolio investments; it is calculated by dividing
the Fund's net investment income per share during a recent 30-day period by the
maximum public offering price on the last day of that period and annualizing
the result.
Yield, which is calculated according to a formula prescribed by the SEC (see
the Statement of Additional Information), is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate, which may be quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share paid by the Fund
during the past 12 months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it might be appropriate
to annualize the dividends paid during the period such policies were in effect,
rather than using the dividends during the past 12 months. 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 short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the
maximum sales charge on the initial purchase of shares. The investment results
of the Fund, like all other investment companies, will fluctuate over time;
thus, performance figures should not be considered to represent what an
investment may earn in the future or what the Fund's yield, distribution rate
or total return may be in any future period. Additional information is
contained in the Fund's annual report, which is available without charge upon
request.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series. All shares have
one vote and, when issued, are fully paid, non-assessable, and redeemable.
Currently, the Trust issues shares in six separate and distinct series.
36
The Portfolio is a series of Adjustable Rate Securities Portfolios, a Delaware
business trust, organized on February 15, 1991. Adjustable Rate Securities
Portfolios is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share. All shares have one vote and,
when issued, are fully paid, non-assessable, and redeemable. Currently,
Adjustable Rate Securities Portfolios issues shares in only two series;
however, additional series may be added in the future by the Board of Trustees,
the assets and liabilities of which will be separate and distinct from any
other series.
All shares of each series of the Trust have equal voting, dividend and
liquidation rights. Shares of each series of the Trust vote separately as to
issues affecting that series, or the Trust, unless otherwise permitted by the
1940 Act. The shares have noncumulative voting rights, which means that holders
of more than 50% of the shares voting for the election of trustees can elect
100% of the trustees if they choose to do so. The Trust does not intend to hold
annual meetings; it may, however, hold a meeting for such purposes as changing
fundamental investment restrictions, approving a new management agreement or
any other matters which are required to be acted on by shareholders under the
1940 Act. Whenever the Fund is requested to vote on a fundamental policy
pertaining to the Portfolio, it will hold a special meeting of Fund
shareholders and will cast its vote in the same proportion as the shareholders'
votes received. A meeting may also be called by a majority of the Board of
Trustees or by shareholders holding at least 10% of the shares entitled to vote
at the meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of trustees such as
that provided in Section 16(c) of the 1940 Act. The Board of Trustees may from
time to time establish other series of the Trust, the assets and liabilities of
which will be separate and distinct from any other series.
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the
value of such account has been reduced by the shareholder's prior voluntary
redemption of shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided advance notice is
given to the shareholder. More information is included in the Statement of
Additional Information.
Shares have no preemptive or subscription rights and are fully transferable.
There are no conversion rights; however, holders of shares of any fund may
reinvest all or any portion of the proceeds from the redemption or repurchase
of such shares into shares of another fund as described in "Exchange
Privilege."
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused
by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
37
Accounts should not be registered in the name of a minor either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's broker to a comparably
registered Fund account maintained by another securities dealer. Both the
delivering and receiving brokers must have executed dealer agreements on file
with Distributors. Unless a dealer agreement has been executed and is on file
with Distributors, the Fund will not process the transfer and will so inform
the shareholder's delivering broker. To effect the transfer, a shareholder
should instruct the broker to transfer the account to a receiving securities
dealer and sign any documents required by the broker(s) to evidence consent to
the transfer. Under current procedures the account transfer may be processed by
the delivering broker and the Fund after the Fund receives authorization in
proper form from the shareholder's delivering securities dealer. In the future
it may be possible to effect such transfers electronically through the services
of the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee,
or both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near
future, include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required
to report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt shareholders who
have not provided a correct taxpayer identification number ("TIN") and made
certain required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a
38
broker notifies the Fund that the number furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close
an account by redeeming its shares in full at the then-current net asset value
upon receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day to day portfolio
management of the Portfolio in which the Fund invests: Tony Coffey since 1989,
Roger Bayston since 1991 and Jack Lemein since inception.
Tony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey holds a Master of Business Administration from the University of
California at Los Angeles. He earned his Bachelor of Arts degree from Harvard
University. Prior to joining Franklin, Mr. Coffey was an associate with the
Analysis Group. He is a member of several securities industry associations and
joined Franklin in 1989.
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia.
Prior to joining Franklin, Mr. Bayston was an Assistant Treasurer for
Bankers Trust Company. Following completion of the Masters degree program,
Mr. Bayston joined Franklin in 1991.
Jack Lemein
Senior Vice President
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance from the University
of Illinois. Mr. Lemein has been in the securities industry since 1967. He
is a member of several securities industry associations. Mr. Lemein joined
Franklin in 1984.
TELEPHONE TRANSACTIONS
Effective June 1, 1994, shareholders of the Fund and their investment
representative of record, if any, will be able to execute various transactions
by calling the Fund's Shareholder Services Agent at 1-800/632-2301. Redemptions
by telephone will be available to all accounts for which a Telephone
Transaction Application (the "Application") has been received, subject to the
Restricted Account exception noted below. The telephone exchange privilege will
be automatically available to all accounts unless specifically declined.
Shareholders who want to be able to redeem shares by telephone may obtain an
Application from the Fund by writing to the Fund at the address shown on the
cover or by calling the telephone number listed above. Shareholders bear the
risk of loss in certain cases as described below.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares
in one account to another identically registered account in the Fund, (iv)
exchange Fund shares
39
as described in this Prospectus by telephone. Shareholders who complete and
file an Application will be able to redeem shares of the Fund, as more fully
set forth below.
REDEMPTIONS BY TELEPHONE
For shareholder accounts with a completed Application on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 (or the account
balance, whichever is less) per day per Fund account. Telephone redemption
requests received before 1:00 p.m. Pacific time on any business day will be
processed that same day. The redemption check will be sent within seven days,
made payable to all the registered owners on the account, and will be sent only
to the address of record. Redemption requests by telephone will not be accepted
within 30 days following an address change by telephone. In that case, a
shareholder should follow the other redemption procedures set forth in this
Prospectus. Institutional accounts (certain corporations, bank trust
departments, government entities, and qualified retirement plans which qualify
to purchase shares at net asset value pursuant to the terms of this Prospectus)
which wish to execute redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is available from Franklin's
Institutional Services Department by telephoning 1-800/321-8563.
EXCHANGES BY TELEPHONE
The telephone exchange privilege described in this Prospectus will, as of June
1st, automatically be available to all accounts unless the Fund or Investor
Services receives notification from a shareholder that the telephone exchange
privilege should not be extended to a particular account. It will no longer be
necessary to complete a telephone exchange authorization application in order
to do telephone exchanges. Shareholders who do not wish to have telephone
exchange privileges with respect to an account may call or write the Fund or
Investor Services.
VERIFICATION PROCEDURES
As currently disclosed under "Exchange Privilege - Telephone Exchange
Privilege," the Fund and its transfer agent will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine. These will
include: recording all telephone calls requesting account activity by
telephone, requiring the caller to present a form of personal identification as
requested by the telephone service agent at the time of the call, and by
sending a confirmation statement on redemptions to the address of record each
time account activity is initiated by telephone. So long as the Fund and
Investor Services follow instructions communicated by telephone which were
reasonably believed to be genuine at the time of their receipt, neither they
nor their affiliates will be liable for any loss to the shareholder caused by
an unauthorized transaction. The Fund or Investor Services may only be liable
for losses due to an unauthorized or fraudulent instruction if the Fund or
Investor Services failed to follow reasonable procedures to detect such
unauthorized instructions. Shareholders are, of course, under no obligation to
apply for telephone transaction privileges. In any instance where the Fund or
Investor Services is not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Trust
40
Company ("FTC") or Templeton Funds Trust Company ("TFTC") retirement accounts.
To assure compliance with all applicable regulations, special forms are required
for any distribution, redemption, or dividend payment. Although the telephone
exchange privilege is extended to these retirement accounts, a
Franklin/Templeton Transfer Authorization Form must be on file in order to
transfer retirement plan assets between a Franklin fund and a Templeton fund
within the same plan type. Changes to dividend options must also be made in
writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, FTC retirement account shareholders may call
1-800/527-2020 (toll free), and TFTC retirement account shareholders may call
1-800/354-9191 (press "2") (also toll free).
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
registered investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the
Fund at any time upon 60 days' written notice to shareholders.
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE PROSPECTUS OF
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
DATED MARCH 1, 1994
AS AMENDED SEPTEMBER 23, 1994
The following sections of the prospectus are revised to reflect changes to the
operational policies of the Fund, effective February 1, 1995:
1. EXPENSE TABLE
Revised to reflect that investments of $1,000,000 or more are not subject to a
front-end sales charge but a contingent deferred sales charge of 1% will be
imposed on certain redemptions within 12 months of the calendar month following
such investments. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
2. MANAGEMENT OF THE FUND
Revised to add the definition "Franklin Templeton Group" to describe the
subsidiaries of Resources.
3. HOW TO BUY SHARES OF THE FUND
(a) The following is added at the end of the first paragraph:
The Fund may impose a $10 charge for each returned item, against any
shareholder account which, in connection with the purchase of Fund shares,
submits a check or a draft which is returned unpaid to the Fund.
(b) Substitute the following for the sales charge table and the ensuing two
paragraphs:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
----------------------------------------------------------
AS A AS A DEALER CONCESSION
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF NET AS A PERCENTAGE
AT OFFERING PRICE OFFERING PRICE AMOUNT INVESTED OF OFFERING PRICE*,***
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000...................................... 4.25% 4.44% 4.00%
$100,000 but less than $250,000......................... 3.50% 3.63% 3.25%
$250,000 but less than $500,000......................... 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000....................... 2.15% 2.20% 2.00%
$1,000,000 or more...................................... none none (see below)**
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for
purchases of $1 million or more: 0.75% on sales of $1 million but less than
$2 million, plus 0.60% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on sales of $100
million or more. Dealer concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all sales charges may at times be
allowed to the securities dealer. If 90% or more of the sales commission is
allowed, such securities dealer may be deemed to be an underwriter as that
term is defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but
a contingent deferred sales charge of 1% is imposed on certain redemptions
of investments of $1 million or more within 12 months of the calendar month
following such investments ("contingency period"). See "How to Sell Shares
of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on
the purchase of Fund shares is determined by adding the amount of the
shareholder's current purchase plus the cost or current value (whichever is
higher) of a shareholder's existing investment in one or more of the funds
in the Franklin Group of Funds(R) and the Templeton Group of Funds. Included
for these aggregation purposes are (a) the mutual funds in the Franklin
Group of Funds except Franklin Valuemark Funds and Franklin Government
Securities Trust (the "Franklin Funds"), (b) other investment products
underwritten by Distributors or its affiliates (although certain investments
may not have the same schedule of sales charges and/or may not be subject to
reduction) and (c) the U.S. mutual funds in the Templeton Group of Funds
except Templeton American Trust, Inc., Templeton Capital Accumulator Fund,
Inc., Templeton Variable Annuity
1
<PAGE>
Fund, and Templeton Variable Products Series Fund (the "Templeton Funds").
(Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment
qualifies for a discount. References throughout the Prospectus, for purposes
of aggregating assets or describing the exchange privilege, refer to the
above descriptions.
Distributors, or one of its affiliates, may make payments, out of its own
resources, of up to 0.75% of the amount purchased to securities dealers who
initiate and are responsible for purchases made at net asset value by
non-designated retirement plans, and up to 1% of the amount purchased to
securities dealers who initiate and are responsible for purchases made at
net asset value by certain designated retirement plans (excluding IRA and
IRA rollovers), certain trust company and trust departments of banks and
certain retirement plans of organizations with collective retirement plan
assets of $10 million or more. See definitions under "Description of Special
Net Asset Value Purchases" and as set forth in the SAI.
(c) Substitute the following for the current "Purchases at Net Asset Value"
subsection:
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a
front-end sales charge ("net asset value") or a contingent deferred sales
charge by (1) officers, directors, trustees, and full-time employees of the
Trust, any of the Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2) companies exchanging
shares with or selling assets pursuant to a merger, acquisition or exchange
offer; (3) insurance company separate accounts for pension plan contracts;
(4) accounts managed by the Franklin Templeton Group; (5) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from
that fund under an employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the Fund; (6)
certain unit investment trusts and unit holders of such trusts reinvesting
their distributions from the trusts in the Fund; (7) registered securities
dealers and their affiliates, for their investment account only; and (8)
registered personnel and employees of securities dealers and by their
spouses and family members, in accordance with the internal policies and
procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another
of the Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. An
investor may reinvest an amount not exceeding the redemption proceeds. While
credit will be given for any contingent deferred sales charge paid on the
shares redeemed, a new contingency period will begin. Shares of the Fund
redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however, do not begin to
run on redemption proceeds placed immediately after redemption in a Franklin
Bank Certificate of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled by a securities
dealer or other financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction but reinvestment
without a sales charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in the same fund is
made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be
used to purchase shares of the Fund or another of the Franklin Templeton
Funds at net asset value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such distribution. To
exercise this privilege, a written request to reinvest the distribution must
accompany the purchase order. Addi-
2
<PAGE>
tional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have,
within the past 60 days, redeemed an investment in an unaffiliated mutual
fund which charged the investor a contingent deferred sales charge upon
redemption and which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by registered investment
advisors and/or their affiliated broker-dealers, who have entered into a
supplemental agreement with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (also known as a wrap fee
program).
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by anyone who has taken a
distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such distribution.
In order to exercise this privilege a written order for the purchase of
shares of the Fund must be received by Franklin Templeton Trust Company (the
"Trust Company"), the Fund or Investor Services, within 120 days after the
plan distribution. A prospectus outlining the investment objectives and
policies of a fund in which the shareholder wishes to invest may be obtained
by calling toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or
city, or any instrumentality, department, authority or agency thereof which
has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings
into the Fund should consult with expert counsel to determine the effect, if
any, of various payments made by the Fund or its investment manager on
arbitrage rebate calculations. If an investment by an eligible governmental
authority at net asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to such
securities dealer in an amount not to exceed 0.25% of the amount invested.
Contact Franklin's Institutional Sales Department for additional
information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including, profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the
employer establishing the plan have 200 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund
or in any of the Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under Section 401
of the Code ("non-designated plans") may be afforded the same privilege if
they meet the above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases" which enable
Distributors to realize economies of scale in its sales efforts and sales
related expenses.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of
3
<PAGE>
purchase, which may be established by Distributors. Currently, those
criteria require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted 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 such order.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trustees or other
fiduciaries purchasing securities for certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
without regard to where such assets are currently invested.
Refer to the SAI for further information.
4. EXCHANGE PRIVILEGE
(a) The following option is added to "Exchanges by Telephone":
The automatic TeleFACTS(R) system at 1-800/247-1753 is available for
processing exchanges (day or night). During periods of drastic economic or
market changes, however, this option may not be available, in which event
the shareholder should follow other exchange procedures discussed in this
Prospectus.
(b) Add the following paragraph under the subsection "Additional Information
Regarding Exchanges":
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales
charge in the original fund purchased, and shares are subsequently redeemed
within the contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped) for the period
such shares are exchanged into and held in a Franklin or Templeton money
market fund. See also "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
5. HOW TO SELL SHARES OF THE FUND
Add the following subsection:
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on qualified
investments of $1 million or more, a contingent deferred sales charge of 1%
applies to redemptions of those investments within the contingency period of
12 months of the calendar month following their purchase. The charge is 1%
of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge applies, shares
not subject to a contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) Shares representing amounts attributable
to capital appreciation of those shares held less than 12 months; (ii)
shares purchased with reinvested dividends and capital gain distributions;
and (iii) other shares held longer than 12 months; and followed by any
shares held less than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; distributions
to participants in Trust Company retirement plan accounts due to death,
disability or attainment of age 591/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and,
for Systematic Withdrawal Plans set up thereafter, redemptions of up to 1%
monthly of an account's net asset value (3% quarterly, 6% semiannually or
12% annually); and redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account size.
Requests for redemptions for a specified dollar amount will result in
additional shares being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific number of shares
will result in the applicable contingent deferred sales charge being
deducted from the total dollar amount redeemed.
4
<PAGE>
FRANKLIN
GLOBAL GOVERNMENT
INCOME FUND
Franklin Investors Securities Trust
PROSPECTUS MARCH 1, 1994
AS AMENDED SEPTEMBER 23, 1994
[FRANKLIN LOGO]
777 Mariners Island Blvd., P.O. Box 7777
San Mateo, CA 94403-7777 1-800/DIAL BEN
- -------------------------------------------------------------------------------
Franklin Global Government Income Fund (the "Fund"), formerly known as Franklin
Global Opportunity Income Fund, a non-diversified separate series of Franklin
Investors Securities Trust (the "Trust"), seeks a high level of current income,
consistent with preservation of capital, with capital appreciation as a
secondary consideration. The Fund seeks to achieve this objective through
investing primarily in debt securities issued by domestic and foreign
governments and related currency transactions. There can, of course, be no
assurance that the Fund's objective will be achieved.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which the prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information concerning the Fund and the Trust, dated
March 1, 1994, as may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number listed above.
This Prospectus is not an offering of the securities herein described in any
state 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 the underwriter.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Expense Table........................................... 2
Financial Highlights.................................... 4
About the Trust......................................... 4
Investment Objective and Policies of the Fund........... 5
Management of the Fund.................................. 14
Distributions to Shareholders........................... 16
Taxation of the Fund and Its Shareholders............... 17
How to Buy Shares of the Fund........................... 19
Purchasing Shares of the Fund in Connection with
Retirement Plans Involving Tax-Deferred Investments.... 25
Other Programs and Privileges Available to Fund
Shareholders........................................... 26
Exchange Privilege...................................... 28
How to Sell Shares of the Fund.......................... 30
Telephone Transactions.................................. 33
Valuation of Fund Shares................................ 34
How to Get Information Regarding an Investment in
the Fund............................................... 36
Performance............................................. 36
General Information..................................... 37
Account Registrations................................... 38
Important Notice Regarding Taxpayer IRS Certifications.. 39
Portfolio Operations.................................... 39
</TABLE>
Expense Table
- -------------------------------------------------------------------------------
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on restated
aggregate annualized operating expenses of the Fund for the nine months ended
October 31, 1993.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)................... 4.25%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)................... NONE*
Deferred Sales Charge.................................. NONE
Redemption Fees........................................ NONE
Exchange Fee (per transaction)......................... $5.00**
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
ANNUALIZED FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................. 0.58%
12b-1 Fees.................................................. 0.15%*
Other Expenses:
Custodian Fees..................................... 0.09%
Reports to Shareholders............................ 0.04%
Other.............................................. 0.06%
-----
Total Other Expenses........................................ 0.19%
Total Fund Operating Expenses............................... 0.92%***
========
</TABLE>
*A plan of distribution (the "Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as approved by shareholders on April 27, 1994,
became effective May 1, 1994. Consistent with National Association of
Securities Dealers, Inc.'s rules, it is possible that 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 those same rules. The existing sales charge on reinvested
income dividends was eliminated at the same time.
**$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
***Total operating expenses for the nine months ended October 31, 1993 have
been restated to reflect the maximum reimbursement allowed pursuant to the
Plan, as though the Plan had been in effect for the entire fiscal year.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the initial sales charge, that apply to a $1,000 investment in the
Fund over various time periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period. As noted in the table above, the Fund
charges no redemption fees:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C>
$51 $71 $91 $151
</TABLE>
THIS EXAMPLE IS BASED ON THE RESTATED AGGREGATE ANNUALIZED OPERATING EXPENSES
SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are
borne by the Fund and only indirectly by shareholders as a result of their
investment in the Fund. In addition, federal regulations require the example to
assume an annual return of 5%, but the Fund's actual return may be more or less
than 5%. No deduction was made for sales charges on reinvested dividends; the
expenses would be increased if they were reflected.
3
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Set forth below is a table containing the financial highlights for a share of
the Fund throughout the periods from the effective date of registration (March
15, 1988) to January 31, 1993 and for the nine-month period from February 1,
1993 to October 31, 1993. The information for each of the periods indicated has
been audited by Coopers & Lybrand, independent auditors, whose audit report
appears in the financial statements in the Trust's Statement of Additional
Information. See the discussion "Reports to Shareholders" under "General
Information."
<TABLE>
<CAPTION>
Per Share Operating Performance+
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Net Realized Distributions Distributions
Values at Net & Unrealized Total From From Net Distributions From
Period Beginning Investment Gains (Losses) Investment Investment From Return+++ Total
Ended of Year Income on Securities Operations Income Capital Gains of Capital Distributions
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989(1) $10.00 $ .66 $ .296 $ .956 $ (.558) $(.008) $ - $ (.566)
1990 10.39 1.11 (.804) .306 (1.116) - - (1.116)
1991 9.58 1.05 (.174) .876 (1.107) (.009) - (1.116)
1992 9.34 .86 .246 1.106 (.900) (.156) - (1.056)
1993 9.39 .83 (.698) .132 (.713) (.075) (.124) (.912)
1993(2) 8.61 .58 .716 1.296 (.576) - - (.576)
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------
Ratio of Ratio of Net
Net Asset Net Assets Expenses Investment
Values at End to Average Income Portfolio
Period at End Total of Year Net Assets to Average Turnover
Ended of Year Return++ (in 000's) (See Note 6)** Net Assets Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1989(1) $10.39 9.52%(1) $ 5,604 -% 9.92%* 2.05%
1990 9.58 2.69 12,421 .03 11.97 41.34
1991 9.34 9.27 29,660 .25 11.80 72.21
1992 9.39 12.15 78,911 .50 7.87 155.40
1993 8.61 1.08 153,899 .72 7.08 49.20
1993(2) 9.33 15.14 195,627 .77* 6.74* 67.36
</TABLE>
(1) For the period March 15, 1988 (effective date of registration) to January
31, 1989.
(2) For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
* Annualized.
+ Selected data for a share of capital stock outstanding throughout the period.
++ Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value.
+++ Certain distributions have been reclassed to conform with SOP 93-2.
** During the periods indicated, Franklin Advisers, Inc., the investment
manager, reduced its management fees and reimbursed other expenses incurred by
the Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
<TABLE>
<S> <C>
1989(1).......... 1.71%*
1990............. .96
1991............. .87
1992............. .80
1993............. .73*
</TABLE>
ABOUT THE TRUST
- -------------------------------------------------------------------------------
The Trust is an open-end management investment company, or mutual fund,
organized as a Massachusetts business trust on December 16, 1986 and registered
with the SEC under the 1940 Act. The Fund and the other series of the Trust each
issue a separate series of shares of beneficial interest, each a separate entity
with its own investment objective and policies and varying possibilities for
income or capital appreciation, and each subject to varying market risks. The
Fund is a non-diversified series, although the other series of the Trust are
diversified.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge
based upon a variable percentage (ranging from 4.25% to less than 1.0% of the
offering price) depending upon the amount invested. (See "How to Buy Shares of
the Fund.")
4
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
- -------------------------------------------------------------------------------
The Fund's principal investment objective is to provide high current income,
consistent with preservation of capital, with capital appreciation as a
secondary consideration. The objective is a fundamental policy of the Fund and
may not be changed without shareholder approval. The Fund seeks to achieve its
objective by investing primarily in securities issued by both domestic and
foreign governments and engaging in related currency transactions. Investments
will be selected to provide a high current yield and currency stability, or a
combination of yield, capital appreciation or currency appreciation consistent
with the Fund's objective. The Fund may also seek to protect or enhance income,
or protect capital, through the use of forward currency exchange contracts,
options, futures contracts and interest rate swaps. A detailed description of
these financial transactions is included under "Special Strategies." The risk
considerations involved are included under "Special Considerations with Respect
to Global Investing."
The Fund Is a Global Fund: As a global fund, the Fund may invest in securities
issued in any currency and may hold foreign currency. Under normal
circumstances, at least 65% of the Fund's assets will be invested in government
securities of issuers located in at least three countries, one of which may be
the United States ("U.S."). Securities of issuers within a given country may be
denominated in the currency of another country, or in multinational currency
units such as the European Currency Unit ("ECU").
The Fund will allocate its assets among securities of various issuers,
geographic regions, and currency denominations in a manner which is consistent
with its objectives based upon relative interest rates among currencies, the
outlook for changes in these interest rates, and anticipated changes in
worldwide exchange rates. In considering these factors, a country's economic and
political conditions such as inflation rate, growth prospects, global trade
patterns and government policies will be evaluated.
The Fund's assets will be invested principally within Australia, Canada, Japan,
New Zealand, the U.S. and Western Europe, and in securities denominated in the
currencies of these countries or denominated in multinational currency units
such as the ECU. The Fund may also acquire securities and currency in less
developed countries and in developing countries.
Investments will not be made in securities of foreign countries issued without
stock certificates or comparable stock documents. Securities which are acquired
by the Fund outside the U.S. and which are publicly traded in the U.S. 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.
The Fund is also authorized to invest in debt securities of supranational
entities denominated in any currency. A supranational entity is an entity
designated or supported by the national government of one or more countries to
promote economic reconstruction or development. Examples of supranational
entities include, among others, the World Bank, the European Investment Bank and
the Asian Development Bank. The Fund may, in addition, invest in debt securities
denominated in ECU of an issuer in any country (including supranational
issuers). The Fund is further authorized to invest in
5
<PAGE>
"semi-governmentalsecurities," which are debt securities issued by entities
owned by either a national, state or equivalent government or are obligations of
such a government jurisdiction which are not backed by its full faith and credit
and general taxing powers.
TYPE OF SECURITIES THE FUND MAY PURCHASE
The Fund is authorized to invest in securities issued by domestic and foreign
governments and their political subdivisions, including the U.S. government, its
agencies, and authorities or instrumentalities ("U.S. government securities")
and supranational organizations and in securities issued by foreign and domestic
corporations, banks, and other business organizations.
The Fund may purchase and sell forward currency exchange contracts, options on
currencies and securities, and futures contracts and options thereon, if such
transactions are believed to be consistent with the Fund's objectives. A further
discussion of these transactions is included under "Special Strategies."
Under normal economic conditions, at least 65% of the Fund's total assets will
be invested in fixed-income securities such as bonds, notes and debentures. The
remaining 35% may be invested, to the extent available and permissible, in
equity securities, foreign or domestic currency deposits or equivalents such as
short-term U.S. Treasury notes or repurchase agreements. Some of the
fixed-income securities may be convertible into common stock or be traded
together with warrants for the purchase of common stocks, although the Fund has
no current intention of converting such securities into equity or holding them
as equity upon such conversion.
The Fund may invest in debt securities with varying maturities. Under current
market conditions, it is expected that the dollar-weighted average maturity of
the Fund's investments will not exceed 15 years. Generally, the portfolio's
average maturity will be shorter when interest rates worldwide or in a
particular country are expected to rise, and longer when interest rates are
expected to fall.
Other fixed-income securities of both domestic and foreign issuers in which the
Fund may invest include preferred and preference stock and all types of
long-term or short-term debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment trust certificates and
conditional sales contracts. Additional information concerning these three
latter categories is included in the Statement of Additional Information. These
fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit). The Fund will limit its
investments in warrants, valued at the lower of cost or market, to 5% of the
Fund's net assets or to warrants attached to securities.
The Fund may invest in obligations of domestic and foreign banks which, at the
date of investment, have total assets (as of the date of their most recently
published financial statements) in excess of one billion dollars (or foreign
currency equivalent at then current exchange rates).
The Fund is also authorized to acquire loan participations in which the Fund
will purchase from a lender a portion of a larger loan which it has made to a
borrower. Generally such loan participations are sold without guarantee or
recourse to the lending institution and are subject to the credit risks of both
the borrower and the lending institution. Such loan participations, however, may
enable the Fund to acquire an interest in a loan from a finan-
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cially strong borrower which the Fund could not do directly. Further information
is included in the Statement of Additional Information.
OTHER INVESTMENT POLICIES
As a non-diversified fund, there is no restriction under the 1940 Act on the
percentage of the Fund's assets that may be invested at any time in the
securities of any issuer. However, the Fund intends to comply with the
diversification and other requirements of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), applicable to regulated investment companies so
that the Fund will not be subject to U.S. federal income tax on the income and
capital gain that it distributes to shareholders.
Under normal market conditions, the Fund will have at least 65% of its total
assets invested in securities issued or guaranteed by domestic and foreign
governments. Securities issued by central banks which are guaranteed by their
national governments are considered to be government securities. Bonds of
foreign governments or their agencies which may be purchased by the Fund may be
less secure than those of U.S. government issuers.
During periods when it is determined that the Fund should be in a temporary
defensive position, the Fund may have less than 25% of its assets concentrated
in such foreign government securities and may invest instead in U.S. government
securities. Such U.S. government securities which may be purchased by the Fund
may include (i) U.S. Treasury obligations, which differ only in their interest
rates, maturities and times of issuance: U.S. Treasury bills (maturity of one
year or less), U.S. Treasury notes (maturities of one to 10 years), and U.S.
Treasury bonds (generally maturities of greater than 10 years), all of which are
backed by the full faith and credit of the U.S. government; and (ii) obligations
issued or guaranteed by U.S. government agencies or instrumentalities, some of
which are backed by the full faith and credit of the U.S. Treasury (e.g., direct
pass-through certificates of the Government National Mortgage Association); some
of which are supported by the right of the issuer to borrow from the U.S.
government (e.g., obligations of Federal Home Loan Banks); and some of which are
backed only by the credit of the issuer itself (e.g., obligations of the Student
Loan Marketing Association).
When investing for defensive purposes is appropriate, such as during periods of
adverse market conditions, or when relative yields in other securities are not
deemed attractive, part or all of the Fund's assets may be invested in cash
(including foreign currency) or cash equivalent short-term obligations,
including, but not limited to: certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. government or any
of its agencies or instrumentalities, and repurchase agreements secured thereby.
In particular, for defensive purposes a larger portion of the Fund's assets may
be invested in U.S. dollar denominated obligations to reduce the risks inherent
in non-dollar denominated assets.
SPECIAL STRATEGIES
The Fund intends to pursue its fundamental investment objective previously
described through the investment strategies and practices described herein.
These practices and strategies are not fundamental policies of the Fund and may
be changed at the discretion of the Board of Trustees without prior notice or
shareholder approval.
Forward Currency Exchange Contracts: The Fund may enter into forward currency
exchange contracts ("Forward Contract[s]") to attempt to minimize the risk to
the Fund from adverse changes in the relationship between currencies or to
enhance income. A Forward Contract is an obligation to purchase or sell a
specific currency for an agreed
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price at a future date which is individually negotiated and privately traded by
currency traders and their customers.
The Fund may construct an investment position by combining a debt security
denominated in one currency with a Forward Contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
Forward Contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
For example, an Italian lira-denominated position could be constructed by
purchasing a German mark-denominated debt security and simultaneously entering
into a Forward Contract to exchange an equal amount of marks for lira at a
future date and at a specified exchange rate. With such a transaction, the Fund
may be able to receive a return that is substantially similar from a yield and
currency perspective to a direct investment in lira debt securities while
achieving other benefits from holding the underlying security. The Fund may
experience slightly different results from its use of such combined investment
positions as compared to its purchase of a debt security denominated in the
particular currency subject to the Forward Contract. Such difference may be
enhanced or offset by premiums which may be available in connection with the
Forward Contract.
The Fund may also enter into a Forward Contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the Fund believes that a foreign currency may
suffer a substantial decline against the U.S. dollar, it may enter into a
Forward Contract to sell an amount of that foreign currency approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency; or when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed dollar amount.
The Fund sets aside or segregates sufficient cash, cash equivalents or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The Fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked to market on a daily basis. The ability of the
Fund to enter into Forward Contracts is limited only to the extent such Forward
Contracts would, in the opinion of the investment manager, impede portfolio
management or the ability of the Fund to honor redemption requests.
Forward Contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the Fund than if it had not entered into such
contracts.
Options on U.S. and Foreign Securities: The Fund intends to write covered put
and call options and purchase put and call options on U.S. or foreign
securities that are traded on U.S. and foreign securities exchanges and in
over-the-counter markets.
Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call.
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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 and the exercise price of the
call held is (a) equal to or less than the exercise price of the call written,
or (b) greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, government securities or other high grade debt
obligations in a segregated account with its custodian.
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 put option written by the
Fund is "covered" if the Fund maintains cash or high grade debt obligations 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 and 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 purchaser of an option will generally 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 current interest rates.
The writer of an option who wishes to terminate its obligation may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. The effect of the purchase is that
the writer's position will be cancelled by the Options Clearing Corporation or
otherwise economically nullified. However, a writer may not effect a closing
purchase transaction after being notified of the exercise of an option.
Likewise, an investor who is the holder of an option may liquidate its position
by effecting a "closing sale transaction." This is accomplished by selling an
option of the same series as the option previously purchased.
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
transaction prior to or concurrent with the sale of the security. There is no
guarantee in any particular situation that either a closing purchase or a
closing sale transaction can be effected.
The writer of an option may have no control over when the underlying securities
must be sold in the case of a call option, or purchased in the case of a put
option, since the writer of certain options may be assigned an exercise notice
at any time prior to the expiration of the option. Whether or not an option
expires unexercised, the writer retains the amount of the premium.
An option position may be closed out only where there exists a secondary market
for an option of the same series. If a secondary market does not exist, it might
not be possible to effect closing sale transactions in particular options held
by the Fund, with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction with respect to options it has written in a secondary market, it
will not be able to sell the underlying security or other asset covering the
option until the option expires or it delivers the underlying security or asset
upon exercise.
The risks of transactions in options on foreign exchanges are similar to the
risks of investing in foreign securities, which are also described under
"Special Considerations with Respect to Global Investing" herein. In addition, a
foreign exchange may impose different exercise and settlement terms and
procedures and margin requirements than a U.S. exchange.
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The Fund may purchase put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option plus transaction costs.
The Fund may purchase call options to hedge against an increase in the price of
securities that the Fund anticipates purchasing in the future. The premium paid
for the call option plus any transaction costs will reduce the benefit, if any,
realized by the Fund upon exercise of the option. Unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
The ability of the Fund to engage in options transactions is subject to the
following limitations: a) not more than 5% of the total assets of the Fund may
be invested in options (when aggregated with straddles and spreads.); b) the
obligations of the Fund under put options written by the Fund may not exceed 50%
of the net assets of the Fund; and c) the aggregate premiums on all options
purchased by the Fund may not exceed 20% of the net assets of the Fund.
A further discussion of the use, risks and costs of options is included in the
Statement of Additional Information.
Options on Foreign Currencies: The Fund may purchase and write put and call
options on foreign currencies (traded on U.S. and foreign exchanges or over-the
counter) for hedging purposes to protect against declines in the U.S. dollar
value of foreign portfolio securities and against increases in the U.S. dollar
cost of foreign securities or other assets to be acquired. As in the case of
other kinds of options, however, the writing of an option on foreign currency
will constitute only a partial hedge, up to the amount of the premium received,
and the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse
to the Fund's position, the Fund may forfeit the entire amount of the premium
plus related transaction costs. A further discussion of the use, risks and costs
of options on foreign currencies is included in the Statement of Additional
Information.
Futures Contracts and Options on Futures Contracts: The Fund may enter into
contracts for the purchase or sale for future delivery of debt securities
("Futures Contracts") and may purchase or write options to buy or sell Futures
Contracts traded on U.S. and foreign exchanges ("Options on Futures Contracts").
These investment techniques are designed only to hedge against anticipated
future changes in interest rates which otherwise might either adversely affect
the value of the Fund's portfolio securities or adversely affect the prices of
securities which the Fund intends to purchase at a later date. Should interest
rates move in an unexpected manner, the Fund may not achieve the anticipated
benefits of Futures Contracts or Options on Futures Contracts or may realize a
loss. A further discussion of the use, risks and costs of Futures Contracts and
Options on Futures Contracts is included in the Statement of Additional
Information.
The trustees have adopted the requirement that Futures Contracts and Options on
Futures Contracts may only be used for hedging purposes and not for speculation.
In addition to complying with this requirement, the Fund will not purchase or
sell Futures Contracts and Options on Futures Contracts if immediately
thereafter the amount of initial margin deposits on all the futures positions of
the Fund and premiums paid on Options on Futures Contracts would exceed 5% of
the market value of the total assets of the Fund.
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The Fund's investment in options, futures contracts and forward contracts,
options on futures contracts, including transactions involving actual or deemed
short sales or foreign exchange gains or losses, may give rise to taxable
income, gain or loss and will be subject to special tax treatment under certain
mark-to-market and straddle rules, the effect of which may be to accelerate
income to the Fund, defer Fund losses, cause adjustments in the holding periods
of Fund securities, convert capital gains and losses into ordinary income and
losses, convert long-term capital gains into short-term capital gains, and
convert short-term capital losses into long-term capital losses. These rules
could, therefore, affect the amount, timing and character of distributions to
shareholders. Certain elections may be available to the Fund to mitigate some of
the unfavorable consequences of the provisions described in this paragraph.
These investments and transactions are discussed in the Statement of Additional
Information.
Lending of Portfolio Securities. As approved by the Board of Trustees and
subject to the following conditions, the Fund may lend its portfolio securities
to qualified securities dealers or other institutional investors, provided that
such loans do not exceed 30% of the value of the Fund's total assets at the time
of the most recent loan. The borrower must deposit and maintain with the Fund's
custodian cash collateral with an initial market value at least 102% of the
initial market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to market daily.
The lending of securities is a common practice in the securities industry. The
Fund engages in security loan arrangements with the primary objective of
increasing the Fund's income either through investing the cash collateral in
short-term interest bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund continues to be entitled
to all dividends or interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail financially.
When-Issued Securities: Securities may be purchased by the Fund on a
"when-issued" or on a "forward delivery" basis, which means that the obligations
will be delivered at a future date beyond customary settlement time. Although
the Fund is not limited to the amount of securities for which it may have
commitments to purchase on such basis, it is expected that under normal
circumstances, the Fund will not commit more than 30% of its assets to such
purchases. The Fund does not pay for the securities until received nor does it
start earning interest on them until it is notified of the settlement date. In
order to invest its assets immediately, while awaiting delivery of securities
purchased on such basis, the Fund will normally invest the amount required to
settle the transaction in short-term securities that offer same-day settlement
and earnings, but which may bear interest at a lower rate than longer term
securities.
When the Fund commits to purchase a security on a when-issued or forward
delivery basis, it will set up segregated accounts, as described in "Forward
Currency Exchange Contracts" above, concerning such purchases. Although the Fund
does not intend to make such purchases for speculative purposes, purchases of
securities on such basis may involve more risk than other types of purchases.
For example, if the Fund determines it is necessary to sell the when-issued or
forward delivery securities before delivery, it may incur a gain or a loss
because of market fluctuations since the time the commitment to purchase such
securities was made.
Repurchase Agreements: The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a
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bank or dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held pursuant to a written agreement and the Fund's
custodian will take title to, or actual delivery of, the security.
Reverse Repurchase Agreements. The Fund may also enter into reverse repurchase
agreements which are the opposite of repurchase agreements but involve similar
mechanics and risks. The Fund sells securities to a bank or broker and agrees to
repurchase them at a mutually agreed price and date. Cash or liquid high-grade
debt securities having an initial market value, including accrued interest,
equal to at least 102% of the dollar amount sold by the Fund are segregated as
collateral and marked to market daily to maintain coverage of at least 100%. A
default by the purchaser might cause the Fund to experience a loss or delay in
the liquidation costs. The Fund intends to enter into reverse repurchase
agreements with domestic or foreign banks or securities dealers. The investment
manager will evaluate the creditworthiness of these entities prior to engaging
in such transactions, under the general supervision of the Board of Trustees.
The general investment practices described above may be changed without
shareholder approval and no assurances can be given that they will in any event
accomplish the results intended.
SPECIAL CONSIDERATIONS WITH RESPECT TO GLOBAL INVESTING
Investment in shares of the Fund may not be appropriate for all investors and
should not be considered as a complete investment program. Each prospective
investor should take into account overall investment objectives as well as other
investments made when considering the purchase of shares of the Fund. The value
of the investments held by the Fund will generally vary inversely with changes
in prevailing interest rates, and the extent of such variance will generally
depend upon the maturities of the instruments held by the Fund.
The Fund may invest in debt securities denominated in U.S. and foreign
currencies. A change in the value of any such foreign currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Fund's assets denominated in the foreign currency. Such changes will also affect
the Fund's yield, income and distributions to shareholders. In addition,
although the Fund receives income in various currencies, the Fund is required to
compute and distribute its income in U.S. dollars. Therefore, if the exchange
rate for any such currency depreciates after the Fund's income has been accrued
and translated into U.S. dollars, the Fund could be required to liquidate
portfolio securities to make such distributions. Similarly, if an exchange rate
depreciates between the time the Fund incurs expenses in U.S. dollars and the
time such expenses are paid, the amount of a currency required to be converted
into U.S. dollars in order to pay such expenses in U.S. dollars will be greater
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<PAGE>
than the equivalent amount in any such currency at the time the expenses were
incurred. The Fund will only invest in foreign currency denominated debt
securities of countries whose currency is fully exchangeable into U.S. dollars
without legal restriction at the time of investment.
Investment in foreign securities involves certain risks which should be
considered carefully. These risks include political, social or economic
instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Such securities may be subject to greater fluctuations in
price than securities issued by U.S. corporations or issued or guaranteed by the
U.S. government, its instrumentalities or agencies. The markets on which such
securities trade may have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may be less publicly
available information about a foreign company than about a U.S. domiciled
company. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. domestic companies. There is generally less government regulation of
securities exchanges, brokers and listed companies abroad than in the U.S.
Confiscatory taxations or diplomatic developments could also affect investment
in those countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the New York
Stock Exchange (the "Exchange") and some foreign government securities may be
less liquid and more volatile than U.S. government securities. Transaction costs
on foreign securities exchanges may be higher than in the U.S. and foreign
securities settlements may, in some instances, be subject to delays and related
administrative uncertainties.
The operating expense ratio of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S. securities because of the
additional expenses of the Fund, such as custodial costs, valuation costs and
communication costs, although they are expected to be similar to expenses of
other investment companies investing in a mix of U.S. securities and securities
of one or more foreign countries.
Although it is a non-diversified series of an investment company, the Fund
intends to comply with the diversification standards under the Code applicable
to regulated investment companies. To the extent the Fund is not fully
diversified, it may be more susceptible to adverse developments affecting a
single issuer.
INVESTMENT RESTRICTIONS
Borrowing: The Fund may borrow from banks, for temporary or emergency purposes
only, up to 30% of its total assets, and pledge up to 30% of its total assets in
connection therewith. No new investments will be made by the Fund while any
outstanding borrowings exceed 5% of its total assets.
Illiquid Securities: It is the policy of the Fund that illiquid securities (a
term which means securities that cannot be disposed of within seven days in the
normal course of business at approximately the amount at which the Fund has
valued the securities) may not constitute, at the time of purchase or at any
time, more than 10% of the value of the total net assets of the Fund. The Fund
may only invest in illiquid securities, as set forth above, to the extent such
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<PAGE>
securities would otherwise qualify as permissible investments for the Fund.
The Fund is subject to a number of additional investment restrictions, some of
which, like the Fund's investment objectives, have been adopted as fundamental
policies of the Fund and may only be changed with the approval of a majority of
the outstanding voting securities of the Fund. A list of these restrictions and
more information concerning the policies discussed herein is included in the
Statement of Additional Information.
MANAGEMENT OF THE FUND
- -------------------------------------------------------------------------------
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson, Rupert H. Johnson, Jr. and R. Martin Wiskemann,
who own approximately 20%, 16% and 10%, respectively, of Resources' outstanding
shares. Through its subsidiaries, Resources is engaged in various aspects of the
financial services industry. Advisers acts as investment manager to 34 U.S.
registered investment companies (112 separate series) with aggregate assets of
over $75 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the nine months ended October 31, 1993, annualized fees totaling 0.58% of
the average daily net assets of the Fund were paid to Advisers.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund as
factors in selecting a broker. Further information is included under "The Fund's
Policies Regarding Brokers Used on Portfolio Transactions" in the Statement of
Additional Information.
Shareholders approved the adoption of a subadvisory agreement between the
Manager and Templeton Investment Counsel, Inc. ("TICI" or "subadvisor"), an
indirect subsidiary of Resources on April 27, 1994. The agreement provides for
the subadvisor to furnish, subject to the Manager's discretion, a portion of the
investment advisory services for which the Manager is responsible pursuant to
the management agreement. Such responsibilities may include managing a portion
of the Fund's investments and supplying research services. For its services,
TICI receives from the Manager a monthly fee equal to an annual rate of 0.35% of
1% of the average daily net assets up to and including $100 million of net
assets of each Fund; 0.25 of 1% of average daily net assets over $100 million up
to and including $250 million; and 0.20 of 1% of average daily net assets over
$250 million. The subadvisory fees are not in addition to those the Fund is
currently obligated to pay the Manager.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Services is a wholly-owned subsidiary of Resources.
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Total operating expenses of the Fund, including fees paid to Advisers and
Investor Services represented 0.77% of the Fund's average daily net assets.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date") the Fund adopted a plan pursuant to
Rule 12b-1 under the 1940 Act (the "Plan"), as approved by shareholders at a
special meeting held on April 27, 1994. Under the Plan, the Fund may reimburse
Distributors or others for all expenses incurred by Distributors or others in
the promotion and distribution of the Fund's shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of Fund shares, as well as any distribution or service fees paid to
securities dealers or their firms or others who have executed a servicing
agreement with the Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such distribution expenses
is 0.15% per annum of the average daily net assets of the Fund, payable on a
quarterly basis. All expenses of distribution and marketing in excess of 0.15%
per annum will be borne by Distributors, or others who have incurred them,
without reimbursement from the Fund. The Plan also covers any payments to or by
the Fund, Advisers, Distributors, or other parties on behalf of the Fund,
Advisers or Distributors, to the extent such payments are deemed to be for the
financing of any activity primarily intended to result in the sale of shares
issued by the Fund within the context of Rule 12b-1. The payments under the Plan
are included in the maximum operating expenses which may be borne by the Fund.
In implementing the Plan, the Board has determined that the annual fees payable
thereunder will be equal to the sum of: (i) the amount obtained by multiplying
0.15% by the average daily net assets represented by shares of the Fund that
were acquired by investors on or after the Effective Date of the Plan ("New
Assets"), and (ii) the amount obtained by multiplying 0.05% by the average daily
net assets represented by shares of the Fund that were acquired before the
Effective Date of the Plan ("Old Assets"). Such fees will be paid to the current
securities dealer of record on the shareholder's account. In addition, until
such time as the maximum payment of 0.15% is reached on a yearly basis, up to an
additional 0.02% will be paid to Distributors under the Plan. The payments to be
made to Distributors will be used by Distributors to defray other marketing
expenses that have been incurred in accordance with the Plan, such as
advertising.
The fee is a Fund expense so that all shareholders regardless of when they
purchased their shares will bear 12b-1 expenses at the same rate. That rate
initially will be at least 0.07% (0.05% plus 0.02%) of such average daily net
assets and, as Fund shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Fund shares purchased on or after
the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the proposed Plan will also increase
(but will not exceed 0.15% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Plan, the Plan
permits the Fund's trustees to allow the Fund to pay a full 0.15% on all assets
at any time. The approval of the Trust's Board of Trustees would be required to
change the calculation of the payments to be made under the Plan.
15
<PAGE>
While this is the currently anticipated method for calculating the 12b-1 fees to
be paid by the Fund, the fee is a Fund expense so that all shareholders
regardless of when they purchased their shares will bear 12b-1 expenses at the
same rate. That rate initially will be at least 0.07% (0.05% plus 0.02%) of
average daily net assets and, as Fund shares are sold on or after the Effective
Date, will increase over time. Thus, as the proportion of Fund shares purchased
on or after the Effective Date to outstanding Fund shares increases, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.15% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Plan, the Plan permits the
Fund's Trustees to allow the Fund to pay a full 0.15% on all assets both Old and
New at any time.
DISTRIBUTIONS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) will generally
be made once a year in December and will reflect the net short-term and net
long-term capital gains realized by the Fund as of October 31, its fiscal
year-end. The Fund reserves the right to make more than one distribution derived
from net short-term and net long-term capital gains in any year or to adjust the
timing of these distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without prior notice to or
approval by shareholders, the Fund's current policy is to declare income
dividends monthly for shareholders of record generally on the first business day
preceding the 15th day of the month, payable on or about the last business day
of that month. The amount of income dividend payments by the Fund is dependent
upon the amount of net income received by the Fund from its portfolio holdings,
is not guaranteed and is subject to the discretion of the Fund's Board of
Trustees. Fund shares are quoted ex-dividend on the first business day following
the record date. The Fund does not pay "interest" or guarantee any fixed rate of
return on an investment in its shares.
In order to be entitled to a dividend, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the investor's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
16
<PAGE>
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares, valued
at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the Statement
of Additional Information for more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(R) or the Templeton Group, to
another person, or directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing House, the payments
may be made automatically by electronic funds transfer. If this last option is
requested, the shareholder should allow at least 15 days for initial processing.
Dividends which may be paid in the interim will be sent to the address of
record. Additional information regarding automated fund transfers may be
obtained from Franklin's Shareholder Services Department. Income dividend
distributions directed to another fund in the Franklin Group of Funds or the
Templeton Group are invested at the offering price which includes the sales
charge, while capital gain distributions are eligible for investment at net
asset value.
TAXATION OF THE FUND AND ITS SHAREHOLDERS
- --------------------------------------------------------------------------------
The following discussion reflects some of the tax considerations which affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the Statement of Additional
Information.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund has elected and qualified to be treated as a regulated
investment company under Subchapter M of the Code. By distributing all of its
net investment income and net realized short-term and long-term capital gain in
accordance with the timing requirements imposed by the Code and by meeting
certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
17
<PAGE>
For federal income tax purposes, any income dividends which the shareholder
receives from a Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
Fund shares held for six months or less will be treated as a long-term capital
loss to the extent of capital gain dividends received with respect to such
shares. All or a portion of the sales charge incurred in purchasing shares of
the Fund will not be included in the federal tax basis of such shares sold or
exchanged within ninety (90) days of their purchase (for purposes of determining
gain or loss with respect to such shares) if the sales proceeds are reinvested
in the Fund or in another fund in the Franklin/Templeton Group and a sales
charge which would otherwise apply to the reinvestment is reduced or eliminated.
Any portion of such sales charge excluded from the tax basis of the shares sold
will be added to the tax basis of the shares acquired in the reinvestment.
Shareholders should consult with their tax advisors concerning the rules
applicable to the redemption or exchange of Fund shares.
For corporate shareholders, it is anticipated that only a small portion of the
Fund's dividends during the current fiscal year will qualify for the corporate
dividends received deduction because of the Fund's principal investment
objective of investing in nonqualifying fixed-income securities. To the extent
that the Fund pays dividends which qualify for this deduction, the availability
of the deduction is subject to certain holding period and debt financing
restrictions imposed under the Code on the corporation claiming the deduction.
These restrictions are discussed in the Statement of Additional Information.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. Because the Fund has invested and intends in the future
to invest 50% or less of its total assets in securities of foreign corporations,
it is not entitled under the Code to pass-through to its shareholders their pro
rata share of the foreign taxes paid by the Fund. These taxes will be taken as a
deduction by the Fund.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn its distributions to shareholders.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they
18
<PAGE>
are paid, and will promptly after the close of each calendar year advise them of
the tax status for federal income tax purposes of such dividends and
distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
HOW TO BUY SHARES OF THE FUND
- --------------------------------------------------------------------------------
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference however is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established at Franklin. The Fund and Distributors
reserve the right to refuse any order for the purchase of shares.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund, or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. On
orders for 100,000 shares or more, the offering price will be calculated to four
decimal places. On orders for less than 100,000 shares, the offering price will
be calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Total Sales Charge
---------------------------------------------------------
As a Percentage Dealer Concession
Size of Transaction As a Percentage of Net Amount As a Percentage
at Offering Price of Offering Price Invested of Offering Price*
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
* Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 through $2,500,000 1.00% 1.01% 1.00%
- -----------------------------------------------------------------------------------------------
</TABLE>
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
19
<PAGE>
On purchases in excess of $2,500,000, the sales charge is 1% of the offering
price on the first $2,500,000, plus 0.5% on the next $2,500,000, plus 0.25% on
the excess over $5,000,000. Sales charges on purchases of $1,000,000 or more are
paid to the securities dealer, if any, involved in the trade, who may therefore
be deemed an "underwriter" under the Securities Act of 1933, as amended.
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the many funds in the
Franklin Group of Funds(R) and the Templeton Group of Funds. Included for these
purposes are (a) the open-end investment companies in the Franklin Group (except
Franklin Valuemark Funds and Franklin Government Securities Trust) (the
"Franklin Group of Funds"), (b) other investment products in the Franklin Group
underwritten by Distributors or its affiliates (although certain investments may
not have the same schedule of sales charges and/or may not be subject to
reduction) (the products in subparagraphs (a) and (b) are referred to as the
"Franklin Group") and (c) the open-end U.S. registered investment companies in
the Templeton Group of Funds except Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Group"). Purchases pursuant to a
Letter of Intent for more than $2,500,000 will be at a 1% sales charge until
cumulative purchases reach $2,500,000 and at the incremental sales charge on the
excess over $2,500,000. Purchases pursuant to the Rights of Accumulation will be
at the applicable sales charge of 1% or more until the additional purchase, plus
the value of the account or the amount previously invested, less redemptions,
exceeds $2,500,000, in which event the sales charge on the excess will be
calculated as stated above. Sales charge reductions based upon purchases in more
than one of the funds in the Franklin Group or Templeton Group (the
"Franklin/Templeton Group") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors or its affiliates, at their expense, may also provide additional
compensation to dealers in connection with sales of shares of the Fund and other
funds in the Franklin Group of Funds or the Templeton Group. Compensation may
include financial assistance to dealers in connection with conferences, sales or
training programs for their employees, seminars for the public, advertising,
sales campaigns and/or shareholder services and programs regarding one or more
of theFranklin Group of Funds or the Templeton Group and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain dealers whose representatives have sold or are expected to sell
significant amounts of such shares. Compensation may include payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Dealers may not use sales of the Fund's shares to qualify for this compensation
to the extent such may be prohibited by the laws of any state or any
self-regulatory agency, such as the National Association of Securities Dealers,
Inc. None of the aforementioned additional compensation is paid for by the Fund
or its shareholders.
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included in the Statement of Additional Information.
20
<PAGE>
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide for a reduced
sales charge. To be certain to obtain the reduction of the sales charge, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any of the Franklin/Templeton
Group may be combined with those of the investor's spouse and children under the
age of 21. In addition, the aggregate investments of a trustee or other
fiduciary account (for an account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is available, even
though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. Rights of Accumulation. The cost or current value (whichever is higher) of
existing investments in the Franklin/Templeton Group may be combined with the
amount of the current purchase in determining the sales charge to be paid.
2. Letter of Intent. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge. At any time within 90 days after the first investment
which the investor wants to qualify for the reduced sales charge, a signed
Shareholder Application, with the Letter of Intent section completed, may be
filed with the Fund. After the Letter of Intent is filed, each additional
investment made will be entitled to the sales charge applicable to the level of
investment indicated on the Letter of Intent as described above. Sales charge
reductions based upon purchases in more than one company in the
Franklin/Templeton Group will be effective only after notification to
Distributors that the investment qualifies for a discount. The shareholder's
holdings in the Franklin/Templeton Group acquired more than 90 days before the
Letter of Intent is filed will be counted towards completion of the Letter of
Intent but will not be entitled to a retroactive downward adjustment of sales
charge. Any redemptions made by the shareholder during the 13-month period will
be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge as specified below, depending upon the amount
actually purchased (less redemptions) during the period. An investor who
executes a Letter of Intent prior to the change in the sales charge structure
for the Fund will be entitled to complete the Letter at the lower of (i) the new
sales charge structure; or (ii) the sales charge structure in effect at the time
the Letter was filed with the Fund.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING PROVISIONS BY COMPLETING
THE LETTER OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%)
of the amount of the total intended purchase will be reserved in shares of the
Fund, registered in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not completed. The
reserved shares will be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions on the reserved
shares will be paid as directed by the investor. The reserved
21
<PAGE>
shares will not be available for disposal by the investor until the Letter of
Intent has been completed or the higher sales charge paid. If the total
purchases, less redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the investor or
delivered to the investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter and is an amount which
would qualify for a further quantity discount, a retroactive price adjustment
will be made by Distributors and the dealer through whom purchases were made
pursuant to the Letter of Intent (to reflect such further quantity discount) on
purchases made within 90 days before, and on those made after filing the Letter.
The resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, the investor 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 which would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance the reserved shares held for the investor's account
will be deposited to an account in the name of the investor or delivered to the
investor or to the investor's order. If within 20 days after written request
such difference in sales charge is not paid, the redemption of an appropriate
number of reserved shares to realize such difference will be made. In the event
of a total redemption of the account prior to fulfillment of the Letter of
Intent, the additional sales charge due will be deducted from the proceeds of
the redemption and the balance will be forwarded to the investor. By completing
the Letter of Intent section of the Shareholder Application, an investor grants
to Distributors a security interest in the reserved shares and irrevocably
appoints Distributors as attorney-in-fact with full power of substitution to
surrender for redemption any or all shares for the purpose of paying any
additional sales charge due. Purchases under the Letter of Intent will conform
with the requirements of Rule 22d-1 under the 1940 Act. The investor or the
investor's securities dealer must inform Investor Services or Distributors that
this Letter is in effect each time a purchase is made.
Additional terms concerning the offering of the Fund's shares are included in
the Statement of Additional Information.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current purchase.
For example, if members of the group had previously invested and still held
$80,000 of Fund shares and now were investing $25,000, the sales charge would be
3.5%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, must be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, must agree to
include sales and other materials related to the Fund in its publications and
mailings to members at reduced or no cost to Distributors, and must
22
<PAGE>
seek to arrange for payroll deduction or other bulk transmission of investments
to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased at net asset value (without sales charge) by
employee benefit plans qualified under Section 401 of the Code, including salary
reduction plans qualified under Section 401(k) of the Code, subject to minimum
requirements with respect to number of employees or amount of purchase, which
may be established by Distributors. Currently those criteria require that the
employer establishing the plan have 500 or more employees or that the amount
invested or to be invested during the subsequent 13-month period in the Fund or
another company or companies in the Franklin/Templeton Group totals at least
$1,000,000. Employee savings plans and employee benefit plans not qualified
under Section 401 of the Code may be afforded the same privilege if they meet
the above requirements as well as the uniform criteria for qualified groups
previously described under Group Purchases which enable Distributors to realize
economies of scale in its sales efforts and sales related expenses. If
investments by employee benefit plans at net asset value are made through a
dealer who has executed a dealer agreement with Distributors, Distributors or
one of its affiliates may make a payment, out of their own resources, to such
dealer in an amount not to exceed 1% of the amount invested.
Shares of the Fund may be purchased at net asset value by trust companies and
bank trust departments for funds over which they exercise exclusive
discretionary investment authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in this Fund or any other
company in the Franklin/Templeton Group must total at least $1,000,000. Orders
for such accounts will be accepted 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 such order. If an investment by a trust
company or bank trust department at net asset value is made through a dealer who
has executed a dealer agreement with Distributors, Distributors or one of its
affiliates may make payment, out of their own resources, to such dealer in an
amount not to exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another fund
in the Franklin Group of Funds or the Templeton Group which were purchased with
a sales charge. An investor may reinvest an amount not exceeding the redemption
proceeds. Shares of the Fund redeemed in connection with an exchange into
another fund (see "Exchange Priv-
23
<PAGE>
ilege") are not considered "redeemed" for this privilege. In order to exercise
this privilege, a written order for the purchase of shares of the Fund must be
received by the Fund or the Fund's Shareholder Services Agent within 120 days
after the redemption. The 120 days, however, do not begin to run on redemption
proceeds placed immediately after redemption in a Franklin Bank Certificate of
Deposit ("CD") until the CD (including any rollover) matures. Reinvestment at
net asset value may also be handled by a securities dealer or other financial
institution, who may charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment is made within a 30-day period. Information
regarding the possible tax consequences of such a reinvestment is included in
the tax section of this Prospectus and in the Statement of Additional
Information.
Dealers may place trades to purchase shares of the Fund at net asset value on
behalf of investors who have, within the past 60 days, redeemed an investment in
a registered management investment company which charges a contingent deferred
sales charge, and which has investment objectives similar to those of the Fund.
Shares of the Fund may also be purchased at net asset value by (1) officers,
trustees, directors and full-time employees of the Fund or any fund in the
Franklin Group of Funds or the Templeton Group, the Manager and Distributors and
affiliates of such companies, if they have been such for at least 90 days, and
by their spouses and family members, (2) former participants in the
Franklin/Templeton Profit Sharing/401(k) plan, who elect to make a direct
rollover of all, or a portion of, their eligible distribution account balance
from such plan, (3) registered securities dealers and their affiliates, for
their investment account only, and (4) registered personnel and employees of
securities dealers and by their spouses and family members, in accordance with
the internal policies and procedures of the employing securities dealer. Such
sales are made upon the written assurance of the purchaser that the purchase is
made for investment purposes and that the securities will not be transferred or
resold except through redemption or repurchase by or on behalf of the Fund.
Employees of securities dealers must obtain a special application from their
employers or from Franklin's Sales Department in order to qualify.
Shares of the Fund may also be purchased at net asset value by individuals who
elect to roll over into a Franklin Rollover IRA account a required distribution
from an existing investment in the Franklin Group of Funds or Templeton Group
through a 401(k) plan or similarly qualified pension plan. To obtain an
application, call toll-free 1-800 DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value by any state,
county, or city, or any instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible investment and which
is prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority").
SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND
TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offer-
24
<PAGE>
ings into the Fund should consult with expert counsel to determine the effect,
if any, of various payments made by the Fund or its investment manager on
arbitrage rebate calculations. If an investment by an eligible governmental
authority at net asset value is made through a dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of their own resources, to such dealer in an amount not to exceed
0.25% of the amount invested. Contact Franklin's Institutional Sales Department
for additional information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS INVOLVING
TAX-DEFERRED INVESTMENTS
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Shares of the Fund may be used for retirement programs providing for
tax-deferred investments for both individuals and businesses. The Fund may be
used as an investment vehicle for an existing retirement plan or
Franklin/Templeton Trust Company may provide the plan documents and trustee or
custodian services. A plan document must be adopted in order for a plan to be in
existence.
Franklin/Templeton Trust Company, an affiliate of Distributors, can serve as
custodian or trustee for various types of retirement plans. Brochures for each
of the plans sponsored by Franklin contain important information regarding
eligibility, contribution limits and Internal Revenue Service ("IRS")
requirements. Please note that the separate applications other than the one
contained in this prospectus must be used to establish a Franklin/Templeton
Trust Company retirement account. To obtain a retirement plan brochure or
application, call toll free 1-800/DIAL BEN (1-800/342-5236).
The Franklin IRA is an individual retirement account in which the contributions,
annually limited to the lesser of $2,000 or 100% of an individual's earned
compensation, accumulate on a tax-deferred basis until withdrawn. Under the
current tax law, individuals who (or whose spouses) are covered by a company
retirement plan (termed "active participants") may be restricted in the amount
they may claim as an IRA deduction on their returns. The IRA deduction is
gradually reduced to the extent that a taxpayer's adjusted gross incomes exceed
certain specified limits.
Two IRAs, with a combined limit of $2,250 or 100% of earned compensation, may be
established by a married couple in which only one spouse is a wage earner. The
$2,250 may be split between the two IRAs, so long as no more than $2,000 is
contributed to either one for a given tax year.
A Franklin Rollover IRA account is designed to maintain the tax-deferred status
of a qualifying distribution from an employer-sponsored retirement plan, such as
a 401(k) plan or qualified pension plan. Additionally, if the eligible
distribution is directly transferred to a rollover IRA account, the distribution
will be exempt from 20% mandatory federal withholding, a new withholding law
enacted in 1993.
The Franklin Simplified Employee Pension Plan (SEP-IRA) and Salary Reduction
Simplified Employee Pension Plan (SAR-SEP) are for use by small businesses
(generally 25 or fewer employees) to provide a retirement plan for their
employees and, at the same time, provide for a tax-deduction to the employer.
SEP-IRA contributions are made to an employee's IRA, at the discretion of the
employer, up to the lesser of $30,000 or 15% of
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compensation* per employee. The SAR-SEP allows employees to contribute a portion
of their salary to an IRA on a pre-tax basis through salary deferrals. The
maximum annual salary deferral limit for a SAR-SEP is the lesser of 15% of
compensation (adjusted for deferrals) or $9,240 (1994 limit; indexed for
inflation).
The Franklin 403(b) Retirement Plan is a salary deferral plan for employees of
certain non-profit and educational institutions [ss.501(c)(3) organizations and
public schools]. The 403(b) Plan allows participants to determine the annual
amount of salary they wish to defer. The maximum annual salary deferral amount
is generally the lesser of 25% of compensation (adjusted for deferrals) or
$9,500.
The Franklin Business Retirement Plans provide employers with additional
retirement plan options and may be used individually, in combination, or with
custom designed features. The Profit Sharing Plan allows an employer to make
contributions, at its discretion, of up to the lesser of $30,000 or 15% of
compensation* per employee each year. The Money Purchase Pension Plan allows the
employer to contribute up to the lesser of $30,000 or 25% of compensation* per
employee; however, contributions are required annually at the rate (percentage)
elected by the employer at the outset of the plan. In order to achieve a
combined contribution rate of 25% while maintaining a certain degree of
flexibility, employers may establish both a Profit Sharing Plan and a Money
Purchase Pension Plan (with a fixed contribution rate of 10%).
Franklin/Templeton Trust Company can add optional provisions to the Profit
Sharing and Money Purchase Pension Plans described above and provide a Defined
Benefit, Target Benefit, and 401(k) Plans on a custom designed basis. Business
Retirement Plans, whether standard or custom designed, may require an annual
report (Form 5500) to be filed with the IRS.
Redemptions from any Franklin retirement plan accounts require the completion of
specific distribution forms to comply with IRS regulations. Please see "How to
Sell Shares of the Fund."
Individuals and employers should consult with a competent tax or financial
advisor before choosing a retirement plan.
* The limit on compensation for determining SEP and qualified plan contributions
is reduced from $235,840 in 1993 to $150,000 in 1994. The new $150,000 limit
will be adjusted for inflation, but only in $10,000 increments.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
- --------------------------------------------------------------------------------
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested in writing by the shareholder or by the securities dealer.
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<PAGE>
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. The plan may be established on a monthly,
quarterly, semi-annual or annual basis. If the shareholder establishes a plan,
any capital gain distributions and income dividends paid by the Fund will be
reinvested for the shareholder's account in additional shares at net asset
value. Payments will then be made from the transaction of shares at net asset
value on the day of the liquidation (which is generally the first business day
of the month in which the payment is scheduled) with payments generally received
by the shareholder three to five days after the date of liquidation. By
completing the "Special Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a shareholder may direct
the selected withdrawals to another fund in the Franklin Group of Funds or the
Templeton Group, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days for
initial processing. Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent withdrawals exceed shares
earned through dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total plan balance, the
account will be closed and the remaining balance will be sent to the
shareholder. As with other redemptions, a liquidation to make a withdrawal
payment is a sale for federal income tax purposes. Because the amount withdrawn
under the plan may be more than the shareholder's actual yield or income, part
of the
27
<PAGE>
payment may be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimums) and schedule of withdrawal payments or suspend such payments
(for up to one month) by giving written notice to Investor Services at least
seven business days prior to the end of the month preceding a scheduled payment.
Share certificates may not be issued while a Systematic Withdrawal Plan is in
effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
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The Franklin Group of Funds(R) and the Templeton Group consist of a number of
investment companies with various investment objectives or policies. The shares
of most of these investment companies are offered to the public with a sales
charge. If a shareholder's investment objective or outlook for the securities
markets changes, the Fund shares may be exchanged for shares of the other mutual
funds in the Franklin Group of Funds or the Templeton Group (as defined under
"How to Buy Shares of the Fund") which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE
SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT 1-800/632-2301.
IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR
ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
funds in the Franklin Group of Funds or the Templeton Group. The Telephone
Exchange Privilege is available only for uncertificated shares or those which
have previously been deposited in the shareholder's account. The Fund and
Investor Services will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Please refer to "Telephone Transactions -
Verification Procedures."
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<PAGE>
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders by telephone or other means of electronic
transmission from securities dealers who execute a dealer or similar agreement
with Distributors. See also "Exchanges by Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income
dividends and capital gain distributions will be transferred to the fund being
exchanged into and will be invested at net asset value. Because the exchange is
considered a redemption and purchase of shares, the shareholder may realize a
gain or loss for federal income tax purposes. Backup withholding and information
reporting may also apply. Information regarding the possible tax consequences of
such an exchange is included in the tax section in this Prospectus and in the
Statement of Additional Information.
There are differences among the many funds in the Franklin Group of Funds and
the Templeton Group. Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the shareholder wishes to
transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate 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 should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
RETIREMENT ACCOUNTS
Franklin/Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may apply to other types of retire-
29
<PAGE>
ment plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) make an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (ii) make more than two exchanges out of the Fund per
calendar quarter, or (iii) exchange shares equal in value to at least $5 million
dollars, or more than 1% of the Fund's net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
- --------------------------------------------------------------------------------
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by the Shareholder
Services Agent. Redemption requests received after the time at which the net
asset value is calculated (at 1:00 p.m. Pacific time) each day that the New York
Stock Exchange (the "Exchange") is open for business will receive the price
calculated on the following business day. In order to be in proper form, the
shareholder's written request must be accompanied by any share certificates
which have been issued for the shares being redeemed, properly endorsed and in
order for transfer. Shareholders are requested to provide a telephone number(s)
where they may be reached during business hours, or in the evening if preferred.
Investor Services' ability to contact a shareholder promptly when necessary will
speed the processing of the redemption.
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<PAGE>
Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or broker may call Franklin's Retirement Plans Department
to obtain the necessary forms.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency, or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction, require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
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Trust - (1) Signature guaranteed letter of instruction from the trustee(s), and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who file a Franklin/Templeton Telephone Redemption Authorization
Agreement (the "Agreement") included with this Prospectus may redeem shares of
the Fund by telephone, subject to the Restricted Account exception noted under
"Telephone Transactions - Restricted Accounts." INFORMATION MAY ALSO BE OBTAINED
BY WRITING TO THE FUND OR INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR
BY CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE
PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE.
SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER
"TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with a completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time on
any business day will be processed that same day. The redemption check will be
sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
SELLING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of electronic
transmission from securities dealers who have entered into a dealer or similar
agreement with Distributors. This is known as a repurchase. The only difference
between a normal redemption and a repurchase is that if the shareholder redeems
shares through a dealer, the redemption price will be the net asset value next
calculated after the shareholder's dealer receives the order which is promptly
transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
dealer, the Fund will still require a signed letter of instruction and all other
documents set forth above. A shareholder's letter should reference the Fund, the
account number, the fact that the repurchase was ordered by a dealer and the
dealer's name. De-
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<PAGE>
tails of the dealer-ordered trade, such as trade date, confirmation number, and
the amount of shares or dollars, will help speed processing of the redemption.
The seven-day period within which the proceeds of the shareholder's redemption
will be sent will begin when the Fund receives all documents required to
complete ("settle") the repurchase in proper form. The redemption proceeds will
not earn dividends or interest during the time between receipt of the dealer's
repurchase order and the date the redemption is processed upon receipt of all
documents necessary to settle the repurchase. Thus, it is in a shareholder's
best interest to have the required documentation completed and forwarded to the
Fund as soon as possible. The shareholder's dealer may charge a fee for handling
the order.
The Statement of Additional Information contains more information on the
redemption of shares.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of certain additional
forms to ensure compliance with IRS regulations. To liquidate a retirement
account, a shareholder or securities dealer may call Franklin's Retirement Plans
Department to obtain the necessary forms.
OTHER
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) exchange
Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Application as described under "How to
Sell Shares of the Fund - Redemptions by Telephone" will be able to redeem
shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by send-
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<PAGE>
ing a confirmation statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the Fund and Investor
Services follow instructions communicated by telephone which were reasonably
believed to be genuine at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges. In any instance where the
Fund or Investor Services is not reasonably satisfied that instructions received
by telephone are genuine, the requested transaction will not be executed, and
neither the Fund nor Investor Services will be liable for any losses which may
occur because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin/Templeton Trust Company or Templeton Funds Trust Company retirement
accounts. To assure compliance with all applicable regulations, special forms
are required for any distribution, redemption, or dividend payment. While the
telephone exchange privilege is extended to Franklin/Templeton IRA and 403(b)
retirement accounts, certain restrictions may apply to other types of retirement
plans. Certain restrictions may apply to other types of retirement plans.
Changes to dividend options must also be made in writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call a
Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2" when prompted to do so) for Templeton Funds.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
VALUATION OF FUND SHARES
- --------------------------------------------------------------------------------
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's "closing bid" (net asset value) and "ask"
(offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, including without limitation the current
market value of any outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves, is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. 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
34
<PAGE>
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 for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which 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 the Manager. 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 sales price on the relevant
exchange prior to the time when assets are valued. Lacking any sales that day or
if the last sale price is outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices if such valuation is
believed to fairly reflect the contract's market value. 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 of Trustees. All money market instruments with a maturity
of more than 60 days are valued at current market, as discussed above. All money
market instruments with a maturity of 60 days or less are valued at their
amortized cost, which the Board of Trustees has determined in good faith
constitutes fair value for purposes of complying with the 1940 Act. This
valuation method will continue to be used until such time as the trustees
determine that it does not constitute fair value for such purposes. With the
approval of trustees, the Fund may utilize a pricing service, bank or securities
dealer to perform any of the above described functions. Securities denominated
in foreign currencies and traded on foreign exchanges or in foreign markets will
be valued in a similar manner and their value translated into U.S. dollars at
the bid price of their respective currency denomination against U.S. dollars
last quoted by a major bank or, if no such quotation is available, at the rate
of exchange determined in accordance with policies established in good faith by
the Board of Trustees. Because the value of securities denominated in foreign
currencies must be translated into U.S. dollars, fluctuations in the value of
such currencies in relation to the U.S. dollar will affect the net asset value
of Fund shares even though there has not been any change in the values of such
securities.
Because foreign securities markets may close prior to the time the Fund
determines its net asset value, events affecting the value of portfolio
securities occurring between the time prices are determined and the time the
Fund calculates its net asset value will not be reflected in the Fund's
calculation of net asset value unless the Adviser or Subadviser, under
supervision of the Board of Trustees, determines that the particular event would
materially affect the Fund's net asset value. The Fund's portfolio securities
listed on foreign exchanges may trade on days other than the Fund's normal
business days, such as Saturdays. As a result, the net asset value of the Fund
may be significantly affected by such trading on days when shareholders have no
access to the Fund.
35
<PAGE>
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
- --------------------------------------------------------------------------------
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Group of Funds(R) by
calling the automated Franklin TeleFACTS system (day or night) at
1-800/247-1753. Information about the Fund may be accessed by entering Fund Code
35 followed by the # sign, when requested to do so by the automated operator.
To assist shareholders and securities wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
Hours of Operation (Pacific time)
Department Name Telephone No. (Monday through Friday)
- --------------------------------------------------------------------------------
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
</TABLE>
PERFORMANCE
- --------------------------------------------------------------------------------
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods, or based on
investments at various sales charge levels or at net asset value. For such
purposes total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield which is calculated according to a formula prescribed by the SEC (see the
Statement of Additional Information) is not indicative of the dividends or
distributions which were or will be paid to the Fund's shareholders. Dividends
or distributions paid to shareholders are reflected in the current distribution
rate which may be quoted to shareholders.
36
<PAGE>
The current distribution rate is computed by dividing the total amount of
dividends per share paid by the Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid during the
period such policies were in effect, rather than using the dividends during the
past 12 months. 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 gain, and is calculated over a different period of time.
In each case performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, distribution rate or total return may be in any future period.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Trust, including the auditor's report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. Additional copies may be obtained, without charge, upon
request to the Trust at the telephone number or address set forth on the cover
page of this prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and the Statement of Additional Information.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share in various series. All shares have
one vote and, when issued, are fully paid, non-assessable, and redeemable.
VOTING RIGHTS
All shares of each fund in the Trust have equal voting, dividend and liquidation
rights. Shares of each fund vote separately as to issues affecting that fund, or
the Trust, unless otherwise permitted under the 1940 Act. The shares have
non-cumulative voting rights, which means that in all elections of trustees, the
holders of more than 50% of the shares voting can elect 100% of the trustees if
they choose to do so and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of Trustees.
The Trust does not intend to hold annual meetings; it may, however, hold special
shareholder meetings for such purposes as changing fundamental policies,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act. A meeting may also be called by
a majority of trustees or by shareholders holding at least 10% of the shares
entitled to vote at the meeting. Shareholders may receive assistance in
communicating with other shareholders in connection with the election or removal
of trustees such as that provided in Section 16(c) under the 1940 Act. The Board
of Trustees may from time to time establish other funds of the Trust, the assets
37
<PAGE>
and liabilities of which will be separate and distinct from any other fund.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the Statement of Additional
Information.
OTHER INFORMATION
Shares have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights; however, holders of shares of any fund may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in "Exchange Privilege."
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
- --------------------------------------------------------------------------------
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's broker to a comparably
registered Fund account maintained by another securities dealer. Both the
delivering and receiving brokers must have executed dealer agreements on file
with Distributors. Unless a dealer agreement has been executed and is on file
with Distributors, the Fund will not process the transfer and will so inform the
shareholder's delivering broker. To effect the transfer, a shareholder should
instruct the broker to transfer the account to a receiving securities dealer and
sign any documents required by the broker(s) to evidence consent to the
transfer. Under current procedures the account transfer may be processed by the
delivering broker and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer.
38
<PAGE>
In the future it may be possible to effect such transfers electronically through
the services of the NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near future,
include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING TAXPAYER IRS CERTIFICATIONS
- --------------------------------------------------------------------------------
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a broker
notifies the Fund that the number furnished by the shareholder is incorrect or
that the shareholder is subject to backup withholding for previous
underreporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
- --------------------------------------------------------------------------------
The following person is primarily responsible for the day-to-day management of
the Fund's portfolio and has managed the portfolio since 1991.
Serena Perin
Portfolio Manager
Franklin Advisers, Inc.
Ms. Perin holds a Bachelor of Arts degree in business economics from Brown
University. She has been with Advisers since 1991. She served as a research
assistant to a member of Parliament in England. Ms. Perin is a member of
several securities industry-related committees and associations.
39
<PAGE>
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN GLOBAL GOVERNMENT INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
DATED MARCH 1, 1994
1. The "Proposed Subadvisory Agreement" as described on page 13 was approved by
shareholders on April 27, 1994 and was effective May 1, 1994.
2. The following substitutes for the subsection "Purchases at Net Asset Value"
under "Additional Information Regarding Fund Shares":
ADDITIONAL INFORMATION REGARDING PURCHASES
Special Net Asset Value Purchases. As discussed in the Fund's Prospectus
under "How to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase shares of the Fund
at net asset value (without a front-end or contingent deferred sales charge).
Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for such
purchases, as indicated below. As a condition for these payments,
Distributors or its affiliates may require reimbursement from the securities
dealers with respect to certain redemptions made within 12 months of the
calendar month following purchase, as well as other conditions, all of which
may be imposed by an agreement between Distributors, or its affiliates, and
the securities dealer.
The following amounts will be paid by Distributors or one of its affiliates,
out of its own resources, to securities dealers who initiate and are
responsible for (i) purchases of most equity and fixed-income Franklin
Templeton Funds made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but
less than $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus
0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales
of $100 million or more; and (ii) purchases of most fixed-income Franklin
Templeton Funds made at net asset value by non-designated retirement plans:
0.75% on sales of $1 million but less than $2 million, plus 0.60% on sales of
$2 million but less than $3 million, plus 0.50% on sales of $3 million but
less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purposes of additional purchases.
With respect to purchases made at net asset value by certain trust companies
and trust departments of banks and certain retirement plans of organizations
with collective retirement plan assets of $10 million or more, Distributors,
or one of its affiliates, out of its own resources, may pay up to 1% of the
amount invested.
Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of shares of the Fund, as described in the Prospectus. At any time
within 90 days after the first investment which the investor wants to qualify
for the reduced sales charge, a signed Shareholder Application, with the
Letter of Intent section completed, may be filed with the Fund. After the
Letter of Intent 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 upon purchases in more than one of the Franklin
Templeton Funds will be effective only after notification to Distributors
that the investment qualifies for a discount. The shareholder's holdings in
the Franklin Templeton Funds acquired more than 90 days before the Letter of
Intent is filed will be counted towards completion of the Letter of Intent
but will not be entitled to a retroactive downward adjustment in the sales
charge. Any redemptions made by the shareholder, other than by a designated
benefit plan during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within
the 13-month period, there will be an upward adjustment of the sales charge,
depending upon the amount actually purchased (less redemptions) during the
period. The upward adjustment does not apply to designated benefit plans. An
investor who executes a Letter of Intent prior to a change in the sales
charge structure for the Fund will be entitled to complete the Letter of
Intent at the lower of (i) the new sales charge structure; or (ii) the sales
charge structure in effect at the time the Letter of Intent was filed with
the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the
total purchases, less redemptions, equal the amount specified under the
Letter, the reserved shares will be deposited to an account in the name of
the investor or delivered to the investor or the investor's order. If the
total purchases, less redemptions, exceed the amount specified under the
Letter of Intent and is an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by Distributors and the
dealer through whom purchases were made pursuant to the Letter of Intent (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
<PAGE>
the total purchases. If the total purchases, less redemptions, are less than
the amount specified under the Letter, the investor 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 which would have applied
to the aggregate purchases if the total of such purchases had been made at a
single time. Upon such remittance the reserved shares held for the investor's
account will be deposited to an account in the name of the investor or
delivered to the investor or to the investor's order. If within 20 days after
written request such difference in sales charge is not paid, the redemption
of an appropriate number of reserved shares to realize such difference will
be made. In the event of a total redemption of the account prior to
fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be
forwarded to the investor.
If a Letter of Intent is executed on behalf of a benefit plan (such plans are
described under "Purchases at Net Asset Value" in the Prospectus), the level
and any reduction in sales charge for these designated benefit plans will be
based on actual plan participation and the projected investments in the
Franklin Templeton Funds under the Letter of Intent. Benefit 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
benefit plans entitled to receive retroactive adjustments in price for
investments made before executing the Letter of Intent.
3. The paragraph "Reinvestment Date" under "Additional Information Regarding
Fund Shares" is substituted with the following language:
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 "ex-dividend date"). The processing date for
the reinvestment of dividends may vary from month to month, and does not
affect the amount or value of the shares acquired.
4. The "Proposed Plan of Distribution" as described on page 20 was approved by
shareholders on April 27, 1994 and was effective May 1, 1994.
<PAGE>
FRANKLIN
GLOBAL GOVERNMENT [FRANKLIN LOGO]
INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
MARCH 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- --------------------------------------------------------------------------------
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of both diversified and non-diversified series,
each of which is a separate entity with its own investment objective and
policies. This Statement of Additional Information relates only to the Franklin
Global Government Income Fund (the "Fund") formerly known as Franklin Global
Opportunity Income Fund, a non-diversified series.
The Fund seeks a high level of current income, consistent with preservation of
capital; capital appreciation is a secondary consideration. The Fund seeks to
achieve this objective through investing primarily in debt securities issued by
domestic and foreign governments, and related currency transactions. There can,
of course, be no guarantee that the Fund's objective will be achieved.
A Prospectus for the Fund, dated March 1, 1994, as may be amended from time to
time, provides the basic information a prospective investor should know before
investing in the Fund. It is incorporated by reference herein and may be
obtained without charge from the Trust or Franklin Distributors, Inc.
("Distributors") at the address listed above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT CONTAINS
INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION IS INTENDED TO PROVIDE A PROSPECTIVE
INVESTOR WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF
THE FUND AND THE TRUST, AND SHOULD BE READ IN CONJUNCTION WITH THE FUND'S
CURRENT PROSPECTUS.
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
About the Trust................................... 2
The Investment Objective
and Policies of the Fund......................... 2
Trustees and Officers............................. 10
Investment Advisory and
Other Services................................... 12
The Fund's Policies Regarding
Brokers Used on Portfolio Transactions........... 14
Additional Information
Regarding Fund Shares............................ 15
Additional Information
Regarding Taxation............................... 17
The Fund's Underwriter............................ 19
Proposed Plan of Distribution..................... 20
General Information............................... 21
Financial Statements.............................. 25
</TABLE>
1
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ABOUT THE TRUST
- --------------------------------------------------------------------------------
The Trust is an open-end management investment company, commonly called a
"mutual fund," organized as a Massachusetts business trust on December 16, 1986.
The Trust issues its shares of beneficial interest with a par value of $.01 per
share in various series, as may be authorized by the Board of Trustees from time
to time, each of which is a separate and distinct series from the others.
The Fund, a non-diversified series of the Trust is managed by Franklin Advisers,
Inc. ("Advisers" or "Manager"), an investment adviser registered under the
Investment Advisers Act of 1940.
THE INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
- --------------------------------------------------------------------------------
As noted in the Prospectus, the Fund has its own investment objective and
follows policies designed to achieve that objective. In addition, except as
otherwise indicated, the following restrictions have been adopted as fundamental
policies for the Fund, which means that they may not be changed without
shareholder approval (as described below). The Fund may not:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that it may borrow from banks, for temporary or emergency purposes, up to 30% of
its total assets and pledge up to 30% of its total assets in connection
therewith. (No new investments will be made by the Fund while any outstanding
borrowings exceed 5% of its total assets.)
2. Buy any securities on "margin," except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and sales
of securities and except that the Fund may make margin deposits in connection
with Futures Contracts and Options on Futures Contracts.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
portfolio securities of the Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 30% of the value of the Fund's total assets
(taken at market value) at the time of the most recent loan. Also, entry into
repurchase agreements is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 25% of its assets in the securities of issuers in any one
industry, other than foreign governments (see "Other Policies" below).
6. Purchase from or sell any portfolio securities to its officers and
trustees, or any firm of which any officer or trustee is a member, as principal,
except that the Fund may deal with such persons or firms as brokers and pay a
customary brokerage commission; retain securities of any issuer, if to the
knowledge of the Fund, one or more of its officers, trustees or the investment
manager own beneficially more than one-half of 1% of the securities of such
issuer and all such persons together own beneficially more than 5% of such
securities.
7. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
8. Acquire, lease or hold real estate (except such as may be necessary or
advisable for the maintenance of its offices).
9. Invest in interests in oil, gas or other mineral exploration or development
programs.
10. Invest in companies for the purpose of exercising control or management.
11. Purchase securities of other investment
companies.
12. Issue senior securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"), except that this restriction shall not be deemed to
prohibit the Fund from (a) making any permitted borrowings, mortgages or
pledges, or (b) entering into options, futures contracts, forward contracts or
repurchase transactions.
13. Make short sales of securities or maintain a short position, unless at all
times when a short position is open it owns an equal amount of such securities
or securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and equal in amount to, the
securities sold short ("short sales against the box"), and unless not more than
10% of the Fund's net assets (taken at market value) is held as collateral for
such sales at any one time.
(Restriction Nos. 7, 11 and 12 are not fundamental policies of the Fund
and may be changed by the trustees without shareholder approval.)
In order to change any restrictions which are fundamental policies, approval
must be obtained from the Fund's shareholders, which requires the affir-
2
<PAGE>
mative vote of the lesser of (i) 67% or more of its voting securities that are
represented at the meeting or (ii) more than 50% of the outstanding voting
securities. If a percentage restriction contained herein is adhered to at the
time of investment, a later increase or decrease in the percentage resulting
from a change in the value of portfolio securities or the amount of net assets
will not be considered a violation of any of the foregoing restrictions.
OTHER POLICIES
There are no restrictions or limitations on investments in obligations of the
United States ("U.S."), or of corporations chartered by the U.S. Congress as
federal government instrumentalities. In the case of the Fund, the underlying
assets may be retained in cash, including cash equivalents which are Treasury
bills, commercial paper and short-term bank obligations such as certificates of
deposit, bankers' acceptances and repurchase agreements. It is intended,
however, that only so much of the underlying assets of the Fund be retained in
cash as is deemed desirable or expedient under then-existing market conditions.
Pursuant to an undertaking given to the Texas State Securities Board, the Fund
may not invest in real estate limited partnerships or in interests (other than
publicly traded equity securities) in oil, gas, or other mineral leases,
exploration or development so long as the Fund's shares are offered for sale in
the state of Texas.
The Fund may invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933 ("restricted
securities"), or in other securities which, in the opinion of the Board of
Trustees, may be otherwise illiquid. It is the policy of the Fund, however, that
illiquid securities may not constitute, at the time of purchase or at any time,
more than 10% of the value of the total net assets of the Fund in which they are
held. Generally, an "illiquid" security is any security that cannot be disposed
of promptly and in the ordinary course of business at approximately the amount
at which the Fund has valued the security. Notwithstanding this limitation, the
Fund's Board of Trustees has authorized the Fund to invest in restricted
securities where such investment is consistent with the Fund's investment
objective and has authorized such securities to be considered to be liquid to
the extent the Manager determines that there is a liquid institutional or other
market for such securities. For example, restricted securities which may be
freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed, will be considered liquid even though such
securities have not been registered pursuant to the Securities Act of 1933. The
Board of Trustees will review any determination by the Manager to treat a
restricted security as a liquid security on an ongoing basis, including the
Manager's assessment of current trading activity and the availability of
reliable price information. In determining whether a restricted security is
properly considered a liquid security, the Manager and the Board of Trustees
will take into account the following factors: (i) the frequency of trades and
quotes for the security; (ii) the number of dealers willing to purchase or sell
the security and the number of other potential purchasers; (iii) dealer
undertakings to make a market in the security; and (iv) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and the mechanics of
transfer). To the extent the Fund invests in restricted securities that are
deemed liquid, the general level of illiquidity in the Fund may be increased if
qualified institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.
U.S. Government Securities. As indicated in the Prospectus, the Fund may invest
in U.S. government securities, which include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. U.S. government securities do not generally involve the
credit risks associated with other types of interest bearing securities, and, as
a result, the yields available from such securities are generally lower than the
yields available from other types of interest bearing securities. Like all
interest bearing securities, however, the market values of U.S. government
securities change as interest rates fluctuate.
DESCRIPTION OF SECURITIES AND INVESTMENT PRACTICES
Obligations of Developing Countries: Among the foreign securities in which the
Fund may invest will be the fixed-income obligations of governments, government
agencies and corporations of developing countries. As of the date of this
Statement of Additional Information, such opportunities are limited as many
developing countries are rescheduling their existing loans and obligations.
However, as restructuring is completed and economic conditions improve, these
obligations may become available at discounts and offer the Fund the potential
for current U.S. dollar income. Such instruments are not traded on any exchange.
However, the Manager believes there may be a market for such securities either
in multinational companies wishing to pur-
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chase such assets at a discount for further investment, or from the issuing
governments which may decide to redeem their obligations at a discount.
Interest Rate Swaps: The Fund may also participate in interest rate swaps. An
interest rate swap is the transfer between two counterparties of interest rate
obligations, one of which has an interest rate fixed to maturity while the other
has an interest rate that changes in accordance with changes in a designated
benchmark (i.e., London Interbank Offered Rate (LIBOR), prime, commercial paper,
or other benchmarks). The obligations to make repayment of principal on the
underlying securities are not exchanged. Such transactions generally require the
participation of an intermediary, frequently a bank. The entity holding the
fixed rate obligation will transfer the obligation to the intermediary, and such
entity will then be obligated to pay to the intermediary a floating rate of
interest, generally including a fractional percentage as a commission for the
intermediary. The intermediary also makes arrangements with a second entity
which has a floating-rate obligation that substantially mirrors the obligation
desired by the first party. In return for assuming a fixed obligation, the
second entity will pay the intermediary all sums that the intermediary pays on
behalf of the first entity, plus an arrangement fee and other agreed upon fees.
Interest rate swaps are generally entered into to permit the party seeking a
floating rate obligation the opportunity to acquire such obligation at a lower
rate than is directly available in the credit market, while permitting the party
desiring a fixed rate obligation the opportunity to acquire such a fixed rate
obligation, also frequently at a price lower than is available in the capital
markets. The success of such a transaction depends in large part on the
availability of fixed rate obligations at a low enough coupon rate to cover the
cost involved.
Other Fixed-Income Securities: As stated in the Prospectus, the Fund may
purchase fixed-income securities of both domestic and foreign issuers including,
among others, preference stock and all types of long-term or short-term debt
obligations, such as equipment trust certificates, equipment lease certificates,
and conditional sales contracts. Equipment related instruments are used to
finance the acquisition of new equipment. The instrument gives the bond-holder
the first right to the equipment in the event that interest and principal are
not paid when due. Title to the equipment is held in the name of the trustee,
usually a bank, until the instrument is paid off. Such equipment related
instruments usually mature over a period of 10 to 15 years. In practical effect
equipment trust certificates, equipment lease certificates and conditional sale
contracts are substantially identical; they differ mainly in legal structure.
These fixed-income securities may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or profits; or the
purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
Options On U.S. and Foreign Securities: In an effort to increase current
income and to reduce the fluctuations in net asset value, the Fund intends
to write covered put and call options and purchase put and call options on
U.S. and foreign securities that are traded on U.S. and foreign securities
exchanges and over-the-counter.
As described in the Prospectus, the Fund may enter into closing transactions to
terminate an options position. 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 purchase 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 purchase the option. Because increases in the market
price of a call option written by the Fund will generally be inversely related
to the market price of the underlying security, any loss resulting from the
closing out of a call option is likely to be offset in whole or in part by
appreciation in the value of the underlying security owned by the Fund.
The Fund may write options in connection with buy-and-write transactions; that
is, the Fund may purchase a security and then write a call option against that
security. The exercise price of the call will depend upon the expected price
movement of the underlying security. The exercise price of a call option may be
below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-money")
the current value of the underlying security at the time the option is written.
Buy-and-write transactions using in-the-money call options may be used when it
is expected that the price of the underlying security will remain flat or
decline moderately during the option period. Buy-and-write transactions using
at-the-money call options may be used when it is expected that the price of the
underlying security will remain fixed or advance moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market
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price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. If the call
options are exercised in such transactions, the Fund's maximum gain will be the
premium received by it for writing the option, adjusted upward or downward by
the difference between the Fund's purchase price for the security and the
exercise price. If the options are not exercised and the price of the underlying
security declines, the amount of such decline will be mitigated by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. 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 wait
for the option to be exercised and take delivery of the security at the exercise
price. The Fund's return will be the premium received from the put option minus
the amount by which the market price of the security is below the exercise
price. Out-of-the-money, at-the-money, and in-the-money put options may be used
by the Fund in the same market environments that call options are used in
equivalent buy-and-write transactions.
In addition to the matters discussed in the Prospectus, investors should be
aware that when trading options on foreign exchanges or in the over-the-counter
market many of the protections afforded to exchange participants will not be
available. For example, there are no daily price fluctuation limits, and adverse
market movements could therefore continue to an unlimited extent over a period
of time. Although the purchaser of an option cannot lose more than the amount of
the premium plus related transaction costs, this entire amount could be lost.
Moreover, the Fund as an option writer could lose amounts substantially in
excess of its initial investment, due to the margin and collateral requirements
associated with such option writing.
Options on securities traded on national securities exchanges are within the
jurisdiction of the Securities and Exchange Commission ("SEC"), as are other
securities traded on such exchanges. As a result, many of the protections
provided to traders on organized exchanges will be available with respect to
such transactions. In particular, all option positions entered into on a
national securities exchange are cleared and guaranteed by the Options Clearing
Corporation ("OCC"), thereby reducing the risk of counterparty default. Further,
a liquid secondary market in options traded on a national securities exchange
may be more readily available than in the over-the-counter market, potentially
permitting the Fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
In regard to the Fund's option trading activities, it intends to comply with the
California Corporate Securities Rules as they pertain to prohibited investments.
The Fund's option trading activities may result in the loss of principal under
certain market conditions. For a more detailed discussion of the use, risks and
costs of securities options trading, see the Prospectus.
Futures Contracts: The Fund may enter into contracts for the purchase or sale
for future delivery of debt securities or currency ("Futures Contracts"). A
"sale" of a Futures Contract means the acquisition and assumption of a
contractual obligation to deliver the securities or currency called for by the
contract at a specified price on a specified date. A "purchase" of a Futures
Contract means the acquisition of a contractual right and obligation to acquire
the securities or currency called for by the contract at a specified price on a
specified date. U.S. Futures Contracts have been designed by exchanges which
have been designated "contract 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. Existing
contract markets for Futures Contracts on debt securities include the Chicago
Board of Trade, the New York Cotton Exchange, the MidAmerica Commodity Exchange
(the "MCE") and the International Money Market of the Chicago Mercantile
Exchange (the "IMM"). Futures Contracts trade on these exchanges, and, through
their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. The Fund will enter
into Futures Contracts which are based on foreign currencies or on debt
securities that are backed by the full faith and credit of the U.S. government,
such as long-term U.S. Treasury bonds, Treasury notes, Government National
Mortgage Association modified pass-through mortgage-backed securities, and
three-month U.S. Treasury bills. The Fund may also enter into Futures Contracts
which are based on corporate securities and non-U.S. government debt securities
when such securities become available. At the time a Futures Contract is
purchased or sold, the Fund must allocate cash or securities as a deposit
payment ("initial deposit"). It is expected that the initial deposit would be
approximately 1% to 5%
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of a contract's face value. Thereafter, the Futures Contract is valued daily and
the payment of "variation margin" may be required since each day the Fund would
pay or receive cash that reflects any decline or increase in the contract's
value.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a Futures
Contract may not have been issued when the contract was written.
Although Futures Contracts by their terms call for the actual delivery or
acquisition of securities or currency, in most cases the contractual obligation
is terminated before the settlement date of the contract without having to make
or take delivery of the securities or currency. The termination of a contractual
obligation is accomplished by buying (or selling, as the case may be) on a
commodities exchange an identical offsetting Futures Contract calling for
delivery in the same month. Such a transaction, which is effected through a
member of an exchange, cancels the obligation to make or take delivery of the
underlying security or currency. 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 purchases or sells Futures Contracts.
The Fund may cover a Futures Contract that it has sold by establishing and
maintaining a segregated account, as indicated above, consisting of cash, cash
equivalents or high quality debt securities from its portfolio. The Fund may
cover its futures positions if it owns (or has an absolute right to acquire) the
underlying instrument or currency covered by the contract. The Fund may also
cover its futures position by holding a call option on the same Futures Contract
permitting the Fund to purchase the instrument or currency at a price no higher
than the price established in the Futures Contract which it sold.
The purpose of the purchase or sale of a Futures Contract by the Fund is to
attempt to protect the Fund from fluctuations in interest or currency exchange
rates without actually buying or selling long-term, fixed-income securities or
currency. For example, if the Fund owns long-term bonds, and interest rates were
expected to increase, the Fund might enter into Futures Contracts for the sale
of debt securities. Such a sale would have much the same effect as selling an
equivalent value of the long-term bonds owned by the Fund. If interest rates did
increase, the value of the debt securities owned by the Fund would decline, but
the value of the Futures Contracts to the Fund would increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining as
much as it otherwise would have. The Fund could accomplish similar results by
selling bonds with long maturities and investing in bonds with short maturities
when interest rates are expected to increase. However, since the futures market
is often more liquid than the cash (securities) market, the use of Futures
Contracts as an investment technique allows the Fund to maintain a defensive
position without having to sell its portfolio securities. Similarly, if the Fund
expects that a foreign currency in which its securities are denominated will
decline in value against the U.S. dollar, the Fund may sell Futures Contracts on
that currency. If the foreign currency does decline in value, the decrease in
value of the security denominated in that currency will be offset by an increase
in the value of the Fund's futures position.
Alternatively, when it is expected that interest rates may decline, Futures
Contracts may be purchased in an attempt to hedge against the anticipated
purchase of long-term bonds at higher prices. Since the fluctuations in the
value of Futures Contracts should be similar to that of long-term bonds, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them until the market had stabilized. At that
time, the Futures Contracts could be liquidated and the Fund could then buy
long-term bonds on the cash (securities) market. Similarly, if the Fund intends
to acquire a security or other asset denominated in a currency that is expected
to appreciate against the U.S. dollar, the Fund may purchase Futures Contracts
on that currency. If the value of the foreign currency does appreciate, the
increase in the value of the futures position will offset the increased U.S.
dollar cost of acquiring the asset denominated in that currency. To the extent
the Fund enters into Futures Contracts for this purpose, the assets in the
segregated asset account maintained to cover the Fund's purchase obligations
with respect to such Futures Contracts will consist of cash, cash equivalents or
high quality debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such Futures Contracts and
the aggregate value of the initial and variation margin payments made by the
Fund with respect to such Futures Contracts.
The ordinary spreads between prices in the cash (securities) or foreign currency
and futures markets, due to differences in the natures of those
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<PAGE>
markets, are subject to distortions. First, all participants in the futures
markets 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 (securities) or foreign currency 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 causing distortions. Due to the
possibility of such distortion, a correct forecast of general interest rate
trends by the Manager may still not result in a successful hedging transaction.
In addition, Futures Contracts entail certain risks. Although the Fund believes
that the use of such contracts will benefit the Fund, if the Manager's
investment judgment about the general direction of interest or currency exchange
rates is incorrect, the Fund's overall performance would be poorer than if it
had not entered into any such contract. For example, if the Fund has hedged
against the possibility of an increase in interest rates 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. Similarly, if the Fund sells a foreign currency Futures
Contract and the U.S. dollar value of the currency unexpectedly increases, the
Fund will lose the beneficial effect of such increase on the value of the
security denominated in that currency. In addition, in such situations, if the
Fund has insufficient cash, it may have to sell bonds from its portfolio to meet
daily variation margin requirements. Such sales of bonds may be, but not
necessarily, 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.
Options on Futures Contracts: The Fund intends to purchase and write options on
Futures Contracts for hedging purposes only. The purchase of a call option on a
Futures Contract is similar in some respects to the purchase of a call option on
an individual security or currency. Depending on the pricing of the option
compared to either the price of the Futures Contract upon which it is based or
the price of the underlying debt securities or currency, it may or may not be
less risky than direct ownership of the Futures Contract of the underlying debt
securities or currency. As with the purchase of Futures Contracts, when the Fund
is not fully invested it may purchase a call option on a Futures Contract to
hedge against a market advance due to declining interest rates or appreciation
in the value of a foreign currency against the U.S. dollar.
If the Fund writes a call option on a Futures Contract and the futures price at
expiration of the option is below the exercise price, the Fund will retain the
full amount of the option premium which may provide a partial hedge against any
decline that may have occurred in the value of the Fund's portfolio holdings. If
the futures price at expiration of the option is higher than the exercise price,
the Fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities which the Fund
intends to purchase. If a put or call option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, the
Fund's losses from existing options on futures may to some extent be reduced or
increased by changes in the value of its portfolio securities.
The amount of risk the Fund assumes when it purchases an option on a Futures
Contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying Futures
Contract will not be fully reflected in the value of the option purchased. The
Fund will purchase a put option on a Futures Contract only to hedge the Fund's
portfolio against the risk of rising interest rates or the decline in the value
of securities denominated in a foreign currency.
The Fund's ability to engage in the options and futures strategies described
above will depend on the availability of liquid markets in such instruments.
Markets in options and futures are relatively new and still developing, and it
is impossible to predict the amount of trading interest that may exist in
various types of options or futures. Therefore, no assurance can be given that
the Fund will be able to utilize these instruments effectively for the purposes
set forth above. Furthermore, the Fund's ability to engage in options and
futures transactions may be limited by tax considerations.
Options on Foreign Currencies: The Fund may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
Futures Contracts on foreign currencies, or Forward Contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in
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which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a
fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options on such currency. The purchase of
such options could offset, at least partially, the effects of the adverse
movements in currency exchange rates. As with other types of options, however,
the benefit the Fund derives from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require the Fund to forego a portion or all of the benefits
of advantageous changes in such rates.
The Fund may also write options on foreign currencies for hedging purposes. For
example, where the Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to adverse fluctuations in currency exchange
rates the Fund could, instead of purchasing a put option, write a call option on
the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency. If currency exchange rates increase as
projected, the put option will expire unexercised and the premium received will
offset such increased cost. As with other types of options, however, the writing
of a foreign currency option will constitute only a partial hedge up to the
amount of the premium received, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be fully offset by the amount of the premium received. As a result of
writing options on foreign currencies, the Fund may also be required to forego
all or a portion of the benefits which might otherwise have been obtained from
favorable changes in currency exchange rates.
All call options written on foreign currencies will be covered. A call option on
foreign currencies written by the Fund is "covered" if the Fund owns (or has an
absolute right to acquire) the underlying foreign currency covered by the call.
A call option is also covered if the Fund has a call on the same foreign
currency 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 U.S. government securities
in a segregated account with its custodian.
Additional Risks of Forward Contracts, Options on Foreign Currencies and Options
on Futures Contracts: Forward Contracts are not traded on contract markets
regulated by the CFTC or by the SEC. The ability of the Fund to use such
instruments could be restricted to the extent that Congress authorized the CFTC
or the SEC to regulate such transactions. Forward Contracts are traded through
financial institutions acting as market-makers.
The purchase and sale of exchange-traded foreign currency options is subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, margins of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events.
Futures Contracts on currencies, options on Futures Contracts and options on
foreign currencies may be traded on foreign exchanges. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies. The value of such positions could also be adversely
affected by (i) other foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to base trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the U.S., (iv) the
imposition of exercise and settlement terms and procedures, and margin
requirements different from those in the U.S., and (v) lesser trading volume.
Future Developments: The Fund proposes to take advantage of investment
opportunities in the area of options, Futures Contracts and options on Futures
Contracts which are not presently contemplated for use by the Fund or which are
not currently available but which may be developed in the future, to
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<PAGE>
the extent such opportunities are both consistent with the Fund's investment
objective and policies and are legally permissible transactions for the Fund.
Such opportunities, if they arise, may involve risks which are different from
those involved in the options and futures activities described above.
Loan Participations: The Fund may invest in loan participations, all of which
may have speculative characteristics. The Fund may purchase loan participations
at par or which sell at a discount because of the borrower's credit problems. To
the extent the borrower's credit problems are resolved, the loan participation
may appreciate in value but not beyond par value.
The Manager may acquire loan participations, which sell at a discount, for the
Fund from time to time when it believes the investments offer the possibility of
long-term appreciation in value in addition to current income. An investment in
loan participations carries a high degree of risk and may have the consequence
that interest payments with respect to such securities may be reduced, deferred,
suspended or eliminated and may have the further consequence that principal
payments may likewise be reduced, deferred, suspended or cancelled, causing the
loss of the entire amount of the investment. Loans will generally be acquired by
the Fund from a bank, finance company or other similar financial services entity
("Lender").
Loan participations are interests in floating or variable rate senior loans
("Loans") to U.S. corporations, partnerships and other entities ("Borrowers")
which operate in a variety of industries and geographical regions. Loans in
which the Fund will purchase participation interests may pay interest at rates
which are periodically redetermined on the basis of a base lending rate plus a
premium. These base lending rates are generally the Prime Rate offered by a
major U.S. bank, the London Inter-Bank Offered Rate, the Certificate of Deposit
rate or other base lending rates used by commercial lenders. The Loans typically
have the most senior position in a Borrower's capital structure, although some
Loans may hold an equal ranking with other senior securities of the Borrower.
Although the Loans generally are secured by specific collateral, the Fund may
invest in Loans which are not secured by any collateral. Uncollateralized Loans
pose a greater risk of nonpayment of interest or loss of principal than do
collateralized Loans. The collateral underlying a collateralized Loan may
consist of assets that may not be readily liquidated, and there is no assurance
that the liquidation of such assets would satisfy fully a Borrower's obligation
under a Loan. The Fund is not subject to any restrictions with respect to the
maturity of the Loans in which it purchases participation interests.
The Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the Manager may consider such ratings in determining whether
to invest in a particular Loan, such ratings will not be the determinative
factor in the Manager's analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular market
has developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Fund expects to purchase interests
are of a relatively large principal amount and are held by a relatively large
number of owners which in the Manager's opinion, should enhance the relative
liquidity of such interests.
When acquiring a loan participation, the Fund will have a contractual
relationship only with the Lender (typically an entity in the banking, finance
or financial services industries), not with the Borrower. The Fund has the right
to receive payments of principal and interest to which it is entitled only from
the Lender selling the loan participation and only upon receipt by such Lender
of such payments from the Borrower. In connection with purchasing loan
participations, the Fund generally will have no right to enforce compliance by
the Borrower with the terms of the Loan Agreement, nor any rights with respect
to any funds acquired by other Lenders through set-off against the Borrower and
the Fund may not directly benefit from the collateral supporting the Loan in
which it has purchased the loan participation. As a result, the Fund may assume
the credit risk of both the Borrower and the Lender selling the loan
participation. In the event of the insolvency of the Lender selling a loan
participation, the Fund may be treated as a general creditor of such Lender, and
may not benefit from any set-off between such Lender and the Borrower.
Portfolio Turnover: The portfolio turnover of the Fund for the fiscal year ended
January 31, 1993 and for the nine-month period ended October 31, 1993, were
approximately 49.20% and 67.36%, respectively.
9
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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The Board of Trustees has the responsibility for the overall management of the
Fund, including general supervision and review of its investment activities. The
trustees, in turn, elect the officers of the Trust who are responsible for
administering day-to-day operations of the Trust. The affiliations of the
officers and trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested persons" of the
Trust, as defined in 1940 Act, are indicated by an asterisk (*).
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Trustee President and Director, Abbott Corporation
1045 Sansome St. (an investment company); Director, Vacu-Dry
San Francisco, CA 94111 Co. (a food processing company) and Mother
Lode Gold Mines Consolidated; and director,
trustee or managing general partner, as the
case may be, of most of the investment
companies in the Franklin Group of Funds.(R)
- ---------------------------------------------------------------------------------------------------------------
Harris J. Ashton Trustee President, Chief Executive Officer and
General Host Corporation Chairman of the Board, General Host
Metro Center, 1 Station Place Corporation (nursery and craft centers);
Stamford, CT 06904-2045 Director, RBC Holdings, Inc. (a bank holding
company) and Bar-S Foods; director of
certain of the investment companies in the
Templeton Group of Funds; and director,
trustee or managing general partner, as the
case may be, of most of the investment
companies in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin,
Park Avenue at Morris County Kipp & Szuch; Director of General Host
P. O. Box 1945 Corporation; director of certain of the
Morristown, NJ 07962-1945 investment companies in the Templeton Group
of Funds; and director, trustee or managing
general partner, as the case may be, of most
of the investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
David W. Garbellano Trustee Private Investor; Assistant Secretary/
111 New Montgomery St., #402 Treasurer and Director, Berkeley Science
San Francisco, CA 94105 Corporation (a venture capital company); and
director, trustee or managing general
partner, as the case may be, of most of the
investment companies in the Franklin Group
of Funds.
- ---------------------------------------------------------------------------------------------------------------
* Edward B. Jamieson President Senior Vice President and Portfolio Manager,
777 Mariners Island Boulevard and Trustee Franklin Advisers, Inc.; and officer and/or
San Mateo, CA 94404 director or trustee of some of the
investment companies in the Franklin Group
of Funds.
- ---------------------------------------------------------------------------------------------------------------
* Charles B. Johnson Chairman President and Director, Franklin Resources,
777 Mariners Island Blvd. of the Board Inc. and Franklin/Templeton Distributors,
San Mateo, CA 94404 and Trustee Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.
and General Host Corporation; director of
certain of the investment companies in the
Templeton Group of Funds; and officer and/or
director, trustee or managing general
partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and
of most of the investment companies in the
Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
* Rupert H. Johnson, Jr. Vice President Executive Vice President and Director,
777 Mariners Island Blvd. and Trustee Franklin Resources, Inc. and
San Mateo, CA 94404 Franklin/Templeton Distributors, Inc.;
President and Director, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor
Services, Inc.; director of certain of the
investment companies in the Templeton Group
of Funds; and officer and/or director,
trustee or managing general partner, as the
case may be, of most other subsidiaries of
Franklin Resources, Inc. and of most of the
investment companies in the Franklin Group
of Funds.
- ---------------------------------------------------------------------------------------------------------------
Frank W. T. LaHaye Trustee General Partner, Peregrine Associates and
20833 Stevens Creek Blvd. Miller & LaHaye, which are General Partners
Suite 102 of Peregrine Ventures and Peregrine Ventures
Cupertino, CA 95014 II (venture capital firms); Chairman of the
Board and Director, Quarterdeck Office
Systems, Inc.; Director, FischerImaging
Corporation; and director or trustee, as the
case may be, of most of the investment
companies in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
Gordon S. Macklin Trustee Chairman, White River Corporation (financial
8212 Burning Tree Road services); Director, Fundamerican
Bethesda, MD 20817 Enterprises Holdings, Inc., Martin Marietta
Corporation, and MCI Communications
Corporation; director of certain of the
investment companies in the Templeton Group
of Funds; and director, trustee or managing
general partner, as the case may be, of most
of the investment companies in the Franklin
Group of Funds; formerly, Chairman,
Hambrecht and Quist Group; Director, H & Q
Healthcare Investors; and President,
National Association of Securities Dealers,
Inc.
- ---------------------------------------------------------------------------------------------------------------
Andrew R. Johnson Vice President Senior Vice President, Franklin Advisers,
777 Mariners Island Blvd. Inc.; employee of Franklin Resources, Inc.
San Mateo, CA 94404 and its subsidiaries in administrative and
portfolio management capacities; and officer
of some of the investment companies in the
Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
Charles E. Johnson Vice President Senior Vice President, Franklin Resources,
777 Mariners Island Blvd. Inc. and Franklin/Templeton Distributors,
San Mateo CA 94404 Inc.; President, Franklin Institutional
Services Corporation; director of certain of
the investment companies in the Templeton
Group of Funds; officer and/or director, as
the case may be, of some of the subsidiaries
of Franklin Resources, Inc.; and officer
and/or director or trustee, as the case may
be, of some of the investment companies in
the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Harmon E. Burns Vice President Executive Vice President, Secretary and
777 Mariners Island Blvd. Director, Franklin Resources, Inc.;
San Mateo, CA 94404 Executive Vice President and Director,
Franklin/Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor
Services, Inc.; director of certain of the
investment companies in the Templeton Group
of Funds; officer and/or director, as the
case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or
director or trustee of all the investment
companies in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President Senior Vice President, Franklin Resources,
777 Mariners Island Blvd. and Treasurer Inc. and Franklin Advisers, Inc.; Vice
San Mateo, CA 94404 President, Franklin/Templeton Distributors,
Inc.; officer or director, as the case may
be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or managing
general partner, as the case may be, of all
the investment companies in the Franklin
Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales
777 Mariners Island Blvd. Manager, Franklin/Templeton Distributors,
San Mateo, CA 94404 Inc.; and officer of many of the investment
companies in the Franklin Group of Funds.
- ---------------------------------------------------------------------------------------------------------------
Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin
777 Mariners Island Blvd. and Secretary Resources, Inc. and Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Vice President, Franklin
Advisers, Inc.; and officer of all the
investment companies in the Franklin Group
of Funds.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
As indicated above, certain trustees and officers hold positions with other
companies in the Franklin Group of Funds(R). Trustees not affiliated with the
investment manager are currently paid fees of $925 per month plus $925 per
meeting attended and are reimbursed for expenses incurred in connection with
attending such meetings. Payment for fees and reimbursement of expenses are paid
pro rata by each series of the Trust based on net assets. For the nine-month
period ended October 31, 1993, the Fund's pro rata payment totaled $6,706. No
officer or trustee received any other compensation directly from the Trust. As
of December 9, 1993, the trustees and officers did not own of record or
beneficially any outstanding shares of the Fund. Certain officers or trustees
who are shareholders of Franklin Resources, Inc. may be deemed to receive
indirect remuneration by virtue of their participation, if any, in the fees paid
to its subsidiaries. Charles B. Johnson (the father of Charles E. Johnson),
Rupert H. Johnson, Jr. and Andrew R. Johnson are brothers.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding common stock.
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------------------------------------------------
Advisers, an investment adviser registered under the Investment Advisers Act of
1940, is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company whose shares are listed on the New York Stock
Exchange (the "Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services. The Manager and
other subsidiary companies of Resources currently manage over $117 billion in
assets for over 3.3 million shareholders. The preceding table indicates those
officers and trustees who are also affiliated persons of Distributors and
Advisers.
12
<PAGE>
Pursuant to the management agreement, the Manager provides investment research
and portfolio management services, including the selection of securities for the
Fund to purchase, hold or sell and the selection of brokers through whom the
Fund's portfolio transactions are executed. The Manager's activities are subject
to the review and supervision of the Trust's Board of Trustees to whom the
Manager renders periodic reports of the Fund's investment activities. The
Manager, at its own expense, furnishes the Fund with office space and office
furnishings, facilities and equipment required for managing the business affairs
of the Fund; maintains all internal bookkeeping, clerical, secretarial and
administrative personnel and services; and provides certain telephone and other
mechanical services. The Manager is covered by fidelity insurance on its
officers, directors and employees for the protection of the Fund. The Fund bears
all of its expenses not assumed by the Manager. See the Statement of Operations
in the financial statements at the end of this Statement of Additional
Information for additional details of these expenses.
Pursuant to the management agreement, the Fund is obligated to pay the Manager a
fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for the
first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2 of
1% per year) of net assets of the Fund in excess of $100 million up to $250
million; and 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of
the Fund in excess of $250 million.
The management agreement specifies that the management fee will be reduced to
the extent necessary to comply with the most stringent limits on the expenses
which may be borne by the Fund as prescribed by any state in which the Fund's
shares are offered for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes, brokerage commissions and
extraordinary expenses such as litigation costs) would otherwise exceed in any
fiscal year 21/2% of the first $30 million of average net assets of the Fund, 2%
of the next $70 million of average net assets of the Fund and 11/2% of average
net assets of the Fund in excess of $100 million. Expense reductions have not
been necessary based on state requirements. Management fees for the fiscal years
ended January 31, 1992 and 1993, would have been $324,997 and $763,966,
respectively. Advisers, however, waived a portion of its management fees and the
amounts paid by the Fund for the same periods were $175,943 and $747,403,
respectively. For the nine-month period ended October 31, 1993, the Fund paid
Advisers fees totaling $746,129.
The management agreement is in effect until April 30, 1994. Thereafter, it may
continue in effect for successive annual periods providing such continuance is
specifically approved at least annually by a vote of the Trust's Board of
Trustees 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 Trust's
trustees who are not parties to the management agreement or interested persons
of any such party (other than as trustees of the Trust), cast in person at a
meeting called for that purpose. The management agreement may be terminated, as
to the Fund, without penalty at any time by the Trust or by the Manager on 30
days' written notice and will automatically terminate in the event of its
assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund 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.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand, 333 Market Street, San Francisco, California 94105, are the
Fund's independent auditors. For the nine-month period ended October 31, 1993,
their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders and
this Statement of Additional Information.
PROPOSED SUBADVISORY AGREEMENT
On October 30, 1992, Resources, directly and through newly formed affiliates of
Advisers, acquired the assets of Templeton, Galbraith & Hansberger, Ltd.
("TGH"), an investment advisory firm which manages the Templeton Family of
Funds. At the Trust's Board of Trustees' meeting held on December 14, 1993,
Advisers proposed for consideration by the Trustees, the establishment for the
Fund of a subadvisory relationship with the Templeton Global Bond Managers, a
division of Templeton
13
<PAGE>
Investment Counsel, Inc. ("TICI"). TICI, a Florida corporation with offices at
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394-3091, is an
affiliate of TGH, which, operating through its subsidiaries, is a major
investment management organization with approximately $117 billion in assets
under management. TICI is registered under the Investment Advisers Act of 1940.
TICI and its affiliates currently manage $26.2 billion for U.S. registered
management investment companies. Approval of adoption of the subadvisory
arrangement is being sought at a special meeting of shareholders which has been
called for mid-April 1994.
If shareholders approve the subadvisory agreement, the subadviser will provide,
subject to the Manager's discretion a portion of the investment advisory
services for which the Manager is responsible pursuant to the management
agreement. Such responsibilities may include managing a portion of the Fund's
investments and supplying research services. Research services provided by the
subadviser may include information, analytical reports, computer screening
studies, statistical data and factual resumes pertaining to securities
throughout the world. Such supplemental research when utilized, is subject to
analysis by the Manager before being incorporated into the investment advisory
process. The subadvisory agreement provides that the subadviser also may select
brokers and dealers for execution of the Fund's portfolio transactions
consistent with the Fund's brokerage policies.
Under the subadvisory agreement, TICI will receive from the Manager a fee equal
to an annual rate of 0.35% of 1% of the average daily net assets up to and
including $100 million of net assets of each Fund; 0.25 of 1% of average daily
net assets over $100 million up to and including $250 million; and 0.20 of 1% of
average daily net assets over $250 million.
THE FUND'S POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in the Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Board of Trustees may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Manager, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. As a general rule, the Fund
does not purchase bonds in underwritings where it is not given any choice, or
only limited choice, in the designation of dealers to receive the commission.
The Fund will seek to obtain prompt execution of orders at the most favorable
net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interests, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will have to
pay a higher commission than would be the case if no weight were given to the
broker's furnishing of these services. This will be done only if, in the opinion
of the Manager, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist the Manager in carrying out its responsibilities
to the Fund, or when it is otherwise in the best interest of the Fund to do so,
whether or not such data may also be useful to the Manager in advising other
clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations
14
<PAGE>
necessary to determine the value of the Fund's net assets, in such amount of
total brokerage as may reasonably be required in light of such services, and
through brokers who supply research, statistical and other data to the Fund and
Manager in such amount of total brokerage as may reasonably be required.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers 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 staff of other securities firms. As long as it is lawful and
appropriate to do so, the Manager and its affiliates may use this research and
data in their investment advisory capacities with other clients. Provided that
the Fund's officers are satisfied that the best execution is obtained, the sale
of Fund shares may also be considered as a factor in the selection of securities
dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain 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 under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the nine-month period ended October 31, 1993, the Fund paid no brokerage
commissions. For fiscal year ended January 31, 1992 and 1993, the Fund paid
$4,858 and $867, respectively, in brokerage commissions. As of October 31, 1993,
the Fund did not own the securities of any broker-dealer.
ADDITIONAL INFORMATION REGARDING FUND SHARES
- --------------------------------------------------------------------------------
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) to
honor the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
Dividend checks which are returned to the Fund marked unable to "forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at the
public offering price (or net asset value if a capital gain distribution) until
new instructions are received.
The Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or the Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for their location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of the Fund will be
offered with the following schedule of sales charges:
<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- ---------------------------------------------- ------
<S> <C>
Up to U.S. $100,000........................... 3%
U.S. $100,000 to U.S. $1,000,000.............. 2%
Over U.S. $1,000,000.......................... 1%
</TABLE>
15
<PAGE>
PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS
Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the Exchange is open for trading
and promptly transmitted to the Fund will be based upon the public offering
price determined that day. Purchase orders received by securities dealers or
other financial institutions after 1:00 p.m. Pacific time will be effected at
the Fund's public offering price on the day it is next calculated. The use of
the term "securities dealer" herein shall include other financial institutions
which, pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the Fund. Such reference
however is for convenience only and does not indicate a legal conclusion of
capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
PURCHASES AT NET ASSET VALUE
As discussed in the Prospectus, certain categories of investors may purchase
shares of the Fund at net asset value (without a sales charge) or at a reduced
sales charge. The reason for this is that there is minimal or no sales effort
required with respect to these investors. If certain investments at net asset
value are made through a dealer who has executed a dealer or similar agreement
with Distributors, Distributors or its affiliates may make a payment, out of
their own resources, to such dealer in an amount not to exceed .25% of the
amount invested, paid pro rata on a quarterly basis on average quarterly
balances for a period of one year.
REDEMPTIONS IN KIND
The Fund has committed itself to pay in cash 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 such period. Such commitment is irrevocable without the prior
approval of the SEC. In the case of requests for redemption in excess of such
amounts, the trustees reserve the right to make payments in whole or in part in
securities or other assets of the Fund from which the shareholder is redeeming,
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 such circumstances, the
securities distributed would be valued at the price used to compute the Fund's
net assets. Should the Fund do so, a shareholder may incur brokerage fees in
converting the securities to cash. The Fund does not intend to redeem illiquid
securities in kind; however, should it happen, shareholders may not be able to
timely recover their investment and may also incur brokerage costs in selling
such securities.
REDEMPTIONS BY THE FUND
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of the Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before the Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in this account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectus, the Fund generally calculates net asset value as of
1:00 p.m. Pacific time each day that the Exchange is open for trading. As of the
date of this Statement of Additional Information, the Fund is informed that the
Exchange observes the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of the Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and 1:00 p.m.
Pacific time which will not be reflected in the computation of the Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their
16
<PAGE>
fair value as determined in good faith by the Board of Trustees.
REINVESTMENT DATE
The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. This
date will vary from month to month, based on operational considerations, and is
not necessarily the same date as the record date or the payable date for cash
dividends.
SPECIAL SERVICES
The Trust and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Fund. The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. Such financial institutions may also charge a fee for their services
directly to their clients.
ADDITIONAL INFORMATION REGARDING TAXATION
- --------------------------------------------------------------------------------
The following information is a supplement to and should be read in conjunction
with the section in the Fund's Prospectus entitled "Taxation of the Fund and Its
Shareholders."
As stated in the Prospectus, the Fund has elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). The trustees reserve the right not to maintain the
qualification of the Fund as a regulated investment company if they determine
such course of action to be beneficial to the shareholders. In such case, the
Fund will be subject to federal and possibly state corporate taxes on its
taxable income and gains, and distributions to shareholders will be ordinary
dividend income to the extent of the Fund's available earnings and profits.
Subject to the limitations discussed below, the portion of the income
distributions paid by the Fund may be treated by corporate shareholders as
qualifying dividends for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying dividends received by the
Fund (generally, dividends from U.S. domestic corporations, the stock in which
is not debt-financed by the Fund and is held for at least a minimum holding
period) is less than 100% of its distributable income, then the amount of the
Fund's dividends paid to corporate shareholders which may be designated as
eligible for such deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or percentage of income
qualifying for the deduction will be declared by the Fund annually in a notice
to shareholders mailed shortly after the end of the Fund's fiscal year.
Corporate shareholders should note that dividends paid by a Fund from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and short-term
capital gain (in excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and distributed by a
Fund as a dividend will not qualify for the dividends received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion which is treated as a
deduction, is includable in the tax base on which the alternative minimum tax is
computed and may also result in a reduction in the shareholder's tax basis in
its Fund shares, under certain circumstances, if the shares have been held for
less than two years. Corporate shareholders whose investment in the Fund is
"debt financed" for these tax purposes should consult with their tax advisors
concerning the availability of the dividends-received deduction.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare and pay such dividends, if any, in December to avoid the imposition
of this tax, but does not guarantee that its distributions will be sufficient to
avoid any or all federal excise taxes. Under the Code, certain distributions
which are declared in October, November or December but which, for operational
reasons, may
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<PAGE>
not be paid to the shareholder until the following January, will be treated for
tax purposes as if paid by the Fund and received by the shareholder on December
31 of the calendar year in which they are declared.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Gain realized by the Fund from transactions entered into after April 30, 1993
that are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code 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 the
applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.
The Fund's investment in options, futures contracts and forward contracts,
including transactions involving actual or deemed short sales or foreign
exchange gains or losses are subject to many complex and special tax rules. For
example, 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. By contrast, the Fund
treatment of certain other options, futures and forward contracts entered into
by the Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contacts and
options thereon.
Absent a tax election to the contrary, each such Section 1256 position held by
the Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of the Fund's fiscal year, and all gain
or loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain foreign currency gain or loss covered by Section
988 of the Code) will generally be treated as 60% long-term capital gain or loss
and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to 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 both the
amount, character and time of income distributed to shareholders 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, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of short
term capital losses into long-term capital losses. Certain tax elections exist
for mixed straddles (i.e., straddles comprised of at least one Section 1256
position and at least one non-Section 1256 position) which may reduce or
eliminate the operation of these straddle rules.
As a regulated investment company, the Fund is also subject to the requirement
that less than 30% of its annual gross income be derived from the sale or other
disposition of securities and certain other investments held for less than three
months ("short-short income").
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<PAGE>
This requirement may limit the Fund's ability to engage in options, straddles,
hedging transactions and forward or futures contracts because these transactions
are often consummated in less than three months, may require the sale of
portfolio securities held less than three months and may, as in the case of
short sales of portfolio securities reduce the holding periods of certain
securities within the Fund, resulting in additional short-short income for the
Fund.
The Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a regulated investment
company under Subchapter M of the Code.
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currencies, foreign currency payables or
receivables, foreign currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on foreign currencies are
subject to special tax rules which may cause such gains and losses to be treated
as ordinary income and losses rather than capital gains and losses and may
affect the amount and timing of the Fund's income or loss from such transactions
and in turn its distributions to shareholders.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. Because the Fund will likely invest 50% or less of its
total assets in securities of foreign corporations, the Fund will not be
entitled under the Code to pass through to its shareholders their pro rata share
of the foreign taxes paid by the Fund. These taxes will be taken as a deduction
by the Fund.
In order for the Fund to qualify as a regulated investment company, at least 90%
of the Fund's annual gross income must consist of dividends, interest and
certain other types of qualifying income, and also conform to the aforementioned
30% gross income test. Foreign exchange gains are presently treated as
qualifying income for purposes of this 90% limitation. However, future Treasury
regulations are expected to provide that such gains may not qualify for purposes
of the 90% limitation if such gains are not directly related to the Fund's
principal business of investing in stock or securities, or options or futures
with respect to such stock or securities.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not
directly related to the Fund's principal business of investing in stock or
securities and related options or futures. Under current law,
non-directly-related gains arising from foreign currency positions or
instruments held for less than three months are treated as derived from the
disposition of securities held less than three months in determining the Fund's
compliance with the 30% limitation. The Fund will limit its activities involving
foreign exchange gains to the extent necessary to comply with these
requirements.
The federal income tax treatment of interest rate and currency swaps is unclear
in certain respects and may in some circumstances result in the realization of
income not qualifying under the 90% test described above or be deemed to be
derived from the disposition of securities held less than three months in
determining the Fund's compliance with the 30% limitation. The Fund will limit
its interest rate and currency swaps to the extent necessary to comply with
these requirements.
The Fund will limit its equity investments in non-U.S. corporations which would
be treated as Passive Foreign Investment Companies (PFICs) under the Code in
order to avoid adverse tax consequences upon the disposition of, or the receipt
of excess "distributions" with respect to, such equity investments. To the
extent the Fund does invest in PFICs, it may adopt certain tax strategies to
reduce or eliminate the adverse effects of certain federal tax provisions
governing PFIC investments. Many non-U.S. banks and insurance companies may not
be treated as PFICs if they satisfy certain technical requirements under the
Code. To the extent that the Fund does invest in foreign securities which are
determined to be PFIC securities and is required to pay a tax on such an
investment, a credit for this tax would not be allowed to be passed through to
the Fund's shareholders. Therefore, the payment of this tax would reduce the
Fund's economic return from its PFIC investment. The recognition of income upon
the disposition of or the receipt of excess distributions from the PFIC security
may also change the character of such income from capital gain to ordinary
income. For these and other operational reasons, the Fund will generally avoid,
where possible, investment in foreign securities which are known to be or
potentially may be classified as PFIC securities.
THE FUND'S UNDERWRITER
- --------------------------------------------------------------------------------
Pursuant to an underwriting agreement in effect until April 30, 1994,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund.
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<PAGE>
Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The underwriting agreement will continue in effect for successive annual periods
provided that its continuance is specifically approved at least annually by a
vote of the Trust's Board of Trustees, or, as to the Fund, by a vote of the
holders of a majority of its outstanding shares, and in either event by a
majority vote of the Trust's trustees who are not parties to the underwriting
agreement or interested persons of any such party (other than as trustees of the
Trust), 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 allows the entire underwriting commission on the sale of Fund
shares and 50% of the underwriting commission on the reinvestment of income
dividends to the securities dealer of record, if any, on an account.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal periods ended January 31, 1992 and 1993 and October
31, 1993 were $1,221,597, $2,396,458 and $1,099,431 respectively. After
allowances to dealers, Distributors retained $28,679, $76,998 and $76,161 for
the respective periods. Distributors received no other compensation from the
Fund for acting as underwriter.
PROPOSED PLAN OF DISTRIBUTION
- --------------------------------------------------------------------------------
At a meeting held on October 15, 1993, the Board of Trustees approved, subject
to approval by shareholders at a special meeting to be held in mid-April 1994, a
proposed plan of distribution (the "Plan") pursuant to Rule 12b-1 under the 1940
Act. The proposed Plan provides that the Fund shall reimburse Distributors or
others for all expenses incurred by Distributors or others in the promotion and
distribution of Fund shares in an amount not to exceed 15/100 of 1% per annum of
its average daily net assets. Reimbursable expenses include, but are not limited
to, the printing of prospectuses and reports used for sales purposes, expenses
of preparing and distributing of sales literature and related expenses,
advertisements, and other distribution-related expenses including a prorated
portion of Distributor's overhead expenses, attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates.
In addition to the payments which the Fund will be otherwise authorized to make
under the Plan, to the extent that certain parties make payments that are deemed
to be payments by the Fund for the financing of any activity primarily intended
to result in the sale of shares issued by the Fund within the context of Rule
12b-1, then such payments will be deemed to have been made pursuant to the Plan.
Under the Plan, Distributors will furnish to the Board of Trustees of the Trust,
for their review, on a quarterly basis, a written report of the monies
reimbursed to it and to others under the Plan, and shall furnish the Board with
such other information as the Board may reasonably request in connection with
the payments made under the Plan in order to enable the Board to make an
informed determination of whether the Plan shall be continued. The Plan shall
continue in effect for a period of more than one year only so long as its
continuance is specifically approved at least annually by a vote of the Fund's
Board of Trustees, including the independent Trustees, cast in person at a
meeting called for the purpose of voting on the Plan. The Plan, or any
agreements entered into pursuant to the Plan, may be terminated at any time,
without penalty, by vote of a majority of the outstanding voting securities, or
by vote of a majority of the independent Trustees, on not more than 60 days'
written notice, or by Distributors on not more than 60 days' written notice. In
addition, the Plan terminates automatically in the event of any act that
constitutes an assignment of the management agreement with Advisers.
If the proposed Plan is approved by the shareholders of the Fund, it will become
effective on such date as Distributors shall notify the Fund, which date shall
not be earlier than the date on which the Plan is approved by shareholders as
required by Rule 12b-1 (the "Effective Date"). It is currently anticipated that
the Effective Date will be on or about May 1, 1994, however, implementation may
be delayed at the discretion of the Board of Trustees.
In implementing the Plan, the Board has determined that initially the annual
fees payable thereunder will be equal to the sum of: (i) the amount obtained by
multiplying 0.15% by the average daily net assets represented by shares of the
Fund that were acquired by investors on or after the Effective Date of the Plan
("New Assets"), and (ii) the amount obtained by multiplying 0.05% by the average
daily
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<PAGE>
net assets represented by shares of the Fund that were acquired before the
Effective Date of the Plan ("Old Assets"). It is anticipated that the 0.05% will
be paid to dealers who are responsible for the Old Assets having been invested
in the Fund, while the 0.15% will be paid to dealers responsible for New Assets.
In addition, until such time as the maximum payment of 0.15% is reached on a
yearly basis, up to an additional 0.02% will be paid to Distributors under the
Plan. The payments to be made to Distributors will be used by Distributors to
defray other marketing expenses that have been incurred in accordance with the
Plan, such as advertising.
While this is the currently anticipated method for calculating the 12b-1 fees to
be paid by the Fund, the fee is a Fund expense so that all shareholders
regardless of when they purchased their shares will bear 12b-1 expenses at the
same rate. That rate initially will be at least 0.07% (0.05% plus 0.02%) of such
average daily net assets and, as Fund shares are sold on or after the Effective
Date, will increase over time. Thus, as the proportion of Fund shares purchased
on or after the Effective Date to outstanding Fund shares increases, the
expenses attributable to payments under the proposed Plan will also increase
(but will not exceed 0.15% of average daily net assets). While this is the
currently anticipated calculation for fees payable under the Plan, the Plan
permits the trustees to allow the Fund to pay a full 0.15% on all assets both
Old and New at any time. The approval of the Board of Trustees would be required
to change the calculation of the payments to be made under the Plan.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
PERFORMANCE
As noted in the Prospectus, the Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. 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. Current yield and average annual compounded total return
quotations used by the Fund are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by the Fund to compute or express performance follows.
TOTAL RETURN
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods (or fractional
portion thereof) that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum sales charge is
deducted from the initial $1,000 purchase order, capital gains are reinvested at
net asset value and all income dividends are reinvested at the maximum public
offering price (offering price includes sales charge) on the reinvestment dates
during the period. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period (or fractional portion thereof)
and the deduction of all applicable charges and fees.
In considering the quotations set forth below investors should remember that the
4% maximum sales charge reflected in each quotation is a one time fee (charged
on all direct purchases and reinvested dividends) which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of an investment will be affected less by this charge the
longer an investor retains the investment in the Fund. The average annual
compounded rate of return for the one year and five-year period ended October
31, 1993 was 11.84% and 7.59%, and for the period from inception (March 15,
1988) to January 31, 1993, was 7.96%.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the one-,
five-, or ten -year periods (or fractional portion thereof).
As discussed in the Prospectus, the Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as the Fund's average annual compounded rate, except that such
quotations will be based on the Fund's actual return for a specified period
rather than to its average return over one, five and ten year periods (to the
extent applicable). The aggregate total return for the Fund for the one-year and
five-year periods ending January 31,
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1993, was 11.84% and 44.18% and for the period covering its inception (March 15,
1988) to October 31, 1993 was 53.94%.
YIELD
Current yield reflects the income per share earned by the Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the 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 during the base period. The
yield for the Fund for the 30-day period ended on October 31, 1993 was 7.16%.
These figures were obtained using the following SEC formula:
Yield = 2 [(a-b + 1)6 -1]
---
cd
where
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reduction)
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
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 the Fund's shareholders.
Amounts paid to shareholders are reflected in the quoted "current distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by the Fund during the past 12 months by the current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of time.
VOLATILITY
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative 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 the
Standard & Poor's 500 Stock Index. 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 premise is that
greater volatility connotes greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are permitted to purchase
shares of the Fund at net asset value, sales literature pertaining to the Fund
may quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this
Statement of Additional Information with the substitution of net asset value for
the public offering price. The current distribution rate for the Fund for the
fiscal year ended January 31, 1993, based on the Fund's net asset value, was
8.92%.
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. Regardless
of the method used, past performance is not necessarily indicative of future
results, but is an indication of the return to shareholders only for the limited
historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Franklin Resources, Inc. is the parent company of the
advisers and underwriters of both the Franklin Group of Funds and Templeton
Group of Funds.
COMPARISONS
To help investors better evaluate how an investment in the Fund might satisfy
their investment objective, advertisements and other materials regarding the
Fund may discuss various measures of Fund performance as reported by various
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices and averages. The
following publications, indices and averages are examples of materials that may
be used:
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<PAGE>
a) Dow Jones Composite Average or its component averages- unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 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.
c) Lipper- Mutual Fund Performance Analysis and Lipper- Fixed Income Fund
Performance Analysis- measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
d) 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.
e) Mutual Fund Source Book, published by Morningstar, Inc.- analyzes price,
yield, risk, and total return for equity and fixed income funds.
f) 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.
g) 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.
h) 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, non U.S. and
inflation.
i) Salomon Brothers Broad Bond Index or its component indices- The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
j) Savings and Loan Historical Interest Rates- as published in the U.S. Savings
& Loan League Fact Book.
k) Lehman Brothers Aggregate Bond Index or its component indices- The Aggregate
Bond Index or its component indices- The Aggregate Bond Index measures yield,
price and total return for Treasury, Agency, Corporate, Mortgage, and Yankee
bonds.
l) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers and Bloomberg L.P.
m) Yields and total return of other taxable investments including certificates
of deposit (CDs), money market deposit accounts (MMDAs), checking accounts,
savings accounts, money market mutual funds, and repurchase agreements.
n) Yields of other countries' government and corporate bonds as compared to U.S.
Government and corporate bonds to illustrate the potentially higher returns
available outside the United States.
o) Salomon Brothers World Government Bond Index covers the available market for
domestic Government bonds worldwide. It includes all fixed-rate bonds with a
remaining maturity of one year or longer with amounts outstanding of at least
the equivalent of $25 million dollars. The index provides an accurate,
replicable fixed income benchmark for market performance. Returns are in local
currency.
From time to time, advertisements or information for the Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may also compare the Fund's
performance to the return on certificates of deposit or other investments.
Investors 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 certificate of deposit issued by a bank. For example, as the
general level of interest rates rise, the value of the Fund's fixed-income
investments, as well as the value of its shares which 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. Certificates of deposit 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 such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Fund's portfolio, that the averages are generally
unmanaged, and that the items included in the calculations of such 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 this performance
as compared to such other averages.
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<PAGE>
OTHER FEATURES AND BENEFITS
The Fund may help investors achieve various investment goals such as
accumulating money for retirement, saving for a down payment on a home, college
cost and/or other long-term goals. The Franklin College Costs Planner may assist
an investor 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 an investor through the steps to start a retirement savings program. Of
course, an investment in the Fund cannot guarantee that such goals will be met.
The Fund is a member of the Franklin/Templeton Group, 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 45 years and now services
more than 2.4 million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in creating domestic equity
funds, joined forces with Templeton Worldwide, Inc., a pioneer in international
investing. Together, the Franklin/Templeton Group has over $117 billion in
assets under management worldwide for more than 3.3 million mutual fund
shareholders, in addition to foundations and endowments, employee benefit plans,
and individuals. The Fund may identify itself by its Quotron or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
36 mutual fund groups in service quality for 1993. One other fund group was also
ranked number one. Franklin has been ranked number one in service quality by
Dalbar for five of the past six years.
MISCELLANEOUS
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for obligations of the
Trust. The Declaration of Trust provides that the Trust shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the series of which a shareholder holds shares. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance exists and the Trust
itself is unable to meet its obligations.
OWNERSHIP AND AUTHORITY DISPUTES
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's 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, prior
to 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 Internal Revenue Service in response
to a Notice of Levy.
24
FRANKLIN INVESTORS SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
of Franklin Investors Securities Trust:
We have audited the accompanying statements of assets and liabilities of the
various funds comprising Franklin Investors Securities Trust, including each
Fund's statement of investments in securities and net assets, as of October 31,
1993, and the related statements of operations and changes in net assets for the
periods indicated thereon, and the selected per share data and ratios included
under the caption "Financial Highlights" for the periods
indicated in Note 12. 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 investments
and cash held by the custodian as of October 31, 1993, and confirmation by
correspondence with brokers as to securities purchased but not received at that
date, or other auditing procedures where confirmations from brokers were not
received. 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 various funds comprising Franklin Investors Securities Trust as
of October 31, 1993, the results of their operations and the changes in their
net assets for the periods indicated thereon, and the financial highlights
for each of the periods indicated in Note 12, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND
San Francisco, California
December 6, 1993
23
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS .3%
FINANCIAL SERVICES .2%
US 16,200 (d)Grupo Financiero Bancomer, ADS................................................ $ 471,066
------------
HOME BUILDING
US 2,302 (a)NVR, Inc...................................................................... 23,308
------------
METALS .1%
US 7,000 Kloof Gold Mining Co., Ltd., ADR.............................................. 70,000
US 3,000 Orange Free State Investments, Ltd., ADR...................................... 105,750
------------
175,750
------------
TOTAL COMMON STOCKS (COST $614,341)...................................... 670,124
------------
WARRANTS
HOME BUILDING
US 1,193 (a)NVR, Inc...................................................................... 5,816
------------
RESTAURANTS/FOOD SERVICES
US 115 (a)Foodmaker, Inc................................................................ 1,393
------------
TOTAL WARRANTS (COST $5,230)............................................. 7,209
------------
PREFERRED STOCKS .4%
FINANCIAL SERVICES
US 30,000 Nortel Communications, Inc., Series B, ADR (Cost $450,000).................... 555,000
------------
FACE
AMOUNT
-------------
BONDS, NOTES, BILLS & DEBENTURES 83.4%
ARGENTINA 4.8%
US 14,000,000 Republic of Argentina, 4.00%, 03/31/23........................................ 9,292,500
------------
AUSTRALIA 2.1%
AUS 2,396,000 Fanmac Strip, 13.95%, 05/15/06................................................ 1,747,205
AUS 3,000,000 Queensland Treasury Corp., 8.00%, 05/14/03.................................... 2,181,459
AUS 450,000 (f)Snowy Mountain Hydro, notes, 0.00%, 02/01/97.................................. 236,746
------------
4,165,410
------------
CANADA 14.1%
CAN 16,000,000 (f)Canadian Strip, 0.00%, 03/01/08............................................... 3,776,172
CAN 5,000,000 Government of Canada, 10.00%, 06/01/08........................................ 4,685,549
CAN 450,000 Hydro-Quebec, Eurobonds, 11.00%, 02/09/99..................................... 397,332
CAN 1,150,000 Ontario-Hydro, Eurobonds, 10.875%, 01/08/96................................... 965,367
CAN 3,000,000 Ontario-Hydro, Eurobonds, 9.00%, 06/24/02..................................... 2,491,393
CAN 3,500,000 Ontario-Hydro, Eurobonds, 8.90%, 08/18/22..................................... 2,844,553
CAN 1,000,000 Province of British Columbia, 10.15%, 08/29/01................................ 894,310
CAN 12,000,000 Province of British Columbia, 8.00%, 09/09/23................................. 9,089,327
CAN 3,000,000 Province of Quebec, Eurobonds, 8.50%, 04/01/97................................ 2,438,898
------------
27,582,901
------------
DENMARK 4.1%
DAN 23,000,000 Kingdom of Denmark, 9.00%, 11/15/95........................................... 3,587,117
DAN 26,000,000 Kingdom of Denmark, 9.00%, 11/15/00........................................... 4,433,905
------------
8,021,022
------------
FRANCE 4.2%
FR 11,197,437 CB-2 Cetelem Assets Backed Securities, 9.50%, 11/20/96........................ 1,948,823
FR 550,000 French OAT Bond, 9.80%, 01/30/96.............................................. 102,253
FR 20,000,000 French OAT Bond, 7.41%, 01/25/01.............................................. 3,418,498
FR 15,400,000 Government of France, BTAN, 9.00%, 02/12/95................................... 2,728,772
------------
8,198,346
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS, NOTES, BILLS & DEBENTURES (CONT.)
GREAT BRITAIN 6.6%
UK 700,000 Halifax Building Society, floating rate deb., Series B, 5.955%, 09/30/96...... $ 1,041,053
UK 3,500,000 United Kingdom Treasury, 10.00%, 11/15/96..................................... 5,772,348
UK 3,500,000 United Kingdom Treasury, 9.75%, 08/27/02...................................... 6,165,326
------------
12,978,727
------------
ITALY 15.2%
ITY 10,000,000,000 Buoni Poliennali del Tesoro (BTPS), 9.625%, 06/01/03.......................... 6,869,245
ITY 13,000,000,000 Certificati di Credito del Tesoro (CCTS), 11.20%, 01/20/00.................... 8,108,042
ITY 15,000,000,000 Certificati di Credito del Tesoro (CCTS), 10.50%, 08/01/00.................... 9,383,057
ITY 1,710,000,000 Deutshcebank Finance, 12.375%, 11/07/94....................................... 1,091,713
EC 1,500,000 Government of Italy, 9.25%, 03/07/11.......................................... 1,963,082
UK 1,200,000 Government of Italy, 10.50%, 04/28/14......................................... 2,220,008
------------
29,635,147
------------
MEXICO 1.2%
US 700,000 United Mexican States, FRN, 5.00%, 03/31/08................................... 669,375
US 600,000 United Mexican States, FRN, 4.25%, 12/31/19................................... 521,250
US 1,400,000 United Mexican States, Series B, 6.25%, 12/31/19.............................. 1,137,500
------------
2,328,125
------------
NEW ZEALAND 8.5%
NWZ 16,250,000 Electricity Corp. of New Zealand, 10.00%, 10/15/01............................ 11,057,578
NWZ 8,000,000 Government of New Zealand, 10.00%, 03/15/02................................... 5,607,819
------------
16,665,397
------------
SOUTH AFRICA 3.1%
SA 29,350,000 ESCOM, E168, 11.00%, 06/01/08................................................. 6,072,034
------------
SPAIN 8.0%
SP 500,000,000 Government of Spain, 13.65%, 03/15/94......................................... 3,769,173
SP 300,000,000 Government of Spain, 12.00%, 07/15/94......................................... 2,272,226
SP 600,000,000 Government of Spain, 11.40%, 07/15/95......................................... 4,670,886
SP 240,000,000 Government of Spain, 13.45%, 04/15/96......................................... 1,988,086
SP 365,000,000 Government of Spain, 11.60%, 01/15/97......................................... 2,970,551
------------
15,670,922
------------
SWEDEN 7.2%
SWD 10,000,000 Staten Bostadsfinansier, 13.00%, 09/20/95..................................... 1,351,637
SWD 91,000,000 Staten Bostadsfinansier, 11.00%, 01/21/99..................................... 12,712,801
------------
14,064,438
------------
UNITED STATES 1.3%
US 2,000,000 Tele-Communications, Inc., cvt. sub. deb., 9.80%, 02/01/12.................... 2,525,634
------------
VENEZUELA 3.0%
US 4,000,000 Republic of Venezuela, 4.313%, 12/18/07....................................... 2,950,000
US 4,000,000 Republic of Venezuela, 6.75%, 03/31/20........................................ 2,985,000
------------
5,935,000
------------
TOTAL BONDS, NOTES, BILLS & DEBENTURES (COST $163,416,679)............... 163,135,603
------------
TOTAL COMMON STOCKS, WARRANTS, PREFERRED STOCKS, AND BONDS,
NOTES, BILLS & DEBENTURES (COST $164,486,250).......................... 164,367,936
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM SECURITIES 11.1%
GOVERNMENT AGENCIES 5.7%
MEX 16,670,000 (f)Mexican Federal Treasury Certificates (CETES), 0.00%, 03/24/94............... $ 5,070,768
US 5,220,000 (d,f)Offshore Mexican Junior Bond, 0.00%, 07/20/94................................. 6,133,500
------------
TOTAL GOVERNMENT AGENCIES (COST $10,809,397)............................. 11,204,268
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $175,295,647)....... 175,572,204
------------
RECEIVABLES FROM REPURCHASE AGREEMENTS 5.4%
$ 4,740,000(h) Bank of America Government Securities, Inc., 2.98%, 11/01/93
(Maturity Value $5,051,254)
Collateral: U.S. Treasury Notes, 7.75%, 03/31/96............................ 5,050,000
5,435,000(h) Daiwa Securities of America, Inc., 2.95%, 11/01/93
(Maturity Value $5,526,358)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94............................ 5,525,000
------------
TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS (COST $10,575,000).......... 10,575,000
------------
TOTAL INVESTMENTS (COST $185,870,647) 95.2%............................ 186,147,204
OTHER ASSETS AND LIABILITIES, NET 4.8%................................. 9,479,309
------------
NET ASSETS 100.0%...................................................... $195,626,513
============
At October 31, 1993, the net unrealized depreciation based on the cost of
investments for income tax purposes of $186,149,185 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost.................................... $ 8,159,227
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value.................................... (8,161,208)
------------
Net unrealized depreciation............................................... $ (1,981)
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
BTAN - Treasury Bond at Fixed Interest Rate
FRN - Floating Rate Notes
OAT - Obligations Assumable by the Treasurer
COUNTRY LEGEND:
AUS - Australia
CAN - Canada
DAN - Denmark
EC - European Community
FR - France
ITY - Italy
MEX - Mexico
NWZ - New Zealand
SA - South Africa
SP - Spain
SWD - Sweden
UK - United Kingdom
US - United States
*Securities traded in currency of country indicated.
(a)Non-income producing.
(d)See Note 10 regarding Rule 144A securities.
(f)Zero coupon bonds. Accretion rate may vary.
(h)Face amount for repurchase agreements is for the underlying collateral.
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
FACE FRANKLIN SHORT-INTERMEDIATE VALUE
AMOUNT U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Securities 100.4%
$25,000,000 U.S. Treasury Notes, 7.50%, 11/15/01........................................................... $ 28,562,250
6,000,000 U.S. Treasury Notes, 6.00%, 10/15/99........................................................... 6,296,220
17,000,000 (f)U.S. Treasury Strips, 0.00%, 02/15/99.......................................................... 13,099,010
12,000,000 U.S. Treasury Notes, 6.375%, 01/15/99.......................................................... 12,809,880
8,000,000 U.S. Treasury Notes, 4.75%, 08/31/98........................................................... 7,979,920
4,000,000 U.S. Treasury Notes, 5.125%, 06/30/98.......................................................... 4,057,480
10,000,000 U.S. Treasury Notes, 5.125%, 03/31/98.......................................................... 10,159,300
6,000,000 U.S. Treasury Notes, 5.50%, 09/30/97........................................................... 6,198,720
6,500,000 U.S. Treasury Notes, 6.75%, 02/28/97........................................................... 6,965,140
5,000,000 U.S. Treasury Notes, 6.25%, 01/31/97........................................................... 5,279,650
4,000,000 U.S. Treasury Notes, 6.125%, 12/31/96.......................................................... 4,208,720
20,000,000 (f)U.S. Treasury Strips, 0.00%, 08/15/96.......................................................... 17,752,660
74,000,000 U.S. Treasury Notes, 4.25%, 05/15/96........................................................... 74,161,320
5,000,000 (f)U.S. Treasury Strips, 0.00%, 05/15/96.......................................................... 4,495,885
80,010,000 (f)U.S. Treasury Strips, 0.00%, 02/15/96.......................................................... 72,830,463
------------
TOTAL INVESTMENTS (COST $266,425,895) 100.4%....................................... 274,856,618
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.4)%................................... (1,178,637)
------------
NET ASSETS 100.0%................................................................... $273,677,981
============
At October 31, 1993, the net unrealized appreciation based on the cost of investment
for income tax purposes of $266,425,895 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost............................................................. $ 8,490,803
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value............................................................. (60,080)
------------
Net unrealized appreciation................................................................. $ 8,430,723
============
</TABLE>
(f)Zero coupon bonds. Accretion rate may vary.
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS & WARRANTS
HOME BUILDERS
3,872 (a)NVR LP, warrant (cost $16,456).......................................................... $ 18,876
----------
CONVERTIBLE PREFERRED STOCKS 32.2%
AUTOMOTIVE 2.2%
4,400 Ford Motor Co., $4.20 cum. cvt. pfd., Series A.......................................... 460,900
10,300 General Motors Corp., $2.86 cvt. pfd., Series E......................................... 584,525
----------
1,045,425
----------
BANKING 4.3%
5,100 Ahmanson (H.F.) & Co., $3.00 cvt. pfd., Series D........................................ 251,813
7,570 Bank of America, $3.25 cvt. pfd., Series G.............................................. 439,060
7,000 (d)Chemical Bank, $5.00 cvt. pfd........................................................... 587,125
6,800 (d)Citicorp, $5.375 cvt. pfd............................................................... 744,600
----------
2,022,598
----------
BROADCAST/MEDIA .7%
5,800 Evergreen Media Corp., $3.00 cvt. pfd., Series A........................................ 312,475
----------
CONSTRUCTION 1.0%
8,700 (d)McDermott International, $2.875 cum. cvt. pfd., Series C................................ 457,838
----------
ENERGY 2.1%
7,300 Ashland Oil, $3.12 cum. cvt. pfd........................................................ 455,337
10,000 (d)Occidental Petroleum Corp., $3.875 cvt. pfd............................................. 555,000
----------
1,010,337
----------
FINANCIAL SERVICES .8%
6,000 (d)Equitable Cos., $3.00 cvt. pfd., Series C.............................................. 381,750
----------
GOLD .3%
2,600 Battle Mountain Gold, $3.25 cvt. pfd.................................................... 156,975
----------
INDUSTRIAL EQUIPMENT .9%
14,000 Cooper Industries, $1.60 cvt. pfd....................................................... 444,500
----------
LEASING .9%
7,600 GATX Corp., $3.875 cvt. pfd., Series A.................................................. 408,500
----------
LONG DISTANCE/TELECOM 4.8%
30,000 LCI International, Inc., $1.25 cvt. pfd................................................. 885,000
15,000 (d)Mobile Telecommunication, $2.25 cvt. pfd................................................ 641,250
20,000 (d)Philippine Long Distance Telephone Company, $1.44 cvt. pfd.............................. 750,000
----------
2,276,250
----------
METAL & RESOURCES 1.1%
9,200 Armco, Inc., $3.625 cvt. pfd., Series A.................................................. 501,400
----------
OIL & GAS 5.1%
4,000 (d)Diamond Shamrock, $2.50 cvt. pfd......................................................... 230,000
12,000 Gerrity Oil & Gas, $1.50 cvt. pfd........................................................ 306,000
11,100 Maxus Energy Corp., $4.00 cum. cvt. pfd.................................................. 532,800
9,600 Noble Drilling Corp., $2.25 cvt. pfd..................................................... 524,400
12,662 Santa Fe Energy, $1.40 cvt. pfd.......................................................... 251,657
11,100 Snyder Oil Corp., $1.50 cvt. pfd......................................................... 333,000
5,000 (d)Transco Energy, $3.50 cvt. pfd........................................................... 258,750
----------
2,436,607
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
REAL ESTATE .7%
6,250 Catellus Development, $3.75 cvt. pfd., Series A.......................................... $ 357,812
-----------
REAL ESTATE INVESTMENT TRUST 1.1%
18,300 Merry Land & Investment, $1.75 cvt. pfd., Series A....................................... 519,263
-----------
RESTAURANTS .8%
15,100 Flagstar Cos., Inc., $2.25 cvt. pfd., Series A........................................... 362,400
-----------
SAVINGS & LOANS 2.3%
9,700 Great Western Financial, $4.375 cvt. pfd................................................. 590,487
7,900 Roosevelt Financial Group, $3.25 cvt. pfd................................................ 519,425
-----------
1,109,912
-----------
SEMICONDUCTORS .7%
5,000 National Semiconductor, $3.25 cvt. pfd................................................... 347,500
-----------
TEXTILES 1.2%
10,000 (d,j)Fieldcrest Cannon, $3.00 cvt. pfd........................................................ 590,000
-----------
TRANSPORTATION 1.2%
10,000 (d)American Airlines, $3.00 cvt. pfd........................................................ 546,250
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $12,729,082)............................... 15,287,792
-----------
FACE
AMOUNT
- ----------
CONVERTIBLE BONDS 64.7%
ADVERTISING 3.9%
$1,750,000 (d)Omnicom Group, cvt. deb., 4.50%, 09/01/00................................................ 1,850,625
-----------
APPAREL .6%
250,000 L.A. Gear, Inc., cvt. sub. notes, 7.75%, 11/30/02........................................ 281,250
-----------
BANKING 1.2%
500,000 Banco National de Mexico, cvt. deb., 7.00%, 12/15/99..................................... 547,500
-----------
BIOTECHNOLOGY 1.8%
650,000 Centocor, Inc., Eurobond cvt. sub. deb., 6.75%, 10/16/01................................. 487,500
400,000 (d)Genzyme Corp., cvt. sub. deb., 6.75%, 10/01/01........................................... 400,000
-----------
887,500
-----------
BROADCAST/MEDIA 3.4%
400,000 (d)All American Communications, cvt. deb., 6.50%, 10/01/03.................................. 402,000
300,000 (d)RHI Entertainment, Inc., cvt. sub. deb., 6.50%, 06/01/03................................. 387,000
2,000,000 (f)Time Warner, Inc., cvt. liquid yield option notes, 0.00%, 06/22/13....................... 822,500
-----------
1,611,500
-----------
BUILDING MATERIALS .6%
175,000 (d)Owens Corning Fiberglass Corp., cvt. junior sub. deb., 8.00%, 12/30/05................... 285,469
-----------
CABLE 1.7%
2,005,000 (f)Rogers Communication, Inc., cvt. liquid yield option sub. notes, 0.00%, 05/20/13......... 812,025
-----------
ELECTRONIC 1.5%
350,000 Sensormatic Electric Corp., cvt. sub. deb., 7.00%, 05/15/01.............................. 705,250
-----------
GAMING 1.3%
500,000 WMS Industries, cvt. deb., 6.00%, 10/01/02............................................... 597,500
-----------
GROCERY/FOOD 3.3%
500,000 (d)Food Lion, Inc., cvt. sub. deb., 5.00%, 06/01/03......................................... 525,000
500,000 Kroger Co., cvt. junior sub. deb., 6.375%, 12/01/99...................................... 621,875
400,000 (d)Kroger Co., cvt. junior sub. deb., 8.25%, 04/15/11....................................... 424,000
-----------
1,570,875
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
HEALTH CARE 8.6%
$ 300,000 Hillhaven Corp, cvt. sub. deb., 7.75%, 11/01/12.......................................... $ 418,500
400,000 Integrated Health Services, cvt. sub. deb., 6.00%, 01/01/03.............................. 456,000
400,000 (d)Medical Care International, Inc., cvt. sub. deb., 6.75%, 10/01/06........................ 368,000
250,000 Omnicare, Inc., cvt. sub. notes, 5.75%, 10/01/03......................................... 288,750
1,000,000 Quantum Health Resources, cvt. sub. deb., 4.75%, 10/10/00................................ 1,090,000
2,000,000 (e)Roche Holdings, cvt., 0.00%, 09/23/08.................................................... 1,047,500
500,000 Vencor, Inc., cvt. sub. notes, 6.00%, 10/01/02........................................... 477,500
-----------
4,146,250
-----------
INDUSTRIAL EQUIPMENT 1.0%
300,000 Mark IV Industries, Inc., cvt. sub. deb., 6.25%, 02/15/07................................ 469,500
-----------
INSURANCE COMPANIES 3.6%
500,000 Horace Mann Educators Corp., cvt. sub. notes, 4.00%, 12/01/99............................ 510,000
500,000 Leucadia National Corp., cvt., 5.25%, 02/01/03........................................... 512,500
400,000 (d)Scor U.S. Corp., cvt. sub. deb., 5.25%, 04/01/00......................................... 391,500
250,000 Trenwick Group, Inc., cvt. deb., 6.00%, 12/15/99......................................... 281,250
-----------
1,695,250
-----------
LONG DISTANCE/TELECOM 3.9%
500,000 (d,f)Cellular Communications, Inc., cvt. sub. notes, 0.00%, 07/27/99.......................... 387,500
495,000 Cellular, Inc., cvt. sub. deb., 6.75%, 07/15/09.......................................... 482,625
1,000,000 (f)ComCast Cellular, cvt. sub. deb., Series B, 0.00%, 03/05/00.............................. 620,000
300,000 Compania Telefonos de Chile, cvt. sub., ADS, 4.50%, 01/15/03............................. 372,000
-----------
1,862,125
-----------
METAL/MINING 1.2%
500,000 (d)Homestake Mining Co., cvt. sub., 5.50%, 06/23/00......................................... 562,500
-----------
OIL & GAS 6.1%
396,000 Amoco Canada Petroleum Co., Ltd., cvt. sub. deb., Series A, 7.375%, 09/01/13............. 488,070
975,000 Noble Affiliates, cvt. sub. notes, 4.25%, 11/01/03....................................... 1,000,594
550,000 Pennzoil Co., cvt. sub. deb., 6.50%, 01/15/03............................................ 713,625
550,000 Presidio Oil Co., cvt. sub. deb., 9.00%, 03/15/15........................................ 445,500
200,000 (d)Seacor Holdings, Inc., cvt. sub. deb., 6.00%, 07/01/03................................... 234,000
-----------
2,881,789
-----------
POLLUTION CONTROL 1.4%
400,000 Air & Water Technology, cvt. sub. deb., 8.00%, 05/15/02.................................. 382,000
290,000 Sanifill, Inc., cvt. sub. deb., 7.50%, 06/01/06.......................................... 286,375
-----------
668,375
-----------
PUBLISHING/NEWSPAPERS 1.0%
1,500,000 (f)Hollinger, Inc., cvt. sub. notes, 0.00%, 10/05/13........................................ 466,875
-----------
REAL ESTATE 2.1%
1,000,000 (d)Henderson Capital International, cvt. deb., 4.00%, 10/27/96.............................. 1,002,500
-----------
REAL ESTATE INVESTMENT TRUST 4.1%
525,000 MediTrust, cvt. deb., 9.00%, 01/01/02.................................................... 660,844
1,250,000 Mid Atlantic Realty Trust, cvt. sub. deb., 7.625%, 09/15/03.............................. 1,268,750
-----------
1,929,594
-----------
RETAIL 2.4%
200,000 Home Depot, Inc., cvt. sub. notes, 4.50%, 02/15/97....................................... 244,000
300,000 Michael Stores, cvt., 4.75%, 01/15/03.................................................... 343,500
200,000 Pier One Imports, Inc., cvt. sub. notes, 6.875%, 04/01/02................................ 221,000
300,000 Staples, Inc., cvt. sub. deb., 5.00%, 11/01/99........................................... 310,500
-----------
1,119,000
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
SEMICONDUCTORS 1.8%
$ 900,000 (f)Motorola, Inc., cvt. liquid yield option sub. notes, 0.00%, 09/07/09.................... $ 861,750
-----------
SOFTWARE .7%
250,000 Sterling Software, cvt. sub. deb., 5.75%, 02/01/03....................................... 321,250
-----------
STEEL 1.3%
500,000 Essar Gujarat, Ltd., cvt., 5.50%, 08/05/98............................................... 602,500
-----------
TECHNOLOGY 4.2%
700,000 Conner Peripherals, Inc., cvt. deb., 6.50%, 03/01/02..................................... 603,750
1,750,000 (d,f)Silicon Graphics, cvt. sub. deb., 0.00%, 11/02/13........................................ 790,780
600,000 (d)SynOptics Communications, Inc., cvt. sub. deb., 5.25%, 05/15/03......................... 585,000
-----------
1,979,530
-----------
TRANSPORTATION 2.0%
1,000,000 Air Express International, cvt. sub. deb., 6.00%, 01/15/03............................... 960,000
-----------
TOTAL CONVERTIBLE BONDS (COST $27,492,184).......................................... 30,678,282
-----------
SHORT TERM SECURITIES .5%
BANKING .5%
25,000 (l)Banco de Santander S.A., cvt. deb., 9.00%, 06/24/94 (Cost $205,398)...................... 244,788
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $40,443,120).................... 46,229,738
-----------
RECEIVABLES FROM REPURCHASE AGREEMENTS 4.2%
1,960,000 (h)Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $1,970,484)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94 (Cost $1,970,000)..................... $ 1,970,000
-----------
TOTAL INVESTMENTS (COST $42,413,120) 101.6%......................................... 48,199,738
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (1.6)%................................... (759,468)
-----------
NET ASSETS 100.0% .................................................................. $47,440,270
===========
At October 31, 1993, the net unrealized appreciation based on the cost of investments
for income tax purposes of $42,413,120 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost...................................................... $ 6,135,930
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value...................................................... (349,312)
-----------
Net unrealized appreciation.......................................................... $ 5,786,618
===========
(a)Non-income producing.
(d)See Note 10 regarding Rule 144A securities.
(f)Zero coupon bonds. Accretion rate may vary.
(h)Face amount for repurchase agreements is for the underlying collateral.
(j)See Note 1 regarding securities purchased on a when-issued or to-be-announced basis.
(l)Face amount stated in foreign currencies, value in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 99.7%
184,156,840 U.S. Government ARM Portfolio (Note 1)...................................................... $1,808,420,173
--------------
TOTAL INVESTMENTS (COST $1,843,714,150) 99.7%........................................... 1,808,420,173
OTHER ASSETS AND LIABILITIES, NET .3%................................................... 5,083,843
--------------
NET ASSETS 100.0%....................................................................... $1,813,504,016
==============
At October 31, 1993, the net unrealized depreciation based on the cost of investments
for income tax purposes of $1,843,825,431 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost......................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value......................................................... (35,405,258)
--------------
Net unrealized depreciation............................................................. $ (35,405,258)
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 65.4%
CHEMICALS 8.0%
15,700 Chemed Corp................................................................................ $ 492,588
13,200 Dow Chemical Co............................................................................ 732,600
13,300 duPont, (E.I.) de Nemours & Co............................................................. 635,075
10,200 Imperial Chemical Industries, Plc., ADR.................................................... 438,600
16,000 Olin Corp.................................................................................. 742,000
16,200 Union Carbide Corp......................................................................... 319,950
-----------
3,360,813
-----------
CONGLOMERATES 3.5%
41,800 Hanson, Plc., Sponsored ADR................................................................ 841,225
29,000 Ogden, Corp................................................................................ 696,000
-----------
1,537,225
-----------
FINANCE 5.3%
45,000 Ahmanson (H.F.) & Co....................................................................... 815,625
30,000 Corporacion Bancaria de Espana, S.A., ADR.................................................. 667,500
38,300 Great Western Financial Corp............................................................... 732,487
-----------
2,215,612
-----------
INSURANCE 4.6%
9,700 Aetna Life & Casualty Co................................................................... 637,774
9,000 CIGNA Corp................................................................................. 604,125
19,400 Travelers Corp............................................................................. 683,850
-----------
1,925,749
-----------
MEDICAL SUPPLIES 1.1%
19,200 Baxter International, Inc.................................................................. 456,000
-----------
NATURAL GAS 1.7%
5,000 Laclede Gas Co............................................................................. 241,250
14,800 Sonat, Inc................................................................................. 460,650
-----------
701,900
-----------
OIL-INTEGRATED-INTERNATIONAL 9.0%
6,500 Atlantic Richfield Co...................................................................... 716,625
6,700 Chevron Corp............................................................................... 649,900
10,000 Exxon Corp................................................................................. 653,750
8,600 Mobil Corp................................................................................. 700,900
4,800 Royal Dutch Petroleum Co................................................................... 507,600
8,500 Texaco, Inc................................................................................ 579,063
-----------
3,807,838
-----------
PAPER & FOREST PRODUCTS 1.6%
15,400 Potlatch Corp.............................................................................. 675,675
-----------
PHARMACEUTICAL 6.6%
11,800 American Home Products Corp................................................................ 737,500
16,600 Bristol-Myers Squibb Co.................................................................... 975,250
16,900 Merck & Co., Inc........................................................................... 542,913
15,600 Zeneca Group, Plc, ADR..................................................................... 532,350
-----------
2,788,013
-----------
PHOTOGRAPHY 1.2%
7,900 Eastman Kodak Co........................................................................... 497,700
-----------
PUBLISHING 1.6%
9,900 Dun & Bradstreet Corp...................................................................... 663,300
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
RETAIL STORES 1.4%
24,900 K-mart Corp................................................................................ $ 610,050
-----------
STEEL 1.3%
9,800 Carpenter Technology Corp.................................................................. 536,550
-----------
TOBACCO 3.1%
18,100 American Brands, Inc....................................................................... 624,450
12,900 Philip Morris Cos., Inc.................................................................... 693,375
-----------
1,317,825
-----------
TRANSPORTATION 1.3%
24,500 Yellow Corp................................................................................ 563,500
-----------
UTILITIES - ELECTRIC 6.2%
10,200 Delmarva Power & Light Co.................................................................. 244,800
14,600 FPL Group, Inc............................................................................. 574,875
3,500 New England Electric System................................................................ 146,124
14,900 Ohio Edison Co............................................................................. 359,463
19,800 Pacificorp................................................................................. 388,575
24,900 SCEcorp.................................................................................... 522,900
8,500 Texas Utilities Co......................................................................... 382,500
-----------
2,619,237
-----------
UTILITIES - TELEPHONE 7.9%
10,300 BellSouth Corp............................................................................. 646,325
16,300 GTE Corp................................................................................... 647,925
21,300 NYNEX Corp................................................................................. 899,925
9,500 Pacific Telesis Group...................................................................... 521,313
11,900 U.S. West, Inc............................................................................. 596,488
-----------
3,311,976
-----------
TOTAL COMMON STOCKS (COST $23,552,506) 27,588,963
-----------
CONVERTIBLE PREFERRED STOCKS 20.7%
10,900 (d)American Airlines, $3.00 cvt. pfd.......................................................... 595,413
4,000 Battle Mountain Gold, $3.25 cvt. pfd....................................................... 241,500
6,000 Burlington Northern, $6.25 cvt. pfd., Series A............................................. 409,500
6,600 (d)Chemical Bank, $5.00 cvt. pfd.............................................................. 553,575
6,000 (d)Citicorp, $5.375 cum. cvt. adj. rate pfd................................................... 657,000
11,100 Delta Airlines, $3.50 cvt. pfd., Series C.................................................. 636,863
4,200 Evergreen Media Corp., $3.00 cvt. pfd., Series A........................................... 226,275
1,500 Ford Motor Co., $4.20 cum. cvt. pfd., Series A............................................. 157,125
11,100 General Motors Corp., $3.31 cvt. pfd., Series A............................................ 530,025
8,600 General Motors Corp., $3.25 cvt. pfd., Series C............................................ 488,050
5,400 Great Western Financial Corp., $8.75 cvt. pfd.............................................. 328,724
8,600 K-mart Corp., $3.41 cvt. pfd............................................................... 425,700
29,000 Kaufman & Broad Homes, $1.52 cvt. pfd., Series B........................................... 616,250
7,500 (d)Kemper Co., $2.875 cvt. pfd., Series E..................................................... 373,593
9,700 (d)Occidental Petroleum Corp., $3.875 cvt. pfd................................................ 538,350
69,700 RJR Nabisco Holdings Corp., $.835 cvt. pfd................................................. 426,913
6,200 Roosevelt Financial Group, $3.25 cvt. pfd.................................................. 407,650
11,600 Tandy Corp. $2.140, cvt. pfd., Series C.................................................... 408,900
3,400 (d)Transco $3.50, cvt. pfd.................................................................... 175,950
28,500 Westinghouse Electric, $1.53 cvt. pfd...................................................... 527,250
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $7,680,093) 8,724,606
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN EQUITY INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT SECURITIES 2.5%
$1,000,000 U.S. Treasury Notes, 6.00%, 11/30/97 (Cost $997,734)....................................... $ 1,050,310
------------
TOTAL COMMON STOCKS, CONVERTIBLE PREFERRED STOCKS AND GOVERNMENT SECURITIES
(COST $32,230,333).................................................................. 37,363,879
------------
Receivables from Repurchase Agreements 11.9%
5,000,000 (h)Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $5,031,237)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94 (Cost $5,030,000)....................... 5,030,000
-----------
TOTAL INVESTMENTS (COST $37,260,333) 100.5%.......................................... 42,393,879
LIABILITIES IN EXCESS AND OTHERS ASSETS, NET (.5)%................................... (216,649)
-----------
NET ASSETS 100.0%.................................................................... $42,177,230
===========
At October 31, 1993, the net unrealized appreciation based on the cost of investments
for income tax purposes of $37,262,565 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost....................................................... $ 5,524,564
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value....................................................... (393,250)
-----------
Net unrealized appreciation........................................................... $ 5,131,314
===========
</TABLE>
(d)See Note 10 regarding Rule 144A securities.
(h)Face amount for repurchase agreements is for the underlying collateral.
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN ADJUSTABLE RATE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.7%
3,795,340 Adjustable Rate Securities Portfolio (Note 1)............................................. $38,067,265
-----------
TOTAL INVESTMENTS (COST $38,103,334) 100.7%.......................................... 38,067,265
LIABILITIES IN EXCESS AND OTHER ASSETS, NET (.7)%.................................... (258,260)
-----------
NET ASSETS 100.0%.................................................................... $37,809,005
===========
At October 31, 1993, the net unrealized depreciation based on the cost of investments
for income tax purposes of $38,104,327 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost....................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value....................................................... (37,062)
-----------
Net unrealized depreciation........................................................... $ (37,062)
===========
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN FRANKLIN ADJUSTABLE FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT FRANKLIN EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- ------------------ --------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments:
At identified cost........ $175,295,647 $266,425,895 $40,443,120 $1,843,714,150 $32,230,333 $38,103,334
============ ============ =========== ============== =========== ===========
At value.................. 175,572,204 274,856,618 46,229,738 1,808,420,173 37,363,879 38,067,265
Receivables from
repurchase agreements
at value and cost......... 10,575,000 - 1,970,000 - 5,030,000 -
Cash....................... 912,062 7,237 70,657 2,719,550 180,560 -
Receivables:
Dividends and interest.... 5,706,563 2,990,231 399,235 - 195,033 -
Investment securities
sold..................... 21,005,812 - 78,116 - 143,743 -
Capital shares sold....... 623,553 711,939 181,756 17,902,314 199,143 16,964
Unrealized appreciation on
foreign currency forward
contracts (Note 2)........ 78,055 - - - - -
Other...................... - - - - - 461
Receivable from affiliates. - - 49,139 - 45,863 -
------------ ------------ ----------- -------------- ----------- -----------
Total assets............ 214,473,249 278,566,025 48,978,641 1,829,042,037 43,158,221 38,084,690
------------ ------------ ----------- -------------- ----------- -----------
Liabilities:
Payables:
Investment securities
purchased:
Regular delivery......... 18,509,074 - 1,019,598 - 961,550 -
When-issued basis
(Note 1)................ - - 500,000 - - -
Capital shares
repurchased.............. 130,157 4,732,938 6,079 9,454,376 7,629 275,685
Dividends to shareholders. - - - 5,437,973 - -
Distribution fees......... - - - 382,505 - -
Administration fees....... - - - 157,866 - -
Management fees........... 91,627 111,680 - - - -
Shareholder servicing
cost..................... 6,151 5,050 2,100 27,137 2,201 -
Accrued expenses and
other payables........... 109,727 38,376 10,594 78,164 9,611 -
------------ ------------ ----------- -------------- ----------- -----------
Total liabilities....... 18,846,736 4,888,044 1,538,371 15,538,021 980,991 275,685
------------ ------------ ----------- -------------- ----------- -----------
Net assets, at value....... $195,626,513 $273,677,981 $47,440,270 $1,813,504,016 $42,177,230 $37,809,005
============ ============ =========== ============== =========== ===========
Net assets consist of:
Undistributed net
investment income........ $ 1,060,001 $ 75,286 $ 153,988 $ (3,106,684) $ 325,509 $ -
Unrealized appreciation
(depreciation) on
investments.............. 276,557 8,430,723 5,786,618 (35,293,977) 5,133,546 (36,069)
Unrealized depreciation
on translation of
assets and liabilities
in foreign currencies.... (98,891) - (35) - - -
Accumulated net
realized gain (loss)..... 1,614,693 2,326,356 454,206 (9,738,510) 981,826 (137)
Capital shares............ 209,784 253,410 37,092 1,856,630 28,288 37,660
Additional paid-in
capital.................. 192,564,369 262,592,206 41,008,401 1,859,786,557 35,708,061 37,807,551
------------ ------------ ----------- -------------- ----------- -----------
Net assets, at value....... $195,626,513 $273,677,981 $47,440,270 $1,813,504,016 $42,177,230 $37,809,005
============ ============ =========== ============== =========== ===========
Shares outstanding......... 20,978,367 25,340,952 3,709,205 185,663,040 2,828,752 3,765,966
============ ============ =========== ============== =========== ===========
Net asset value per share.. $9.33 $10.80 $12.79 $9.77 $14.91 $10.04
============ ============ =========== ============== =========== ===========
Representative computation
(Franklin Global Government
Income Fund) of net asset
value and offering price
per share:
Net asset value and
redemption price per share
($195,626,513 / 20,978,367) $9.33
============
Maximum offering price+*
(100/96 of $9.33)......... $9.72
============
</TABLE>
+The maximum offering price for each of the other series of the Trust is
calculated as follows: Franklin Short-Intermediate U.S. Government Securities
Fund - 100/97.75 of $10.80; Franklin Convertible Securities Fund - 100/96 of
$12.79; Franklin Adjustable U.S. Government Securities Fund - 100/97.75 of
$9.77; Franklin Equity Income Fund - 100/96 of $14.91; Franklin Adjustable Rate
Securities Fund - 100/97.75 of $10.04.
*On sales of $100,000 or more the offering price is reduced as stated in the
section of the Prospectus entitled "How to Buy Shares of the Fund."
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND
--------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Investment income:
Interest (Note 1)................................ $11,438,242 $10,176,446 $ 981,701 $ --
Dividends........................................ 25,014 -- 485,546 77,341,909
Realized foreign currency gain (loss)............ (1,783,238) -- 1,199 --
----------- ----------- ---------- ------------
Total income.............................. 9,680,018 10,176,446 1,468,446 77,341,909
----------- ----------- ---------- ------------
Expenses:
Management fees (Note 9)......................... 746,129 897,620 8,346 --
Administration fees (Note 9)..................... -- -- -- 1,798,293
Shareholder servicing costs (Note 9)............. 50,392 42,932 14,517 272,952
Distribution fees (Note 9)....................... -- -- -- 4,285,695
Reports to shareholders.......................... 51,614 47,859 22,776 351,871
Custodian fees................................... 110,758 21,297 3,747 --
Professional fees................................ 15,768 21,515 4,358 27,405
Trustees' fees and expenses...................... 6,706 10,056 1,358 96,794
Registration & filing fees....................... 3,466 -- 6,041 19,546
Amortization of organization costs
(Note 5)....................................... 788 -- -- --
Other............................................ 6,541 17,038 5,116 31,526
Payments from Manager (Note 9)................... -- -- -- --
----------- ----------- ---------- ------------
Total expenses............................ 992,162 1,058,317 66,259 6,884,082
----------- ----------- ---------- ------------
Net investment income................... 8,687,856 9,118,129 1,402,187 70,457,827
----------- ----------- ---------- ------------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss)................ 3,867,132 2,327,131 514,896 (7,642,575)
Net realized gain on written
foreign currency options which
expired (Note 3)...................... 164,812 -- -- --
Net unrealized appreciation
(depreciation):
Investments........................... 11,494,774 3,329,742 3,705,700 (11,107,442)
Translation of assets and
liabilities in foreign currencies... (348,304) -- (35) --
----------- ----------- ---------- ------------
Net realized and unrealized gain (loss) on
investments...................................... 15,178,414 5,656,873 4,220,561 (18,750,017)
----------- ----------- ---------- ------------
Net increase in net assets resulting from
operations....................................... $23,866,270 $14,775,002 $5,622,748 $ 51,707,810
=========== =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
SPECIAL EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND
-------------- ---------------
<S> <C> <C>
Investment income:
Interest (Note 1)................................ $ 141,288 $ --
Dividends........................................ 1,380,662 949,089
Realized foreign currency gain (loss)............ -- --
---------- --------
Total income.............................. 1,521,950 949,089
---------- --------
Expenses:
Management fees (Note 9)......................... 5,146 --
Administration fees (Note 9)..................... -- --
Shareholder servicing costs (Note 9)............. 15,017 4,237
Distribution fees (Note 9)....................... -- 52,449
Reports to shareholders.......................... 25,277 7,042
Custodian fees................................... 3,060 --
Professional fees................................ 4,145 5,126
Trustees' fees and expenses...................... 1,280 --
Registration & filing fees....................... 4,997 19,700
Amortization of organization costs
(Note 5)....................................... 59 --
Other............................................ 3,061 21
Payments from Manager (Note 9)................... -- (88,575)
---------- --------
Total expenses............................ 62,042 --
---------- --------
Net investment income................... 1,459,908 949,089
---------- --------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss)................ 984,058 (137)
Net realized gain on written
foreign currency options which
expired (Note 3)...................... -- --
Net unrealized appreciation
(depreciation):
Investments........................... 2,263,533 (40,575)
Translation of assets and
liabilities in foreign currencies... -- --
---------- --------
Net realized and unrealized gain (loss) on
investments...................................... 3,247,591 (40,712)
---------- --------
Net increase in net assets resulting from
operations....................................... $4,707,499 $908,377
========== ========
</TABLE>
The acccompanying notes are an integral part of these financial statements.
38
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
AND FOR THE YEAR ENDED JANUARY 31, 1993
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND
------------------------------ -------------------------------
NINE MONTHS YEAR ENDED NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93 ENDED 10/31/93 01/31/93
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 8,687,856 $ 8,823,242 $ 9,118,129 $ 10,726,589
Net realized gain on investments............ 3,867,132 614,712 2,327,131 4,383,930
Net realized gain on written foreign
currency options which expired............ 164,812 626,559 -- --
Net unrealized appreciation
(depreciation) on investments............. 11,494,774 (10,408,436) 3,329,742 3,498,538
Net unrealized appreciation
(depreciation) on translation of
assets and liabilities denominated
in foreign currencies..................... (348,304) 245,635 -- --
------------ ------------ ------------ ------------
Net increase (decrease) in
net assets resulting from
operations........................... 23,866,270 (98,288) 14,775,002 18,609,057
Distributions to shareholders:
From undistributed net
investment income........................... (8,687,856) (8,823,242) (9,354,403) (10,507,984)
From distribution in excess of net
investment income (Note 7)................ (2,174,626) (655,580) -- --
From net realized capital gains............. -- (1,269,959) (114,640) (5,408,200)
From tax return of capital
distribution (Note 7)..................... -- (1,914,600) -- --
Increase in net assets from capital
share transactions (Note 6)................... 28,723,568 87,749,900 32,990,155 68,998,817
------------ ------------ ------------ ------------
Net increase in net assets............. 41,727,356 74,988,231 38,296,114 71,691,690
Net assets:
Beginning of period......................... 153,899,157 78,910,926 235,381,867 163,690,177
------------ ------------ ------------ ------------
End of period............................... $195,626,513 $153,899,157 $273,677,981 $235,381,867
============ ============ ============ ============
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ -- $ 321,300 $ 102,695
============ ============ ============ ============
End of period............................... $ 1,060,001 $ -- $ 75,286 $ 321,300
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE
SECURITIES FUND
------------------------------
NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93
-------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 1,402,187 $ 1,353,279
Net realized gain on investments............ 514,896 1,169,942
Net realized gain on written foreign
currency options which expired............ -- --
Net unrealized appreciation
(depreciation) on investments............. 3,705,700 1,135,980
Net unrealized appreciation
(depreciation) on translation of
assets and liabilities denominated
in foreign currencies..................... (35) --
----------- -----------
Net increase (decrease) in
net assets resulting from
operations........................... 5,622,748 3,659,201
Distributions to shareholders:
From undistributed net
investment income........................... (1,518,536) (1,436,879)
From distribution in excess of net
investment income (Note 7)................ -- --
From net realized capital gains............. -- --
From tax return of capital
distribution (Note 7)..................... -- --
Increase in net assets from capital
share transactions (Note 6)................... 15,029,224 5,802,271
----------- -----------
Net increase in net assets............. 19,133,436 8,024,593
Net assets:
Beginning of period......................... 28,306,834 20,282,241
----------- -----------
End of period............................... $47,440,270 $28,306,834
=========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ 270,337 $ 353,937
=========== ===========
End of period............................... $ 153,988 $ 270,337
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
AND FOR THE YEAR ENDED JANUARY 31, 1993
U.S. Government Securities Fund Franklin Equity Income Fund Securities Fund
Nine Months Year Ended Nine Months Year Ended Nine Months Year Ended
Ended 10/31/93 01/31/93 Ended 10/31/93 01/31/93 Ended 10/31/93 01/31/93
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN EQUITY INCOME FUND
----------------------------------- -------------------------------
NINE MONTHS YEAR ENDED NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93 ENDED 10/31/93 01/31/93
---------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 70,457,827 $ 176,702,868 $ 1,459,908 $ 1,037,080
Net realized gain (loss) on
investments............................... (7,642,575) (2,095,935) 984,058 598,873
Net unrealized appreciation
(depreciation) on investments............. (11,107,442) (32,428,773) 2,263,533 1,541,457
--------------- -------------- ----------- -----------
Net increase in net assets
resulting from operations............ 51,707,810 142,178,160 4,707,499 3,177,410
Distributions to shareholders:
From undistributed net investment
income.................................... (69,480,027) (177,197,215) (1,152,084) (1,061,394)
From distribution in excess of net
investment income (Note 7)................ -- (4,177,392) -- --
From net realized capital gains............. -- (1,053,980) (205,929) (244,963)
Increase (decrease) in net assets from
capital share transactions (Note 6)........... (1,140,147,375) (501,740,946) 12,735,376 8,077,442
--------------- -------------- ----------- -----------
Net increase (decrease) in net
assets............................... (1,157,919,592) (541,991,373) 16,084,862 9,948,495
Net assets:
Beginning of period......................... 2,971,423,608 3,513,414,981 26,092,368 16,143,873
--------------- -------------- ----------- -----------
End of period............................... $ 1,813,504,016 $2,971,423,608 $42,177,230 $26,092,368
=============== ============== =========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ 494,347 $ 16,794 $ 41,108
=============== ============== =========== ===========
End of period............................... $ (3,106,684) $ -- $ 325,509 $ 16,794
=============== ============== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE RATE
SECURITIES FUND
------------------------------
NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93
-------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 949,089 $ 417,186
Net realized gain (loss) on
investments............................... (137) 34
Net unrealized appreciation
(depreciation) on investments............. (40,575) 4,506
----------- -----------
Net increase in net assets
resulting from operations............ 908,377 421,726
Distributions to shareholders:
From undistributed net investment
income.................................... (949,089) (417,186)
From distribution in excess of net
investment income (Note 7)................ -- --
From net realized capital gains............. (34) --
Increase (decrease) in net assets from
capital share transactions (Note 6)........... 25,328,996 12,516,115
----------- -----------
Net increase (decrease) in net
assets............................... 25,288,250 12,520,655
Net assets:
Beginning of period......................... 12,520,755 100
----------- -----------
End of period............................... $37,809,005 $12,520,755
=========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ --
=========== ===========
End of period............................... $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is an open-end management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended. The Trust currently has six separate funds (the Funds) in
operation consisting of five separate diversified Funds: Franklin
Short-Intermediate U.S. Government Securities Fund (the Short-Intermediate
Fund), Franklin Convertible Securities Fund (the Convertible Fund), Franklin
Adjustable U.S. Government Securities Fund (the Adjustable U.S. Government
Fund), Franklin Equity Income Fund (the Equity Income Fund), and Franklin
Adjustable Rate Securities Fund (the Adjustable Rate Fund); and one
non-diversified Fund: Franklin Global Government Income Fund (the Global Fund).
Prior to June 1, 1993, the Global Fund was known as the Global Opportunity
Income Fund. On August 17, 1993, the Board of Trustees approved the name change
of Franklin Special Equity Income Fund to Franklin Equity Income Fund effective
August 17, 1993. Each of the Funds issues a separate series of the Trust's
shares and maintains a totally separate investment portfolio.
The Adjustable Rate Fund and the Adjustable U.S. Government Fund invest
substantially all of their assets in the Adjustable Rate Securities Portfolio
and the U.S. Government Adjustable Rate Mortgage Portfolio, respectively. Both
are open-end, diversified management investment companies having the same
investment objective as the Adjustable Rate Fund and Adjustable U.S. Government
Fund. The financial statements of the U.S. Government Adjustable Rate Mortgage
Portfolio and Adjustable Rate Securities Portfolio, including the Statements of
Investments, are included elsewhere in this report and should be read in
conjunction with the financial statements of the Adjustable U.S. Government Fund
and Adjustable Rate Fund.
On June 15, 1993, the Board of Trustees authorized a change in the fiscal year
end of the Trust from January 31 of each year to October 31.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATIONS:
Portfolio securities listed on a U.S. 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, at the mean between the most recent quoted bid and asked prices. Other
securities for which market quotations are readily available are valued at
current market values, obtained from a pricing service, which are 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 securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined by
the Manager. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
current value.
The values of the Adjustable Rate Fund and the Adjustable U.S. Government Fund
reflect the Funds' proportionate interest in the net assets of the Adjustable
Rate Securities Portfolios and the U.S. Government Adjustable Rate Mortgage
Portfolio, respectively. At October 31, 1993, the Adjustable Rate Fund owns 31%
of the Adjustable Rate Securities Portfolio and Adjustable U.S. Government Fund
owns 85% of the U.S. Government Adjustable Rate Mortgage Portfolio. The
Portfolios' shares held by the Funds are valued at the net asset value of the
Portfolios.
Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner and are translated into U.S.
dollars at current market quotations of their respective currency denomination
against U.S. dollars last quoted by a major bank or, if no such quotation is
available, at the rate of exchange determined in accordance with policies
established by the Board of Trustees.
The fair values of securities restricted as to resale, or other securities for
which market quotations are not readily available, if any, are determined
following procedures approved by the Board of Trustees.
B. INCOME TAXES:
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no income tax provision is
required. Each Fund is treated as a separate entity in the determination of
compliance with the Internal Revenue Code.
41
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Short-Intermediate Fund and Adjustable Rate Fund dividend
distributions are declared each day the New York Stock Exchange is open for
business equal to an amount per day set from time to time by the Board of
Trustees and are payable to shareholders of record at the beginning of business
on the ex-date. Once each month, dividends are reinvested in additional shares
of each Fund or paid in cash as requested by the shareholders. Interest income
and estimated expenses are accrued daily. Bond discount and premium are
amortized as required by the Internal Revenue Code.
Distributions from undistributed net investment income, and net realized capital
gains from security transactions, to the extent they exceed available capital
loss carryovers, are generally made during each year to avoid the 4% excise tax
imposed on regulated investment companies by the Internal Revenue Code.
E. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of the net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
F. FOREIGN CURRENCY TRANSLATION:
The accounting records of the Trust are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, income and expenses
are translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recognized as adjustments to investment
income when reported by the custodian bank.
G. SECURITIES TRADED ON A WHEN-ISSUED (WI) BASIS:
The Funds may trade securities on a WI or delayed delivery basis with payment
and delivery scheduled for a future time, generally within two weeks. These
transactions are subject to market fluctuations and are subject to the risk that
the value at delivery may be more or less than the purchase price when the
transactions were entered into. Although the Funds will generally purchase these
securities with the intention of acquiring such securities, they may sell such
securities before the settlement date. The Funds have set aside sufficient
investment securities as collateral for securities purchased on a WI basis.
Securities purchased on a WI basis are identified on the accompanying statement
of investments in securities and net assets.
H. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS:
Effective October 31, 1993. the Funds adopted AICPA Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. As a
result, components of net assets have been reclassified to reconcile financial
statement amounts with distributions determined in accordance with income tax
regulations, as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paid-in capital............... $ (425,734) $ -- $ -- $ 4,203,966 $(891) $ --
Undistributed Net Investment
Income...................... 3,234,627 (9,740) -- (4,084,470) 891 --
Accumulated Net Realized
Gain (Loss)................. (2,808,893) 9,740 -- (119,496) -- --
</TABLE>
42
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
2. FORWARD FOREIGN CURRENCY CONTRACTS:
A forward currency contract, which is individually negotiated and privately
traded by currency traders and their customers, is an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date.
The Global Fund may enter into forward contracts with the goal of minimizing the
risk to the Fund from adverse changes in the relationship between currencies or
to enhance income. The Fund may also enter into a forward contract in relation
to a security denominated in a foreign currency in order to ``lock in'' the U.S.
dollar price of that security.
The Fund sets aside or segregates in its custodian bank sufficient cash, cash
equivalents or readily marketable debt securities as deposits or commitments
created by open forward contracts. The Fund intends to cover any of these
commitments to deliver currency under these contracts by acquiring a sufficient
amount of the underlying currency. The segregated account is marked to market on
a daily basis. The Fund could be exposed to risk if counterparties to the
contracts are unable to meet the terms of their contracts or if the value of the
foreign currency changes unfavorably.
As of October 31, 1993, the Global Fund had the following foreign currency
forward contracts outstanding:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO SELL IN EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- ---------------------------------- --------------- --------------- -----------
<S> <C> <C> <C>
500,000,000 Belgium Francs U.S. $13,336,961 11/04/93 U.S. $(381,966)
300,000,000 Belgium Francs 8,253,095 11/08/93 22,869
300,000,000 Belgium Francs 8,408,072 01/10/94 259,441
240,000,000 French Francs 40,996,208 11/09/93 181,287
61,578,000 French Francs 10,526,333 11/10/93 55,482
----------- --------
$81,520,669 137,113
=========== --------
CONTRACTS TO BUY
- ----------------------------------
13,800,000 German Deutschemarks 8,245,698 11/02/93 (17,210)
47,000,000 German Deutschemarks 28,065,566 11/02/93 (41,848)
----------- ---------
U.S. $36,311,264 (59,058)
=========== ---------
Net unrealized appreciation U.S. $ 78,055
=========
</TABLE>
3. OPTION CONTRACTS:
The Global Fund may write covered put and call options and purchase put and call
options which trade in the over-the-counter (OTC) market. OTC call options give
the holder the right to buy an underlying security or currency from an option
writer at a stated exercise price; OTC put options give the holder the right to
sell an underlying security or currency to an option writer at a stated exercise
price. OTC options are arranged directly with dealers. Because there is no
exchange, pricing is typically negotiated by reference to information from
market makers.
Transactions in purchased options for the nine months ended October 31, 1993
were as follows:
<TABLE>
<CAPTION>
CALL PUT
------------------------- ----------------------------
FACE FACE
AMOUNT AMOUNT
COST OPTIONED COST OPTIONED
---------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at January 31, 1993......... $ 315,000 7,000,000 $ -- --
Options purchased on currencies......... -- -- 164,812 3,000,000,000
Options exercised on currencies......... -- -- (164,812) (3,000,000,000)
Options exercised on security........... (315,000) (7,000,000) -- --
--------- ---------- -------- --------------
Outstanding at October 31, 1993......... $ -- -- $ -- --
========= ========== ======== ==============
</TABLE>
43
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. OPTION CONTRACTS: (CONT.)
Transactions in written options on currencies for the nine months ended October
31, 1993 were as follows:
CALL
-----------------------------
AMOUNT OF
AMOUNT OF CURRENCIES
PREMIUMS OPTIONED
--------- ---------------
Outstanding at January 31, 1993............ $ - -
Options written............................ 639,812 3,050,000,000
Options exercised.......................... (475,000) (50,000,000)
Options expired............................ (164,812) (3,000,000,000)
--------- ---------------
Outstanding at October 31, 1993............ $ - -
========= ===============
The Global Fund realized a net short term capital gain of $11,102 and $164,812
on purchased options and on premiums received on expired written options,
respectively.
4. REPURCHASE AGREEMENTS:
The Trust may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. In a repurchase agreement, the Funds purchase a U.S.
government security from a dealer or bank subject to an agreement to resell it
at a mutually agreed upon price and date. Such a transaction is accounted for as
a loan by the Funds to the seller, collateralized by the underlying security.
The transaction requires the initial collateralization of the seller's
obligation by U.S. government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Funds, with the
value of the underlying security marked to market daily to maintain coverage of
at least 100%. The collateral is delivered to the Funds' custodian and held
until resold to the dealer or bank. At October 31, 1993, all outstanding
repurchase agreements held by the Trust had been entered into on October 29,
1993.
5. ORGANIZATION COSTS
The organization costs of each Fund of the Trust were amortized on a
straight-line basis over a period of five years from the effective date of
registration under the Securities Act of 1933 for each Fund.
6. TRUST SHARES
At October 31, 1993 there were an unlimited number of shares of beneficial
interest authorized with a par value of $0.01 per share. Transactions in each of
the Trust's shares for the nine months ended October 31, 1993 and and the year
ended January 31, 1993 were as follows:
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND
--------------------------- ------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended October 31, 1993
Shares sold......................... 3,132,310 $ 28,574,215 7,951,390 $ 85,374,158 901,908 $10,897,243
Shares issued in reinvestment of
distributions...................... 524,009 4,763,243 485,716 5,219,095 83,403 1,000,357
Shares redeemed..................... (1,993,767) (18,112,506) (4,536,268) (48,709,818) (233,556) (2,786,030)
Changes from exercise of exchange
privilege:
Shares sold....................... 4,720,174 43,119,821 1,390,826 14,928,987 949,792 11,424,393
Shares redeemed................... (3,284,663) (29,621,205) (2,220,138) (23,822,267) (466,500) (5,506,739)
----------- ------------- ----------- ------------- ---------- ------------
Net increase..................... 3,098,063 $ 28,723,568 3,071,526 $ 32,990,155 1,235,047 $15,029,224
=========== ============= =========== ============= ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. TRUST SHARES (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND
--------------------------- ------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended January 31, 1993
Shares sold.......................... 7,358,674 $ 67,040,633 12,607,139 $132,712,369 516,599 $ 5,519,767
Shares issued in reinvestment of
distributions....................... 636,074 5,669,237 902,422 9,463,707 87,646 930,939
Shares redeemed...................... (1,407,590) (12,526,336) (4,479,765) (46,969,706) (297,332) (3,189,326)
Changes from exercise of exchange
privilege:
Shares sold........................ 7,755,681 70,301,582 1,596,043 16,832,882 495,630 5,357,352
Shares redeemed.................... (4,864,918) (42,735,216) (4,111,333) (43,040,435) (262,800) (2,816,461)
----------- ------------ ----------- ------------- --------- ------------
Net increase...................... 9,477,921 $ 87,749,900 6,514,506 $ 68,998,817 539,743 $ 5,802,271
=========== ============= =========== ============= ========= ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN EQUITY INCOME FUND RATE SECURITIES FUND
-------------------------------- --------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- --------------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended October 31, 1993
Shares sold........................ 31,420,134 $ 309,366,714 591,740 $ 8,424,387 1,678,030 $ 16,880,805
Shares issued in reinvestment of
distributions..................... 4,017,124 39,542,565 72,561 1,028,509 70,418 708,233
Shares redeemed.................... (119,230,775) (1,173,985,899) (199,709) (2,866,323) (529,605) (5,325,263)
Changes from exercise of exchange
privilege:
Shares sold...................... 10,303,356 101,458,808 914,654 12,979,279 2,459,907 24,746,127
Shares redeemed.................. (42,291,571) (416,529,563) (489,111) (6,830,476) (1,161,218) (11,680,906)
------------- ---------------- --------- ------------ ---------- -------------
Net increase (decrease)......... (115,781,732) $(1,140,147,375) 890,135 $12,735,376 2,517,532 $ 25,328,996
============= ================ ========= ============ ========== =============
Year ended January 31, 1993
Shares sold........................ 184,596,919 $ 1,835,078,214 376,381 $ 4,823,712 885,535 $ 8,879,231
Shares issued in reinvestment of
distributions..................... 9,042,518 89,709,984 80,587 1,039,534 29,354 294,438
Shares redeemed.................... (212,204,395) (2,107,516,937) (102,872) (1,322,898) (147,844) (1,483,055)
Changes from exercise of exchange
privilege:
Shares sold...................... 21,722,592 215,869,195 416,916 5,388,220 726,569 7,284,763
Shares redeemed.................. (53,818,376) (534,881,402) (143,473) (1,851,126) (245,190) (2,459,262)
------------- --------------- --------- ------------ ---------- -------------
Net increase (decrease)......... (50,660,742) $ (501,740,946) 627,539 $ 8,077,442 1,248,424 $ 12,516,115
============= ================ ========= ============ ========== =============
</TABLE>
7. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1993, for tax purposes, the Funds had accumulated net realized
capital gains or capital loss carryovers as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated net realized
gains..................... $ 1,893,231 $ 2,326,356 $ 454,206 _ $ 984,058 $ 856
=========== ================== =============== =============== =========== ===============
Capital loss carryovers
Expiring in:
October 31, 2000......... - - - $ 1,918,358 - -
October 31, 2001......... - - - 7,708,871 - -
----------- ------------------ --------------- --------------- ----------- ---------------
- - - $ 9,627,229 - -
=========== ================== =============== =============== =========== ===============
</TABLE>
45
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
7. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS (cont.)
For income tax purposes, the aggregate cost of securities is higher than for
financial reporting purposes at October 31, 1993 by $278,538 in the Global Fund,
$111,281 in the Adjustable U.S. Government Fund, $2,232 in the Equity Income
Fund and $993 in the Adjustable Rate Fund.
8. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the nine months ended October 31, 1993 were as
follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
------------ ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Purchases..... $132,983,344 $113,230,949 $25,461,521 $ 166,822,622 $16,742,830 $38,503,288
============ ============ =========== ============== =========== ===========
Sales......... $105,266,530 $ 80,420,910 $10,219,706 $1,319,576,579 $ 5,677,938 $12,917,405
============ ============ =========== ============== =========== ===========
</TABLE>
9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, office space and facilities to each Fund, and receives fees
computed monthly on the net assets on the last day of the month of each fund,
except for the Adjustable U.S. Government Fund and the Adjustable Rate Fund, as
follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE MONTHLY NET ASSETS
------------------- --------------------------
<S> <C>
.625 of 1% First $100 million
.500 of 1% over $100 million, up to and including $250 million
.450 of 1% over $250 million
</TABLE>
Under the terms of a separate administration agreement with the Adjustable U.S.
Government Fund and the Adjustable Rate Fund, Franklin Advisers, Inc. provides
various administrative, statistical, and other services, and receives fees
computed monthly on the net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS
------------------- ------------------------
<S> <C>
.100 of 1% First $5 billion
.090 of 1% over $5 billion, up to and including $10 billion
.080 of 1% over $10 billion
</TABLE>
Fees to which the Advisers is entitled by contracts aggregated $3,952,869 for
the nine months ended October 31, 1993. The terms of these agreements provide
that aggregate annual expenses of the Funds be limited to the extent necessary
to comply with the limitations set forth in the laws, regulations and
administrative interpretations of the states in which the Funds' shares are
registered. The Funds' expenses did not exceed these limitations; however, for
the nine months ended October 31, 1993, Franklin Advisers, Inc. reduced the
fees for the Short-Intermediate Fund, Convertible Fund and Equity Income Fund
by $160,513, $162,261, and $154,426, respectively. In addition, Franklin
Advisers, Inc. reduced the administration fee for the Adjustable Rate Securities
Fund by $20,135 and bore other expenses as reflected in the Statement of
Operations.
In its capacity as underwriter for the shares of the Trust, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Trust's shares.
Commissions received by Franklin/Templeton Distributors, Inc., and the amounts
which were subsequently paid to other dealers for the nine months ended October
31, 1993 were as follows:
46
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total commissions received.. $1,099,431 $891,309 $347,284 $945,767 $299,851 $106,062
========== ======== ======== ======== ======== ========
Paid to other dealers....... $1,023,270 $751,551 $330,298 $818,943 $288,526 $ 91,780
========== ======== ======== ======== ======== ========
</TABLE>
Commissions are deducted from the gross proceeds received from the sale of the
shares of the Trust, and as such are not expenses of the Funds.
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Funds pay costs on a per shareholder account basis. Costs
incurred for the nine months ended October 31, 1993 aggregated $400,047 of which
$369,437 was paid to Franklin/Templeton Investor Services, Inc.
Under the terms of a Distribution Agreement pursuant to Rule 12b1 of the
Investment Company Act of 1940, the Franklin Adjustable U.S. Government
Securities Fund and the Franklin Ajustable Rate Securities Fund will reimburse
Franklin/Templeton Distributors, Inc., in an amount up to 0.25% per annum which
covered costs incurred in the furnishing of promotion, offering and marketing of
the Funds' shares. Fees incurred by Franklin Adjustable U.S. Government
Securities Fund under the agreement aggregated $4,285,695 for the nine months
ended October 31, 1993. Fees which would have been incurred by Franklin
Adjustable Rate Securities Fund but were paid by Franklin Advisers, Inc.
amounted to $52,449 for the nine months ended October 31, 1993.
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
10. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Funds value these
securities as disclosed in note 1. At October 31, 1993, the Global Fund, the
Convertible Fund and the Equity Income Fund held 144A securities with a value
aggregating $6,604,566, $14,338,437 and $2,893,881 respectively, representing
3.4%, 30.2% and 6.9% of the respective Fund's net assets. See accompanying
statement of investments and net assets for specific information of such
securities.
11. CREDIT RISKS
Although the Convertible Fund has a diversified portfolio, the Fund has 64.86%
of its portfolio invested in lower rated and unrated high yield securities.
Investments in higher yield securities are accompanied by a greater degree of
credit risk and the risk tends to be more sensitive to economic conditions than
higher rated securities. The risk of loss due to default by the issuer may be
significantly greater for the holders of high yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
Although each of the Funds has a diversified investment portfolio, there are
certain credit risks, foreign currency exchange risks, or event risks due to the
manner in which the Funds are invested, which may subject the Funds more
significantly to economic changes occurring in certain industries or sectors, as
follows:
The Global Fund has investments in excess of 10% in debt securities
denominated in Canadian Dollars and Italian Lira.
47
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
12. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
year are set forth in the prospectus under the caption "Financial Highlights".
- -------------------------------------------------------------------------------
The Funds hereby designate the amounts below as qualifying for the dividends
received deduction for corporations for the nine months ended October 31, 1993.
Convertible Securities Fund........................ 34.14%
Equity Income Fund................................. 86.80%
The amounts reported above are estimated percentages and should be used for
information purposes only. Information on the final percentages that qualify for
this deduction for calendar year 1993, will be available shortly after the end
of this calendar year.
- -------------------------------------------------------------------------------
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES
FUND FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
DATED MARCH 1, 1994
1. The following is added to the section "Investment
Objectives and Policies of Each Fund."
CREDIT UNION INVESTMENT REGULATIONS
This section summarizes the investment policies of the
Franklin Short-Intermediate U.S. Government Securities Fund
(the "Fund") under which, based on the Fund's understanding
of laws and regulations governing investments by federal
credit unions on September 30, 1994, the Fund would be a
permissible investment for federal credit unions. CREDIT
UNION INVESTORS ARE ADVISED TO CONSULT THEIR OWN LEGAL
ADVISERS TO DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES
OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
All investments of the Fund will be subject to the following
limitations:
(a) The Fund will invest only in obligations of, or
securities guaranteed as to principal and interest by, the
U.S. government or its agencies and instrumentalities,
including without limitation GNMA certificates representing
proportional interests in pools of whole loans.
(b) All purchases and sales of securities will be settled
on a cash basis within 30 days of the trade date. The Fund,
however, may agree to settle a purchase or sale transaction
on a specific date up to 120 days after the trade date if,
on the trade date, the Fund has cash flow projections
evidencing its ability to complete the purchase or the Fund
owns the security it has agreed to sell.
(c) The Fund will not engage in repurchase agreements or
reverse repurchase agreements.
(d) The Fund will not engage in (1) futures or options
transactions; (2) short sales; or (3) purchases of zero
coupon bonds which mature more than ten years after the
purchase date.
(e) The Fund will not invest in derivative mortgage-backed
securities, such as collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits
("REMICs"), which represent non-proportional interests
("tranches" or "classes") in pools of mortgage loans.
2. The following substitutes for the subsection "Purchases
at Net Asset Value" under "Additional Information Regarding
Fund Shares":
ADDITIONAL INFORMATION REGARDING PURCHASES
SPECIAL NET ASSET VALUE PURCHASES. As discussed in each
Fund's Prospectus under "How to Buy Shares of the Fund
Description of Special Net Asset Value Purchases," certain
categories of investors may purchase shares of the Funds
without a front-end sales charge ("net asset value") or a
contingent deferred sales
charge. Distributors or one of its affiliates may make
payments, out of its own resources, to securities dealers
who initiate and are responsible for such purchases, as
indicated below. As a condition for these payments,
Distributors or its affiliates may require reimbursement
from the securities dealers with respect to certain
redemptions made within 12 months of the calendar month
following purchase, as well as other conditions, all of
which may be imposed by an agreement between Distributors,
or its affiliates, and the securities dealer.
The following amounts may be paid by Distributors or one of
its affiliates, out of its own resources, to securities
dealers who initiate and are responsible for (i) purchases
of most equity and taxable income Franklin Templeton Funds
made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of
$1 million but less than $2 million, plus 0.80% on sales of
$2 million but less than $3 million, plus 0.50% on sales of
$3 million but less than $50 million, plus 0.25% on sales of
$50 million but less than $100 million, plus 0.15% on sales
of $100 million or more; and (ii) purchases of most taxable
income Franklin Templeton Funds made at net asset value by
non-designated retirement plans: 0.75% on sales of $1
million but less than $2 million, plus 0.60% on sales of $2
million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of
$50 million but less than $100 million, plus 0.15% on sales
of $100 million or more. These payment breakpoints are
reset every 12 months for purposes of additional purchases.
With respect to purchases made at net asset value by certain
trust companies and trust departments of banks and certain
retirement plans of organizations with collective retirement
plan assets of $10 million or more, Distributors, or one of
its affiliates, out of its own resources, may pay up to 1%
of the amount invested.
LETTER OF INTENT. An investor may qualify for a reduced
sales charge on the purchase of shares of the Funds, as
described in the Prospectuses. At any time within 90 days
after the first investment which the investor wants to
qualify for the reduced sales charge, a signed Shareholder
Application, with the Letter of Intent section completed,
may be filed with a Fund. After the Letter of Intent 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 upon purchases
in more than one of the Franklin Templeton Funds will be
effective only after notification to Distributors that the
investment qualifies for a discount. The shareholder's
holdings in the Franklin Templeton Funds acquired more than
90 days before the Letter of Intent is filed will be counted
towards completion of the Letter of Intent but will not be
entitled to a retroactive downward adjustment in the sales
charge. Any redemptions made by the shareholder, other than
by a designated benefit plan, during the 13-month period
will be subtracted from the amount of the purchases for
purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not
completed within the 13-month period, there will be an
upward adjustment of the sales charge, depending upon the
amount actually purchased (less redemptions) during the
period. The upward adjustment does not apply to designated
benefit plans. An investor who executes a Letter of Intent
prior to a change in the sales charge structure for a Fund
will be entitled to complete the Letter of Intent at the
lower of (i) the new sales charge structure; or (ii) the
sales charge structure in effect at the time the Letter of
Intent was filed with the Fund.
As mentioned in the Prospectuses, five percent (5%) of the
amount of the total intended purchase will be reserved in
shares of a
Fund registered in the investor's name, unless the investor
is a designated benefit plan. If the total purchases, less
redemptions, equal the amount specified under the Letter,
the reserved shares will be deposited to an account in the
name of the investor or delivered to the investor or the
investor's order. If the total purchases, less redemptions,
exceed the amount specified under the Letter of Intent and
is an amount which 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 of Intent (to
reflect such further quantity discount) on purchases made
within 90 days before and on those made after filing the
Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering
price applicable to a single purchase or the dollar amount
of the total purchases. If the total purchases, less
redemptions, are less than the amount specified under the
Letter, the investor 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 which would
have applied to the aggregate purchases if the total of such
purchases had been made at a single time. Upon such
remittance the reserved shares held for the investor's
account will be deposited to an account in the name of the
investor or delivered to the investor or to the investor's
order. If within 20 days after written request such
difference in sales charge is not paid, the redemption of an
appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption
of the account prior to fulfillment of the Letter of Intent,
the additional sales charge due will be deducted from the
proceeds of the redemption, and the balance will be
forwarded to the investor.
If a Letter of Intent is executed on behalf of a benefit
plan (such plans are described under "Purchases at Net Asset
Value" in the Prospectuses), the level and any reduction in
sales charge for these designated benefit plans will be
based on actual plan participation and the projected
investments in the Franklin Templeton Funds under the Letter
of Intent. Benefit 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 benefit plans entitled to receive retroactive
adjustments in price for investments made before executing
the Letter of Intent.
3. The paragraph "Reinvestment Date" under "Additional
Information Regarding Fund Shares" is substituted with the
following language:
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 "exdividend date"). The processing date for the
reinvestment of dividends may vary from month to month, and
does not affect the amount or value of the shares acquired.
4. Add the following section at the end of the section
entitled "The Funds' Underwriter":
DISTRIBUTION PLANS
Each Fund has adopted a distribution plan pursuant to Rule
12b-1 under the 1940 Act (the "Plans") whereby the Funds may
pay up to a maximum of 0.25%, with respect to the
Convertible and Equity Income Funds, and 0.10%, with respect
to the Short-Intermediate
Fund, per annum of their average daily net assets for
expenses incurred in the promotion and distribution of their
shares.
Pursuant to the Plans, Distributors or others will be
entitled to be reimbursed each quarter (up to the maximum as
stated above) for actual expenses incurred in the
distribution and promotion of the Funds' shares, including,
but not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and
distributing sales literature and related expenses,
advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead
expenses attributable to the distribution of Fund shares, as
well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a
servicing agreement with the Funds, Distributors or its
affiliates.
In addition to the payments to which Distributors or others
are entitled under the Plans, the Plans also provide that to
the extent the Funds, the Manager or Distributors or other
parties on behalf of the Funds, the Manager or Distributors,
make payments that are deemed to be payments for the
financing of any activity primarily intended to result in
the sale of shares of the Funds within the context of Rule
12b-1 under the 1940 Act, then such payments shall be deemed
to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges
which include payments made under the Plans, plus any other
payments deemed to be made pursuant to the Plans, exceed the
amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers,
Inc., Article III, Section 26(d)4.
The terms and provisions of the Plans relating to required
reports, term, and approval are consistent with Rule 12b-1.
The Plans do not permit unreimbursed expenses incurred in a
particular year to be carried over to or reimbursed in
subsequent years.
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. Such banking
institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency
transactions. If a bank were prohibited from providing such
services, its customers who are shareholders would be
permitted to remain shareholders of the Funds, and alternate
means for continuing the servicing of such shareholders
would be sought. In such an event, changes in the services
provided might occur and such shareholders might no longer
be able to avail themselves of any automatic investment or
other services then being provided by the bank. It is not
expected that shareholders would suffer any adverse
financial consequences as a result of any of these changes.
Securities laws of states in which the Funds' shares are
offered for sale may differ from the interpretations of
federal law expressed herein, and banks and financial
institutions selling shares of the Funds may be required to
register as dealers pursuant to state law.
The Plans were approved by shareholders on April 13, 1994
and by the trustees of the Trust, including those trustees
who are not interested persons, as defined in the 1940 Act.
The Plans are effective through April 30, 1995 and are
renewable annually by a vote of the Trust's Board of
Trustees, including a majority vote of the trustees who are
non-interested persons of the Trust 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 trustees be done by the non-interested
trustees. The Plans and any related agreements may be
terminated at any time, without any penalty, by vote of a
majority of the non-interested trustees on not more than 60
days' written notice, by Distributors on not more than 60
days' written notice, by any act that constitutes an
assignment of the management agreement with the Manager or
by vote of a majority of a Fund's outstanding shares.
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 a Fund's
outstanding shares, and all material amendments to the Plans
or any related agreements shall be approved by a vote of the
non-interested trustees, cast in person at a meeting called
for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board
of Trustees 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 of Trustees with such other
information as may reasonably be requested in order to
enable the Board of Trustees to make an informed
determination of whether the Plans should be continued.
5. Add the following sentence at the end of the section
entitled "General Information - Total Return":
With the reinvestment of dividends at net asset value
(without a sales charge) effective May 1, 1994 for all of
the Funds, and the increase of the maximum sales charge to
4.50% with respect to the Convertible and Equity Income
Funds effective July 1, 1994, historical performance
information will be restated to reflect these changes.
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN EQUITY INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1994
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open
end management investment company consisting of five separate
diversified series or Funds: Franklin ShortIntermediate U.S.
Government Securities Fund (the "ShortIntermediate Fund"),
Franklin Convertible Securities Fund (the "Convertible
Fund"), Franklin Adjustable U.S. Government Securities Fund
(the "Adjustable U.S. Government Fund"), Franklin Adjustable
Rate Securities Fund (the "Adjustable Rate Securities Fund")
and Franklin Equity Income Fund, formerly Franklin Special
Equity Income Fund (the "Equity Income Fund"); and one non-
diversified series, Franklin Global Government Income Fund,
formerly Franklin Global Opportunity Income Fund (the "Global
Fund"). This Statement of Additional Information pertains
only to the ShortIntermediate Fund, the Convertible Fund and
Equity Income Fund.
The Short-Intermediate Fund, which invests in a portfolio of
U.S. government securities with primary emphasis on
securities with remaining maturities of less than five years,
has the investment objective of providing as high a level of
current income as is consistent with prudent investing while
seeking preservation of shareholders' capital. The Short-
Intermediate Fund's investments will include obligations of
the U.S. government and its agencies or instrumentalities,
some of which, such as Government National Mortgage
Association participation certificates, are backed by the
full faith and credit of the U.S. government. The
ShortIntermediate Fund is designed for individuals and
institutional accounts, such as corporations, banks, savings
and loan associations, trust companies, and other entities.
The Convertible Fund has the investment objective of
maximizing total return, consistent with reasonable risk, by
seeking to optimize capital appreciation and high current
income under varying market conditions. The Convertible Fund
will seek to achieve this objective primarily through
investing in convertible securities as described in detail in
its Prospectus.
The Equity Income Fund seeks to maximize total return through
emphasis on high current income and capital appreciation,
consistent with reasonable risk, primarily through investment
in common stocks with above average dividend yields.
There, of course, can be no guarantee that any Fund's
objectives will be achieved.
Separate prospectuses for the Short-Intermediate Fund, the
Convertible Fund, the Adjustable U.S. Government Fund, the
Equity Income Fund, the Global Fund and the Adjustable Rate
Securities Fund, dated March 1, 1994, each as may be amended
from time to time, provide the basic information a
prospective investor should know before investing in any of
the series of the Trust and may be obtained without charge
from the Trust at the address listed above or from the
Trust's principal underwriter, Franklin/Templeton
Distributors, Inc., 777 Mariners Island Blvd., P.O. Box
7777, San Mateo, California 94403-7777.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN
MORE DETAIL THAN SET
FORTH IN THE PROSPECTUSES. THIS STATEMENT OF ADDITIONAL
INFORMATION IS INTENDED TO PROVIDE ADDITIONAL INFORMATION
REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST AND
EACH FUND, AND SHOULD BE READ IN CONJUNCTION WITH EACH
FUND'S PROSPECTUS. A SEPARATE STATEMENT OF ADDITIONAL
INFORMATION, AS MAY BE AMENDED FROM TIME TO TIME, IS ALSO
AVAILABLE FOR THE GLOBAL FUND, DATED MARCH 1, 1994, AND
FOR THE ADJUSTABLE U.S. GOVERNMENT FUND AND THE
ADJUSTABLE RATE SECURITIES FUND, DATED MARCH 1, 1994.
CONTENTS
PAGE
About the Trust
The Investment Objective
and Policies of Each Fund
Trustees and Officers
Investment Advisory
and Other Services
The Trust's Policies Regarding
Brokers Used on Portfolio
Transactions
Additional Information
Regarding Fund
Shares
Additional Information
Regarding Taxation
The Funds' Underwriter
General Information
Appendix
Financial Statements
ABOUT THE TRUST
The Trust is an open-end management investment company,
commonly called a "mutual fund," organized as a
Massachusetts business trust on December 16, 1986. The Trust
issues its shares of beneficial interest, with a par value
of $.01 per share, in separate series, each known as a
"Fund." Currently, the Trust has six separate funds,
consisting of both diversified and nondiversified series,
each of which maintains a totally separate investment
portfolio. This Statement of Additional Information pertains
only to three such series: the Short-Intermediate Fund, the
Convertible Fund and the Equity Income Fund (may also be
referred hereafter individually as the "Fund" or
collectively as the "Funds").
THE INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND
As noted in the Prospectuses, each Fund has its own
investment objective and follows policies designed to
achieve that objective. In addition, the following
restrictions have been adopted as fundamental policies for
each Fund, which means that, as to each Fund, they may not
be changed without the approval of a majority of the
shares of such Fund. Each Fund MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of
the Trust, except that borrowings (and a pledge of assets
therefor) for temporary or emergency purposes may be made
from banks in an
amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities
"short," except that the Convertible Fund may sell
securities "short against the box" on the terms and
conditions as described in its Prospectus.
3. Lend any funds or other assets, except by the purchase
of publicly distributed bonds, debentures, notes or other
debt securities and except that securities of each Fund may
be loaned to securities dealers or other institutional
investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be
made if, as a result, the aggregate of such loans exceeds
10% of the value of that Fund's total assets at the time of
the most recent loan. The entry into repurchase agreements
is not considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other
persons, except insofar as a Fund may be technically deemed
an underwriter under the federal securities laws in
connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of
a Fund in the securities of any one issuer, but this
limitation does not apply to investments in securities
issued or guaranteed by the U.S. government or its agencies
or instrumentalities.
6. Purchase the securities of any issuer which would result
in owning more than 10% of any class of the outstanding
voting securities of such issuer. To the extent permitted by
exemptions granted under the Investment Company Act of 1940,
the Funds may invest in shares of money market funds managed
by Franklin Advisers, Inc. or its affiliates.
7. 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 retain securities of any issuer if, to the knowledge of
the Trust, one or more of its officers, trustees or
investment adviser own beneficially more than one-half of 1%
of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such
securities.
8. Purchase any securities issued by a corporation which
has not been in continuous operation for three years, but
such period may include the operation of a predecessor.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts,
calls, straddles, spreads or any combination thereof, or
interests in oil, gas or other mineral exploration or
development programs; however, the Convertible Fund and the
Equity Income Fund may write call options which are listed
for trading on a national securities exchange and purchase
put options on securities in their portfolios (see
"Investment Objective and Policies of the Fund" in each
Prospectus). The Convertible Fund and the Equity Income Fund
may also purchase call options to the extent necessary to
cancel call options previously written and may purchase
listed call options provided that the value of the call
options purchased will not exceed 5% of the Fund's net
assets. Such Funds may also purchase call and put options on
stock indices for defensive hedging purposes. (The Equity
Income Fund will comply with the California Corporate
Securities Rules as
they pertain to prohibited investments.) At present, there
are no options listed for trading on a national securities
exchange covering the types of securities which are
appropriate for investment by the Short-Intermediate Fund
and, therefore, there are no option transactions available
for that Fund.
11. Invest in companies for the purpose of exercising
control or management.
12. Purchase securities of other investment companies,
except in connection with a merger, consolidation,
acquisition or reorganization; or except to the extent the
Funds invest their uninvested daily cash balances in shares
of the Franklin Money Fund and other money market funds in
the Franklin Group of Funds provided i) their purchases and
redemptions of such money fund shares may not be subject to
any purchase or redemption fees, ii) their investments may
not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the Fund's
shares (as determined under Rule 12b1, as amended under the
federal securities laws) and iii) provided aggregate
investments by a Fund in any such money fund do not exceed
(A) the greater of (i) 5% of the Fund's total net assets or
(ii) $2.5 million, or (B) more than 3% of the outstanding
shares of any such money fund.
13. Issue senior securities, as defined in the Investment
Company Act of 1940, except that this restriction will not
prevent the Funds from entering into repurchase agreements
or making borrowings, mortgages and pledges as permitted by
restriction #1 above.
In order to change any of the foregoing restrictions,
approval must be obtained by shareholders of each Fund that
would be affected. Such approval requires the affirmative
vote of the lesser of (i) 67% or more of the voting
securities present at a meeting if the holders of more than
50% of voting securities are represented at that meeting or
(ii) more than 50% of the outstanding voting securities of
each Fund. If a percentage restriction contained herein is
adhered to at the time of investment, a later increase or
decrease in the percentage resulting from a change in the
value of portfolio securities or the amount of net assets
will not be considered a violation of any of the foregoing
restrictions.
Other Policies. There are no restrictions or limitations on
investments in obligations of the United States, or of
corporations chartered by Congress as federal government
instrumentalities. In the case of each Fund, the underlying
assets may be retained in cash, including cash equivalents
which are Treasury bills, commercial paper and short-term
bank obligations such as certificates of deposit, bankers'
acceptances and repurchase agreements. However, it is
intended that only so much of the underlying assets of each
Fund be retained in cash as is deemed desirable or expedient
under then-existing market conditions. Each Fund may invest
up to 10% of its net assets in illiquid securities, a term
which means securities that cannot be disposed of within
seven days in the normal course of business at approximately
the amount at which a Fund has valued the securities and
includes, among other things, repurchase agreements of more
than seven days duration, over-the-counter options and the
assets used to cover such options, and other securities
which are not readily marketable. Investments in savings
deposits are generally considered illiquid and will,
together with other illiquid investments, not exceed 10% of
a Fund's total net assets. Pursuant to an undertaking given
to the Texas State Securities Board, the Convertible Fund
and the Equity
Income Fund may not invest in warrants (valued at the lower
of cost or market) in excess of 5.0% of the value of the
Fund's net assets. No more than 2.0% of the value of a
Fund's net assets may be invested in warrants (valued at the
lower of cost or market) which are not listed on the New
York or American Stock Exchanges. In addition, the
Convertible Fund may not invest in real estate limited
partnerships or in interests (other than publicly traded
equity securities) in oil, gas, or other mineral leases,
exploration or development.
Each Fund may invest in securities that cannot be offered to
the public for sale without first being registered under the
Securities Act of 1933 ("restricted securities"), or in
other securities which, in the opinion of the Board of
Trustees, may be otherwise illiquid. It is the policy of
each Fund, however, that illiquid securities may not
constitute, at the time of purchase or at any time, more
than 10% of the value of the total net assets of the Fund in
which they are held. Generally, an "illiquid" security is
any security that cannot be disposed of promptly and in the
ordinary course of business at approximately the amount at
which the Fund has valued the security. Notwithstanding this
limitation, the Funds' Board of Trustees has authorized each
Fund to invest in restricted securities where such
investment is consistent with such Fund's investment
objective and has authorized such securities to be
considered to be liquid to the extent the Manager determines
that there is a liquid institutional or other market for
such securities. For example, restricted securities which
may be freely transferred among qualified institutional
buyers pursuant to Rule 144A under the Securities Act of
1933, as amended, and for which a liquid institutional
market has developed will be considered liquid even though
such securities have not been registered pursuant to the
Securities Act of 1933. The Board of Trustees will review
any determination by the Manager to treat a restricted
security as a liquid security on an ongoing basis, including
the Manager's assessment of current trading activity and the
availability of reliable price information. In determining
whether a restricted security is properly considered a
liquid security, the Manager and the Board of Trustees will
take into account the following factors: (i) the frequency
of trades and quotes for the security; (ii) the number of
dealers willing to purchase or sell the security and the
number of other potential purchasers; (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 a Fund invests in restricted
securities that are deemed liquid, the general level of
illiquidity in that Fund may be increased if qualified
institutional buyers become uninterested in purchasing these
securities or the market for these securities contracts.
Options. As stated in their respective Prospectuses, the
Convertible Fund and the Equity Income Fund may write
covered call options and purchase call and put options on
securities. These Funds may also purchase call and put
options on stock indices in order to hedge against the risk
of market or industry wide stock price fluctuations. Call
and put options on stock indices are similar to options on
exchange-traded securities, except that, rather than the
right to purchase 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 on which the index is based), rather
than price movements in individual stocks.
In the case of put options, a Fund's gain will, of course,
be reduced by the amount of the premium and transaction
costs it paid and may be offset by a decline in the value of
its portfolio securities. If the value of the underlying
stock index never exceeds the exercise price (or never
declines below the exercise price in the case of put
options), a Fund may suffer a loss equal to the amount of
the premium it paid, plus transaction costs. Each Fund may
also close out its option positions before they expire by
entering into a closing purchase transaction as discussed
above. Risks may also arise because the correlation between
movements in the index and the price of the securities
underlying the options is imperfect, and this risk increases
as the composition of a Fund's portfolio diverges from the
composition of the relevant index.
TRUSTEES AND OFFICERS
The Board of Trustees has the responsibility for the overall
management of the Trust, including general supervision and
review of its investment activities. The trustees, in turn,
elect the officers of the Trust who are responsible for
administering dayto-day operations of the Trust. The
affiliations of the officers and trustees and their
principal occupations for the past five years are listed
below. Trustees who are deemed to be "interested persons" of
the Trust, as defined in the Investment Company Act of 1940
(the "1940 Act"), are indicated by an asterisk (*).
POSITIONS AND
OFFICES WITH PRINCIPAL
OCCUPATIONS NAME AND ADDRESS THE TRUST DURING
PAST FIVE YEARS
Frank H. Abbott, III
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment
company); Director, Mother Lode Gold Mines Consolidated;
and director, trustee or managing general partner, as the
case may be, of most of the investment companies in the
Franklin Group of Funds.
Harris J. Ashton
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the
Board, General Host Corporation (nursery and craft
centers); Director, RBC Holdings, Inc. (a bank holding
company) and Bar-S Foods; director of certain of the
investment companies in the Templeton Group of Funds; and
director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds.
S. Joseph Fortunato
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 of General Host Corporation; director of certain of
the investment companies in the Templeton Group of Funds;
and director, trustee or managing general partner, as the
case may be, of most of the investment companies in the
Franklin Group of Funds.
David W. Garbellano
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and
Director, Berkeley Science Corporation (a venture capital
company); and director, trustee or managing general partner,
as the case may be, of most of the investment companies in
the Franklin Group of Funds.
*Edward B. Jamieson
777 Mariners Island Boulevard
San Mateo, CA 94404
President and Trustee
Senior Vice President and Portfolio Manager, Franklin
Advisers, Inc.; and officer and/or director or trustee of
some of the investment companies in the Franklin Group of
Funds.
*Charles B. Johnson
777 Mariners Island Blvd.
San Mateo, CA 94404
Chairman of the Board and Trustee
President and Director, Franklin Resources, Inc.; Chairman
of the Board and Director, Franklin Advisers, Inc. and
Franklin/Templeton Distributors, Inc.; Director,
Franklin/Templeton Investor Services, Inc. and General Host
Corporation; director of certain of the investment companies
in the Templeton Group of Funds; and officer and/or
director, trustee or managing general partner, as the case
may be, of most other subsidiaries of Franklin Resources,
Inc. and of most of the investment companies in the Franklin
Group of Funds.
*Rupert H. Johnson, Jr.
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources,
Inc. and Franklin/Templeton Distributors, Inc.; President
and Director, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; director of
certain of the investment companies in the Templeton Group
of Funds; and officer and/or director, trustee or managing
general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of most of the
investment companies in the Franklin Group of Funds.
Frank W. T. LaHaye
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye,
which are General Partners of Peregrine Ventures and
Peregrine Ventures II (venture capital firms); Chairman of
the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or
trustee, as the case may be, of most of the investment
companies in the Franklin Group of Funds.
Gordon S. Macklin
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services);
Director, Fundamerican Enterprises Holdings, Inc., Martin
Marietta Corporation, MCI Communications Corporation,
Medimmune, Inc. (biotechnology), and Infovest Corporation
(information services); director of certain of the
investment companies in the Templeton Group of Funds; and
director, trustee or managing general partner, as the case
may be, of most of the investment companies in the Franklin
Group of Funds; formerly, Chairman, Hambrecht and Quist
Group; Director, H & Q Healthcare Investors; and President,
National Association of Securities Dealers, Inc.
Harmon E. Burns
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin
Resources, Inc.; Executive Vice President and Director,
Franklin/Templeton Distributors, Inc.; Executive Vice
President, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.; director of
certain of the investment companies in the Templeton Group
of Funds; officer and/or director, as the case may be, of
other subsidiaries of Franklin Resources, Inc.; and officer
and/or director or trustee of all the investment companies
in the Franklin Group of Funds.
Kenneth V. Domingues
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President, Treasurer and Chief Financial Officer
Senior Vice President, Franklin Resources, Inc., Franklin
Advisers, Inc., and Franklin/Templeton Distributors, Inc.;
officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of all the
investment companies in the Franklin Group of Funds.
Edward V. McVey
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager,
Franklin/Templeton Distributors, Inc.; and officer of many
of the investment companies in the Franklin Group of Funds.
Charles E. Johnson
777 Mariners Island Blvd.
San Mateo CA 94404
Vice President
Senior Vice President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin/Templeton
Distributors, Inc.; President and Director, Templeton
Worldwide, Inc. and Franklin Institutional Services
Corporation; director of certain of the investment companies
in the Templeton Group of Funds; officer and/or director, as
the case may be, of some of the subsidiaries of Franklin
Resources, Inc.; and officer and/or director or trustee, as
the case may be, of some of the investment companies in the
Franklin Group of Funds.
Deborah R. Gatzek
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and
Franklin/Templeton Distributors, Inc.; Vice President,
Franklin Advisers, Inc.; and officer of all the investment
companies in the Franklin Group of Funds.
As indicated above, certain of the trustees and officers
hold positions with other companies in the Franklin Group of
Funds. Trustees not affiliated with the investment manager
are currently paid fees of $925 per month, plus $925 per
meeting attended and are reimbursed for expenses incurred in
connection with attending such meetings. These fees to the
trustees and payment for reimbursement of their expenses are
paid pro rata by each series of the Trust based on net
assets. During the period ended October 31, 1993, for the
Short-Intermediate Fund, the Convertible Fund and the Equity
Income Fund, fees totaling $10,056, $1,358 and $1,280,
respectively, were paid to trustees of the Trust who are not
affiliated with the investment manager. No officer or
trustees received any other compensation directly from the
Trust. As of December 7, 1993, the trustees and officers, as
a group, owned of record and beneficially 982 shares of the
ShortIntermediate Fund and did not own any shares of the
Convertible Fund or the Equity Income Fund, or less than 1%
of the total outstanding shares of each Fund. Certain
officers
or trustees who are shareholders of Franklin Resources, Inc.
may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its
subsidiaries. Charles B. Johnson, Rupert H. Johnson, Jr. and
Andrew R. Johnson are brothers.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of each Fund is Franklin Advisers,
Inc. ("Advisers" or "Manager"). Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company whose shares are listed on
the New York Stock Exchange ("Exchange"). Resources owns
several other subsidiaries which are involved in investment
management and shareholder services. The Manager and other
subsidiary companies of Resources currently manage over $117
billion in assets for over three million shareholders. The
preceding table indicates those
officers and directors who are also affiliated persons of
Distributors and of Advisers.
Pursuant to the management agreement for the Funds, the
Manager provides investment research and portfolio
management services, including the selection of securities
for each Fund to purchase, hold or sell and the selection of
brokers through whom each Fund's portfolio transactions are
executed. The Manager's activities are subject to the review
and supervision of the Trust's Board of Trustees to whom the
Manager renders periodic reports of each Fund's investment
activities. The Manager, at its own expense, furnishes each
Fund with office space and office furnishings, facilities
and equipment required for managing the business affairs of
each Fund; maintains all internal bookkeeping, clerical,
secretarial and administrative personnel and services; and
provides certain telephone and other mechanical services.
The Manager is covered by fidelity insurance on its
officers, directors, and employees for the protection of
each Fund. Each Fund bears all of its expenses not assumed
by the Manager. See the Statement of Operations in the
financial statements at the end of this Statement of
Additional Information for additional details of these
expenses.
Pursuant to the management agreement, each Fund is obligated
to pay the Manager a fee computed at the close of business
on the last business day of each month equal to a monthly
rate of 5/96 of 1% (approximately 5/8 of 1% per year) for
the first $100 million of net assets of the Fund; 1/24 of 1%
(approximately 1/2 of 1% per year) on net assets of the Fund
in excess of $100 million up to $250 million; and 9/240 of
1% (approximately 45/100 of 1% per year) of net assets of
the Fund in excess of $250 million.
The Manager has waived a portion of its management fees and
has assumed responsibility for making payments to offset
certain operating expenses otherwise payable by certain
Funds. This action by the Manager to waive a portion of its
management fees and to assume responsibility for payment of
the expenses related to the operations of the Fund may be
terminated by the Manager at any time. The management
agreement specifies that the management fee will be reduced
to the extent necessary to comply with the most stringent
limits on the expenses which may be borne by a Fund as
prescribed by any state in which a Fund's shares are offered
for sale. The most stringent current limit requires the
Manager to reduce or eliminate its fee to the extent that
aggregate operating expenses of a Fund (excluding interest,
taxes, brokerage commissions and extraordinary expenses such
as litigation costs) would otherwise exceed in any fiscal
year 2.5% of the first $30 million of average net assets of
a Fund, 2% of the next $70 million of average net assets of
a Fund and 1.5% of average net assets of a Fund in excess of
$100 million. Expense reductions have not been necessary
based on state requirements.
The table below sets forth on a per Fund basis the
management fees that would have been payable by each Fund
and the management fees actually paid to the Manager during
the period ended October 31, 1993 and for the fiscal years
ended January 31, 1993 and 1992.
NINE-MONTH PERIOD ENDED OCTOBER 31, 1993
MANAGEMENT MANAGEMENT
FUND FEES ACCRUED FEES PAID
Short Intermediate $1,058,133
$897,620
Fund
Convertible Fund $ 170,607 $
8,346
Equity Income Fund $ 159,572 $
5,146
FISCAL YEAR ENDED JANUARY 31, 1993
MANAGEMENT
MANAGEMENT
FUND FEES ACCRUED FEES
PAID
Short Intermediate
Fund $1,133,312
$947,587
Convertible Fund $ 141,863 $
15,487
Equity Income Fund $ 127,083 $
15,127
FISCAL YEAR ENDED JANUARY 31, 1992
MANAGEMENT
MANAGEMENT
FUND FEES ACCRUED FEES
PAID
Short Intermediate
Fund $607,161
$607,161
Convertible Fund $110,237 $
0
Equity Income Fund $ 87,784 $
5,983
The management agreement for the Funds is in effect until
April 30, 1994. Thereafter, it may continue in effect for
successive annual periods, providing such continuance is
specifically approved at least annually by a vote of the
Trust's Board of Trustees or by a vote of the holders of a
majority of each Fund's outstanding voting securities, and
in either event by a majority vote of the Trust's trustees
who are not parties to the management agreement or
interested persons of any such party (other than as trustees
of the Trust), cast in person at a meeting called for that
purpose. The management agreement may be terminated as to
each Fund without penalty at any time by the Trust or by the
Manager on 30 days' written notice and will automatically
terminate in the event of its assignment, as defined in the
1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor
Services" or "Shareholder Services Agent"), a wholly-owned
subsidiary of Resources, is the shareholder servicing agent
for the Trust and acts as the Trust's transfer agent and
dividend-paying agent. Investor Services is compensated on
the basis of a fixed fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor,
San Francisco, California 94104, acts as custodian of the
securities and other assets of each Fund. Citibank Delaware,
One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank
automated clearing houses.
The custodians do not participate in decisions relating to
the purchase and sale of portfolio securities.
Coopers & Lybrand, 333 Market Street, San Francisco,
California 94105, are the Trust's independent auditors.
During the ninemonth period ended October 31, 1993, their
auditing services consisted of rendering an opinion on the
financial statements of the Funds included in the Trust's
Annual Report and this Statement of Additional Information.
THE TRUST'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS
Under the current management agreement with Advisers, the
selection of brokers and dealers to execute transactions in
the portfolio of each Fund is made by the Manager in
accordance with
criteria set forth in the management agreement and any
directions which the Trust's Board of Trustees may give.
When placing a portfolio transaction, the Manager attempts
to obtain the best net price and execution of the
transaction. On portfolio transactions which are done on a
securities exchange, the amount of commission paid by a Fund
is negotiated between the Manager and the broker executing
the transaction. The Manager seeks to obtain the lowest
commission rate available from brokers which are felt to be
capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the
brokerage commissions paid in connection with portfolio
transactions are based to a large degree on the professional
opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on
the basis of, among other things, the experience of these
individuals in the securities industry and information
available to them concerning the level of commissions being
paid by other institutional investors of comparable size.
The Manager will ordinarily place orders for the purchase
and sale of overthe-counter securities on a principal,
rather than agency, basis with a principal market maker
unless, in the opinion of the Manager, a better price and
execution can otherwise be obtained. Purchases of portfolio
securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and
purchases from dealers will include a spread between the bid
and ask price. As a general rule, the Funds do not purchase
bonds in underwritings where they are not given any choice,
or only limited choice, in the designation of dealers to
receive the commission. The Trust will seek to obtain prompt
execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to
be considered in the selection of a broker to execute a
trade. If it is felt to be in the Trust's best interests,
the Manager may place portfolio transactions with brokers
who provide the types of services described below, even if
it means the Trust will have to pay a higher commission than
would be the case if no weight were given to the broker's
furnishing of these services. This will be done only if, in
the opinion of the Manager, the amount of any additional
commission is reasonable in relation to the value of the
services. Higher commissions will be paid only when the
brokerage and research services received are bona fide and
produce a direct benefit to the Trust or assist the Manager
in carrying out its responsibilities to the Trust, or when
it is otherwise in the best interest of the Trust to do so,
whether or not such data may also be useful to the Manager
in advising other clients.
When it is felt that several brokers are equally able to
provide the best net price and execution, the Manager may
decide to execute transactions through brokers who provide
quotations and other services to the Trust, specifically
including the quotations necessary to determine the value of
a Fund's net assets, in such amount of total brokerage as
may reasonably be required in light of such services, and
through brokers who supply research, statistical and other
data to the Trust and Manager in such amount of total
brokerage as may reasonably be required.
It is not possible to place a dollar value on the special
executions or on the research services received by Advisers
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, the
Manager and its affiliates may use this research and data in
their investment advisory capacities with other clients.
Provided that the Trust's officers are satisfied that the
best execution is obtained, the sale of Trust shares may
also be considered as a factor in the selection of
securities dealers to execute the Trust's portfolio
transactions.
Because Distributors is a member of the National Association
of Securities Dealers, it is sometimes entitled to obtain
certain fees when a Fund tenders portfolio securities
pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of each Fund, any
portfolio securities tendered by such Fund will be tendered
through Distributors if it is legally permissible to do so.
In turn, the next management fee payable to Advisers under
the management agreement will be reduced by the amount of
any fees received by Distributors in cash, less any costs
and expenses incurred in connection therewith.
If purchases or sales of securities of each Fund, or one or
more other investment companies or clients supervised by the
Manager are considered at or about the same time,
transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed
equitable to all by the Manager, taking into account the
respective sizes of the funds and the amount of securities
to be purchased or sold. It is recognized that in some cases
this procedure could possibly have a detrimental effect on
the price or volume of the security so far as the Funds are
concerned. In other cases it is possible that the ability to
participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Funds.
For the fiscal years ended January 31, 1992 and 1993 and for
the nine-month period ended October 31, 1993, the
Convertible Fund paid total brokerage commissions of $8,991,
$12,171 and $5,226, respectively, and the Equity Income Fund
paid $22,481, $25,918 and $32,855, respectively, and the
Short-Intermediate Fund paid no brokerage commissions. As of
October 31, 1993, the Funds did not own securities of their
regular broker-dealers.
ADDITIONAL INFORMATION REGARDING FUND SHARES
All checks, drafts, wires and other payment mediums used for
purchasing or redeeming shares of each Fund must be
denominated in U.S. dollars. Each Fund reserves the right,
in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other
currency, or (b) to honor the transaction or make
adjustments to a shareholder's account for the transaction
as of a date and with a foreign currency exchange factor
determined by the drawee bank.
Shares of the Short-Intermediate Fund are eligible to
receive dividends beginning on the first business day
following settlement of the purchase transaction, through
the date on which the Fund writes a check or sends a wire on
redemption transactions.
Dividend checks which are returned to a Fund marked "unable
to forward" by the postal service will be deemed to be a
request by the shareholder to change the dividend option,
and the proceeds will be reinvested in additional shares at
the public offering price (or net asset value if a capital
gain distribution) until new instructions are received.
A Fund may deduct from a shareholder's account the costs of
its efforts to locate a shareholder if mail is returned as
undeliverable or such Fund is otherwise unable to locate the
shareholder or verify the current mailing address. These
costs may include a percentage of the account when a search
company charges a percentage fee in exchange for their
location services.
Under agreements with certain banks in Taiwan, Republic of
China, each Fund's shares are available to such banks'
discretionary trust funds at net asset value. The banks may
charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion
of such service fees may be paid to Distributors, or an
affiliate of Distributors, to help defray expenses of
maintaining a service office in Taiwan, including expenses
related to local literature fulfillment and communication
facilities.
Shares of each Fund may be offered to investors in Taiwan
through securities firms known locally as Securities
Investment Consulting Enterprises. In conformity with local
business practices in Taiwan, shares of each Fund will be
offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE CHARGE
Up to U.S. $100,000 3%
U.S. $100,000 to U.S. $1,000,000 2%
Over U.S. $1,000,000 1%
PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS
Orders for the purchase of shares of any series of the Trust
received in proper form prior to 1:00 p.m. Pacific time any
business day that the Exchange is open for trading and
promptly transmitted to a Fund will be based upon the public
offering price determined that day. Purchase orders received
by securities dealers or other financial institutions after
1:00 p.m. Pacific time will be effected at each Fund's
public offering price on the day it is next calculated. The
use of the term "securities dealer" herein shall include
other financial institutions which, pursuant to agreements
with Distributors (directly or through affiliates), handle
customer orders and accounts with the Fund. Such reference,
however, is for convenience only and does not indicate a
legal conclusion of capacity.
Orders for the redemption of shares are effected at net
asset value subject to the same conditions concerning time
of receipt in proper form. It is the securities dealer's
responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so
must be settled between the customer and the securities
dealer.
PURCHASES AT NET ASSET VALUE
As discussed in each Fund's Prospectus, certain categories
of investors may purchase shares of the Trust at net asset
value (without a sales charge) or at a reduced sales charge.
The reason for this is that there is minimal or no sales
effort required with respect to these investors. In
addition, governmental entities which are prohibited by law
or regulation from paying a sales charge on their
investments may acquire shares at net asset value (without a
sales charge). If certain investments at net asset value are
made through a dealer who has executed a dealer
or similar agreement with Distributors, Distributors or its
affiliates may make a payment, out of their own resources,
to such dealer in an amount not to exceed 0.25% of the
amount invested, paid pro rata on a quarterly basis on
average quarterly balances for a period of one year.
REDEMPTIONS IN KIND
The Trust has committed itself to pay in cash (by check) all
requests for redemption of any Fund 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 such period. Such commitment
is irrevocable without the prior approval of the Securities
and Exchange Commission. In the case of requests for
redemption in excess of such amounts, the trustees reserve
the right to make payments in whole or in part in securities
or other assets of the Fund from which the shareholder is
redeeming, 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 such circumstances,
the securities distributed would be valued at the price used
to compute the Fund's net assets. Should a Fund do so, a
shareholder may incur brokerage fees in converting the
securities to cash. The Fund does not intend to redeem
illiquid securities in kind; however, should it happen,
shareholders may not be able to timely recover their
investment and may also incur brokerage costs in selling
such securities.
REDEMPTIONS BY EACH FUND
Due to the relatively high cost of handling small
investments, each Fund reserves the right to redeem,
involuntarily, at net asset value, the shares of any
shareholder whose account has a value of less than one-half
of the initial minimum investment required for that
shareholder, but only where the value of such account has
been reduced by the shareholder's prior voluntary redemption
of shares. Until further notice, it is the present policy of
each Fund not to exercise this right with respect to any
shareholder whose account has a value of $50 or more. In any
event, before a Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder
that the value of the shares in his account is less than the
minimum amount and allow the shareholder 30 days to make an
additional investment in an amount which will increase the
value of its account to at least $100.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectuses, each Fund generally calculates
its net asset value as of 1:00 p.m. Pacific time each day
that the Exchange is open for trading. As of the date of
this Statement of Additional Information, the Trust is
informed that the Exchange observes the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
Each Fund's portfolio securities are valued as stated in the
Prospectus. Generally, trading in corporate bonds, U.S.
government securities and money market instruments is
substantially completed each day at various times prior to
the close of the Exchange. The values of such securities
used in computing the net asset value of each Fund's shares
are determined as of such times. Occasionally, events
affecting the values of such securities may occur between
the times at which they are determined and 1:00 p.m. Pacific
time which will not be reflected in the computation of a
Fund's net asset value. If
events materially affecting the value of such securities
occur during such period, then these securities will be
valued at their fair value as determined in good faith by
the Board of Trustees.
REINVESTMENT DATE
The dividend reinvestment date is the date on which
additional shares are purchased for the investor who has
elected to have dividends reinvested. This date will vary
from month to month for each Fund, except the Short
Intermediate Fund, based on operational considerations and
is not necessarily the same date as the record date or the
payable date for cash dividends.
SPECIAL SERVICES
The Trust and Institutional Services Division of
Distributors provides specialized services, including
recordkeeping, for institutional investors of the Trust. The
cost of these services is not borne by the Trust.
Franklin/Templeton Investor Services, Inc. may pay certain
financial institutions which maintain omnibus accounts with
the Trust on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such
beneficial owners. For each beneficial owner in the omnibus
account, the Trust may reimburse Investor Services an amount
not to exceed the per account fee which the Trust normally
pays Investor Services. Such financial institutions may also
charge a fee for their services directly to their clients.
ADDITIONAL INFORMATION REGARDING TAXATION
The following information is a supplement to and should be
read in conjunction with the section in each Fund's
Prospectus entitled "Taxation of the Fund and Its
Shareholders."
As stated in each Fund's Prospectus, each Fund has elected
and qualified to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). The trustees reserve the
right not to maintain the qualification of any Fund as a
regulated investment company if they determine such course
of action to be beneficial to the shareholders. In such
case, the Fund will be subject to federal and possibly state
corporate taxes on its taxable income and gains, and
distributions to shareholders will be ordinary dividend
income to the extent of the Fund's available earnings and
profits. Subject to the limitations discussed below, all or
a portion of the income distributions paid by a Fund may be
treated by corporate shareholders as qualifying dividends
for purposes of the dividends-received deduction under
federal income tax law. If the aggregate qualifying
dividends received by a Fund (generally, dividends from U.S.
domestic corporations the stock in which is not debtfinanced
by the Fund and is held for at least a minimum holding
period) are less than 100% of its distributable income, then
the amount of the Funds' dividends paid to corporate
shareholders which may be designated as eligible for such
deduction will not exceed the aggregate qualifying dividends
received by the Fund for the taxable year. The amount or
percentage of income qualifying for the deduction for
distributions made during the calendar year will be declared
by the Fund annually in a notice to shareholders mailed
shortly after the end of the calendar year.
Corporate shareholders should note that dividends paid by a
Fund from sources other than the qualifying dividends it
receives will not qualify for the dividends-received
deduction. For example,
any interest income and net short-term capital gain (in
excess of any net long-term capital loss or capital loss
carryover) included in investment company taxable income and
distributed by a Fund as a dividend will not qualify for the
dividends-received deduction.
Corporate shareholders should also note that availability of
the corporate dividends-received deduction is subject to
certain restrictions. For example, the deduction is
eliminated unless the Fund shares have been held (or deemed
held) for at least 46 days in a substantially unhedged
manner. The dividends-received deduction may also be reduced
to the extent interest paid or accrued by a corporate
shareholder is directly attributable to its investment in
Fund shares. The entire dividend, including the portion
which is treated as a deduction, is includable in the tax
base on which the alternative minimum tax is computed and
may also result in a reduction in the shareholder's tax
basis in its Fund shares, under certain circumstances, if
the shares have been held for less than two years. Corporate
shareholders whose investment in the Fund is a "debt
financed" for these tax purposes should consult with their
tax advisors concerning the availability of the dividends
received deduction.
The Code requires all funds to distribute at least 98% of
their taxable ordinary income earned during the calendar
year and at least 98% of their capital gain net income
earned during the twelve month period ending October 31 of
each year (in addition to amounts from the prior year that
were neither distributed nor taxed to the Fund) to
shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as
a matter of policy to declare such dividends, if any, in
December and to pay these dividends in December or January
to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or
all federal excise taxes. Under the Code, certain
distributions which are declared in October, November or
December but which, for operational reasons, may not be paid
to the shareholder until the following January, will be
treated for tax purposes as if paid by the Fund and received
by the shareholder on December 31 of the calendar year in
which they are declared.
Redemptions and exchanges of Fund shares are taxable
transactions for federal and state income tax purposes. For
most shareholders, gain or loss will be recognized in an
amount equal to the difference between the shareholder's
basis in the shares and the amount realized from the
transaction, subject to the rules described below. If such
shares are a capital asset in the hands of the shareholder,
gain or loss will be capital gain or loss and will be long
term for federal income tax purposes if the shares have been
held for more than one year.
All or a portion of a loss realized upon a redemption of
shares will be disallowed to the extent other shares of the
Fund are purchased (through reinvestment of dividends or
otherwise) within 30 days before or after such redemption.
Any loss disallowed under these rules will be added to the
tax basis of the shares purchased.
Transactions in options by the Convertible Fund and Equity
Income Fund, including written covered calls and purchased
calls and put options, are subject to special rules which
may affect the amount, timing and character of distributions
to shareholders by: accelerating income to a Fund; deferring
Fund losses; causing adjustments in the holding periods of
Fund securities; converting capital gains into ordinary
income; and converting short-term capital losses into long
term capital losses. For example, equity
options, including options on stock and on narrow-based
stock indices, will be subject to tax under Section 1234 of
the Code, and the purchase of a put option may constitute a
short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying stock or
a substantially identical stock in a Fund's portfolio. The
tax treatment of certain other options, such as listed
options on broad-based stock indices or on debt securities,
is governed by Section 1256 of the Code, in the case that
such options are held by the foregoing funds. In general,
each such Section 1256 position held by a Fund will be
marked-to-market (i.e., treated as if it were closed out) on
the last business day of each taxable year of a Fund, and
all gain or loss associated with such marking-to-market or
other transactions in such positions will be treated as 60%
long-term and 40% shortterm capital gain or loss.
When either the Convertible Fund and Equity Income Fund hold
options or contracts which substantially diminish such
Fund's risk of loss with respect to another position of the
Fund (as might occur in some hedging transactions), this
combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of such Fund securities
and conversion of shortterm capital losses into long-term
capital losses.
As a regulated investment company, each Fund is also subject
to the requirement that less than 30% of its annual gross
income be derived from the sale or other disposition of
securities and
certain other investments held for less than three months
("shortshort income").
This requirement may limit the Convertible Fund's and the
Equity Income Fund's ability to engage in options, straddles,
and hedging transactions because these transactions are often
consummated in less than three months, may require the sale
of portfolio securities held less than three months and may,
as in the case of short sales of portfolio securities, reduce
the holding periods of certain securities within these Funds,
resulting in additional short-short income for these Funds.
Each Fund will monitor its transactions in such options and
may make certain other tax elections in order to mitigate the
effect of the above rules and to prevent disqualification of
the Fund as a regulated investment company under Subchapter M
of the Code.
The Convertible Fund and the Equity Income Fund are each
authorized to invest in foreign securities (see the
discussion in each Fund's Prospectus under investment
objectives and policies of the Fund). While neither Fund
currently makes such investments, if the investment manager
makes the decision to invest a portion of each Fund's
portfolio in such securities, these investments may have the
following tax consequences.
The Convertible Fund and the Equity Income Fund may be
subject to foreign withholding taxes on income from certain
of its foreign securities. Because both Funds will likely
invest 50% or less of their total assets in securities of
foreign corporations, neither will be entitled under the Code
to pass through to their shareholders their pro rata share of
the foreign taxes paid by the Fund. These taxes will be taken
as a deduction by the Fund that paid the tax. Foreign
exchange gains and losses, if any, realized by either Fund in
connection with certain transactions involving foreign
currencies, foreign currency payables or receivables, foreign
currency-denominated debt securities, foreign currency
forward contracts, and options or futures contracts on
foreign currencies are subject to special tax rules which may
cause such gains and losses to be treated as ordinary income
and losses rather than capital gains and losses and may
affect the amount and timing of a Fund's income or loss from
such transactions and, in turn, its distributions to
shareholders.
The Convertible Fund and the Equity Income Fund will limit
their equity investments in non-U.S. corporations that would
be treated as a Passive Foreign Investment Company ("PFIC")
under the Code, in order to avoid adverse tax consequences
upon the disposition of, or the receipt of "excess
distributions" with respect to, such equity investments. To
the extent these Funds invest in PFICs, they may adopt
certain tax strategies to reduce or eliminate the adverse
effects of certain federal tax provisions governing PFIC
investments. To the extent that these Funds invest in
foreign securities which are determined to be PFIC
securities and are required to pay a tax related to such an
investment, a credit for this tax would not be allowed to be
passed through to these shareholders. Therefore, the payment
of this tax would reduce each Fund's economic return from
its PFIC investment. The recognition of income upon the
disposition of or the receipt of excess distributions from a
PFIC security may also change the character of such income
from capital gain to ordinary income. For these and other
operational reasons, the Convertible Fund and the Equity
Income Fund will generally avoid, where possible, (but are
not prohibited from acquiring and holding) investments in
foreign securities which are known to be or potentially may
be classified as PFIC securities.
The Short-Intermediate Fund may purchase securities issued
or guaranteed by the U.S. government, or one of its agencies
or instrumentalities, such as GNMAs, which are backed by the
full faith and credit of the U.S. Treasury. The Government
National Mortgage Association may borrow from the U.S.
Treasury to the extent needed to make payments under its
guarantee. However, no assurances can be given that the U.S.
government will provide such financial support to the
obligations of the other U.S. government agencies or
instrumentalities in which a Fund invests, since it is not
obligated to do so. These agencies and instrumentalities are
supported by either the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury,
the discretionary authority of the U.S. government to
purchase certain obligations of an agency or
instrumentality, or the credit of the agency or
instrumentality.
Several of the investment companies registered under the
Investment Company Act of 1940 managed by Franklin Advisers,
Inc. ("Franklin Group of Funds"), including the Short
Intermediate Fund, are major purchasers of government
securities and will seek to negotiate attractive prices for
such securities and to pass on any savings derived from such
negotiations to their shareholders in the form of higher
current yields.
The Convertible Fund's investment in zero coupon, delayed
interest bonds or bonds that provide for payment of interest
in kind (PIK bonds) may cause this Fund to recognize income
and make distributions to shareholders prior to the receipt
of cash payments. For example, with respect to zero coupon
and delayed interest bonds, this Fund will be required to
accrue as income a portion of the discount (or deemed
discount) at which the securities were issued and to
distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid
income and excise taxes. Payment-in-kind obligations are
subject to special tax rules concerning the amount,
character and timing of income required to be accrued by the
Fund. For bonds acquired at a market discount, this Fund may
elect to accrue market discount on a current basis and will
be required to distribute any such accrued discount. 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 may also be required under the Code and
Treasury Regulations to accrue income for income tax
purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is
not currently receiving interest or principal payments on
such obligations. In order to generate cash to satisfy any
or all of 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.
Shareholders who are not U.S. persons for purposes of
federal income taxation should consult with their financial
or tax advisors regarding the applicability of U.S.
withholding taxes to distributions received by them from the
Fund and the application of foreign tax laws to these
distributions.
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement for the Funds in
effect until April 30, 1994, Distributors acts as principal
underwriter in a continuous public offering for shares of
the Funds.
Distributors pays the expenses of distribution of each
Fund's shares, including advertising expenses and the costs
of printing sales material and prospectuses used to offer
shares to the public. The Funds pay the expenses of
preparing and printing amendments to their registration
statements and prospectuses (other than those necessitated
by the activities of Distributors) and of sending
prospectuses to existing shareholders.
The underwriting agreement will continue in effect for
successive annual periods provided that its continuance is
specifically approved at least annually by a vote of the
Trust's Board of Trustees, or by a vote of the holders of a
majority of each Fund's outstanding voting securities, and
in either event by a majority vote of the Trust's trustees
who are not parties to the underwriting agreement or
interested persons of any such party (other than as trustees
of the Trust), 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 allows the entire underwriting commission on
the sale of shares of each Fund and 50% of the underwriting
commission on the reinvestment of income dividends to the
securities dealer of record, if any, on an account.
In connection with the offering of the shares of the Funds,
aggregate underwriting commissions for the fiscal years
ended January 31, 1992 and 1993 and for the period ended
October 31, 1993, were as indicated below.
FISCAL YEAR ENDED JANUARY 31, 1992
TOTAL COMMISSIONS
FUND RECEIVED AMOUNT RETAINED
Short-Intermediate
Fund $1,243,093 $32,333
Convertible Fund $ 108,168
$15,071
Equity Income Fund $ 125,201 $
7,541
FISCAL YEAR ENDED JANUARY 31, 1993
TOTAL COMMISSIONS
FUND RECEIVED AMOUNT
RETAINED
Short-Intermediate
Fund $1,537,189 $44,503
Convertible Fund $ 194,007 $15,964
Equity Income Fund $ 182,371 $ 9,470
NINE-MONTHS ENDED OCTOBER 31, 1993
TOTAL COMMISSIONS
FUND RECEIVED AMOUNT
RETAINED
Short-Intermediate
Fund $891,309 $139,758
Convertible Fund $347,284 $ 16,986
Equity Income Fund $299,851 $ 11,325
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectuses, each Fund may from time to
time quote various performance figures to illustrate that
Fund's past performance. It may occasionally cite statistics
to reflect its volatility or risk.
Performance quotations by investment companies are subject
to rules adopted by the Securities and Exchange Commission
("SEC"). These rules require the use of standardized
performance quotations or, alternatively, that every non
standardized performance quotation furnished by a Fund be
accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average
annual compounded total return quotations used by a Fund are
based on the standardized methods of computing performance
mandated by the SEC. An explanation of those and other
methods used by each Fund to compute or express performance
follows.
TOTAL RETURN
The average annual total return is determined by finding the
average annual compounded rates of return over one-, fiveand
ten-year periods that would equate an initial hypothetical
$1,000 investment to its ending redeemable value. The
calculation assumes the maximum sales charge is deducted
from the initial $1,000 purchase order, capital gains are
reinvested at net asset value and all income dividends are
reinvested at the maximum public offering price (offering
price includes sales charge) on the reinvestment dates
during the period. The quotation assumes the account was
completely redeemed at the end of each one-, fiveand ten-
year period and the deduction of all applicable charges and
fees.
In considering the quotations set forth below, investors
should remember that the maximum sales charge reflected in
each quotation is a one time fee (charged on all direct
purchases and reinvested dividends) which will have its
greatest impact during the early stages of an investor's
investment in each Fund. The actual performance of an
investment will be affected less by this charge the longer an
investor retains the investment in the Fund. The average
annual compounded rates of return for each Fund for the
indicated periods ended on the date of the financial
statements included herein were as follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR
INCEPTION
Short-Intermediate Fund* 6.51% 8.47%
8.06%
Convertible Fund* 22.85% 12.98%
10.44%
Equity Income Fund** 18.95% 12.82%
13.06%
*Inception 4/15/87
**Inception 3/15/88
These figures were calculated according to the SEC
formula: P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one-, five-, or
ten-year periods at the end of the one-, five-, or ten
year periods (or fractional portion thereof)
As discussed in each Prospectus, each Fund may quote total
rates of return in addition to its average annual total
return. Such quotations are computed in the same manner
as each Fund's average annual compounded rate, except
that such quotations will be based on each Fund's
actual return for a specified period rather than to its
average return over one-, five-, or tenyear periods.
The total rates of return for each Fund for the
indicated periods ended on the date of the financial
statements included herein was as follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
Short-Intermediate Fund* 6.51% 50.15% 66.23%
Convertible Fund* 22.85% 84.10% 91.65%
Equity Income Fund** 18.95% 82.79% 99.75%
*Inception 4/15/87
**Inception 3/15/88
YIELD
Current yield reflects the income per share earned by each
Fund's portfolio investments.
Current yield is determined by dividing the net investment
income per share earned during a 30-day base period by the
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 during
the base period. The yield for each Fund for the 30-day
period ended on the date of the financial statements included
herein was as follows:
FUND NAME 30-DAY YIELD
Short-Intermediate Fund 3.80%
Convertible Fund 4.34%
Equity Income Fund 4.37%
These figures were obtained using the following SEC
formula:
Yield = 2[(a-b + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = net expenses accrued for the period
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
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 the Funds' shareholders. Amounts paid to
shareholders are reflected in the quoted "current
distribution rate." The current distribution rate is
computed by dividing the total amount of dividends per share
paid by a Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as
when there has been a change in the amount of dividend
payout, or a fundamental change in investment policies, it
might be appropriate to annualize the dividends paid over
the period such policies were in effect, rather than using
the dividends during the past 12 months. 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 Fund for the period
ended October 31, 1993, was as follows:
Short-Intermediate Fund 4.13%
Convertible Fund 5.14%
Equity Income Fund 4.25%
VOLATILITY
Occasionally statistics may be used to specify Fund
volatility or risk. Measures of volatility or risk are
generally used to compare Fund net asset value or
performance relative 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 the Standard
& Poor's 500 Stock Index. 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 premise is that greater
volatility connotes greater risk undertaken in achieving
performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are
permitted to purchase shares of a Fund at net asset value,
sales literature pertaining to a Fund may quote a current
distribution rate, yield, total return, average annual total
return and other measures of performance, as described
elsewhere in this Statement of Additional Information, with
the substitution of net asset
value for the public offering price.
The current distribution rate for each Fund for the period
ended October 31, 1993, based on each Fund's net asset
value, was as follows:
Short-Intermediate Fund 4.22%
Convertible Fund 5.35%
Equity Income Fund 4.43%
The average annual total return for each Fund, for the
period ended October 31, 1993, based on net asset value, was
as follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
Short-Intermediate Fund* 9.04% 9.15% 8.60%
Convertible Fund* 28.26% 14.23% 11.43%
Equity Income Fund** 24.10% 14.01% 14.14%
*Inception 4/15/87
**Inception 3/15/88
The aggregate total return for each Fund, for the period
ended October 31, 1993, based on net asset value, was as
follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR
INCEPTION
Short-Intermediate Fund* 9.04% 54.89% 71.71%
Convertible Fund* 28.26% 94.49% 103.23%
Equity Income Fund** 24.10% 92.63% 110.67%
*Inception 4/15/87
**Inception 3/15/88
Sales literature referring to the use of each 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.
Regardless of the method used, past performance is not
necessarily indicative of future results, but is an
indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material
information relating to investment objectives and
performance results of funds belonging to the Templeton
Group of Funds. Resources is the parent company of the
advisers and underwriters of both the Franklin Group of
Funds and Templeton Group of Funds.
COMPARISONS
To help investors better evaluate how an investment in the
Funds might satisfy their investment objective,
advertisements and other materials regarding the Funds may
discuss various measures of a Fund's 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. Such
comparisons may include, but are not limited to, the
following examples:
a) Dow Jones Composite Average or its component averages an
unmanaged index composed of 30 blue-chip industrial
corporation stocks (Dow Jones Industrial Average), 15
utilities company stocks (Dow Jones Utilities Average), and
20 transportation
company stocks. Comparisons of performance assume
reinvestment of dividends.
b) Standard & Poor's 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.
c) The New York Stock Exchange composite or component
indices unmanaged indices of all industrial, utilities,
transportation, and finance stocks listed on the New York
Stock Exchange.
d) 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.
e) Lipper - Mutual Fund Performance Analysis and Lipper
Fixed Income Fund Performance Analysis - measure total
return and average current yield for the mutual fund
industry. Rank individual mutual fund performance over
specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
f) 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.
g) Mutual Fund Source Book, published by Morningstar, Inc.
analyzes price, yield, risk, and total return for equity
funds.
h) 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.
i) 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.
j) 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.
k) Savings and Loan Historical Interest Rates - as published
in the U.S. Savings & Loan League Fact Book.
l) Salomon Brothers Broad Bond Index or its component
indices The Broad Index measures yield, price, and total
return for Treasury, Agency, Corporate, and Mortgage bonds.
m) Salomon Brothers Composite High Yield Index or its
component indices - The High Yield Index measures yield,
price and total return for Long-Term High-Yield Index,
Intermediate-Term HighYield Index and Long-Term Utility High
Yield Index.
n) Lehman Brothers Aggregate Bond Index or its component
indices - The Aggregate Bond Index measures yield, price and
total return for Treasury, Agency, Corporate, Mortgage, and
Yankee bonds.
o) Standard & Poor's Bond Indices - measure yield and price
of
Corporate, Municipal, and Government bonds.
p) Other taxable investments, including certificates of
deposit (CDs), money market deposit accounts (MMDAs),
checking accounts, savings accounts, money market mutual
funds, and repurchase agreements.
q) Historical data supplied by the research departments of
First Boston Corporation, the J.P. Morgan companies, Salomon
Brothers, Merrill Lynch, Pierce, Fenner & Smith, Lehman
Brothers and Bloomberg L.P.
r) Donoghue's Money Fund Report - industry averages for seven-
day annualized and compounded yields of taxable, taxfree and
government money funds.
From time to time, advertisements or information for a Fund
may include a discussion of certain attributes or benefits to
be derived by an investment in the Fund. Such advertisements
or information may also compare a Fund's performance to the
return on certificates of deposit or other investments.
Investors should be aware, however, that an investment in a
Fund involves the risk of fluctuation of principal value, a
risk generally not present in an investment in a certificate
of deposit issued by a bank. For example, as the general
level of interest rates rise, the value of a Fund's fixed-
income investments, as well as the value of its shares which
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. Certificates of deposit are frequently insured by
an agency of the U.S. government. An investment in each Fund
is not insured by any federal, state or private entity.
In assessing such comparisons of performance, an investor
should keep in mind that the composition of the investments
in the reported indices and averages is not identical to any
Fund's portfolio, that the indices and averages are generally
unmanaged and that the items included in the calculations of
such averages may not be identical to the formulas used by
any Fund to calculate its figures. In addition there can be
no assurance that the Funds will continue their performance
as compared to such other averages.
In promoting the sale of Fund shares, advertisements or
information for each Fund may also include quotes from
Benjamin Franklin, especially Poor Richard's Almanac.
Shareholders should note that the investment results of each
Fund will fluctuate over time, and any presentation of a
Fund's current yield or total return for any period should
not be considered as a representation of what an investment
may earn or what a shareholder's yield or total return may
be in any future period. Shareholders should also note that,
although the Manager believes that there are substantial
benefits to be realized by investing in each Fund's shares,
such investments also involve certain risks. (See the
discussion of investment objectives and policies in each
Fund's Prospectus.)
OTHER FEATURES AND BENEFITS
Each Fund may help investors achieve various investment
goals, such as accumulating money for retirement, saving for
a down payment on a home, college costs and/or other long
term goals. The Franklin College Costs Planner may assist an
investor 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
an investor through the steps to start a retirement savings
program. Of course, an investment in any of the Funds cannot
guarantee that such goals will be met.
MISCELLANEOUS INFORMATION
The Funds of the Trust are members of the Franklin/Templeton
Group, one of the largest mutual fund organizations in the
United States 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 45 years and now services more than 2.4
million shareholder accounts. In 1992, Franklin, a leader in
managing fixed-income mutual funds and an innovator in
creating domestic equity funds, joined forces with Templeton
Worldwide, Inc., a pioneer in international investing.
Together, the Franklin/Templeton Group has over $117 billion
in assets under management for more than 3.3 million
shareholder accounts and offers 97 U.S.-based mutual funds.
Each Fund may identify itself by its Quotron or CUSIP
number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked
Franklin number one of 36 mutual fund groups in service
quality for 1993. One other fund group was also ranked
number one. Franklin has been ranked number one in service
quality by Dalbar for five of the past six years.
The Short-Intermediate Fund is eligible for investment by
the National Marine Fisheries Service Capital Construction
Funds.
The shareholders of a Massachusetts business trust could,
under certain circumstances, be held personally liable as
partners for its obligations. However, the Trust's
Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust.
The Declaration of Trust also provides for indemnification
and reimbursement of expenses out of Trust assets for any
shareholder held personally liable for obligations of the
Trust. The Declaration of Trust provides that the Trust
shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the
Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Funds of which a shareholder
holds shares. The Declaration of Trust further provides that
the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the
protection of the Trust, its shareholders, trustees,
officers, employees and agents to cover possible tort and
other liabilities. Furthermore, the activities of the Trust
as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess
of the Trust's total assets. Thus, the remote risk of a
shareholder's incurring financial loss on account of
shareholder liability is limited to circumstances in which
both inadequate insurance exists and the Trust itself is
unable to meet its obligations.
From time to time, the number of Trust shares held in the
"street name" accounts of various securities dealers for the
benefit of their clients or in centralized securities
depositories may exceed 5% of the total shares outstanding.
As of December 7, 1993, the principal shareholders of the
Funds, beneficial or of record, their addresses and the
amount of their share ownership were as follows:
NUMBER
FUND OF SHARES
PERCENTAGE
SHORT-INTERMEDIATE
City of Scottsdale 2,869,979 11.4%
3939 Civic Center Blvd.
Scottsdale, AZ 85251
OWNERSHIP AND AUTHORITY DISPUTES
In the event of disputes involving multiple claims of
ownership or authority to control a shareholder's account, a
Fund has the right (but has no obligation) to: (a) freeze
the account and require the written agreement of all persons
deemed by the Funds to have a potential property interest in
the account, prior to 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 Internal Revenue
Service in response to a Notice of Levy.
ADDITIONAL INFORMATION FOR INSTITUTIONAL INVESTORS
Because the investments permitted to the Short-Intermediate
Fund are limited to securities issued or guaranteed by the
U.S. government or its agencies and instrumentalities, the
shares of this Fund may be eligible for investment by
federally chartered credit unions. While the Short
Intermediate Fund is not aware of any investments permitted
to it which would destroy such eligibility, it has agreed
for the benefit of such federally chartered credit unions to
refrain from such investments should the situation arise.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa - Bonds which are 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 by an 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 which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or
may be characteristically unreliable over any great length
of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics
as well.
Ba - Bonds which are rated Ba are judged to have
predominantly speculative elements; their future cannot be
considered as well assured. Often the protection of interest
and principal payments may be 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 which are 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 which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - This is the highest rating assigned by Standard &
Poor's 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, they differ from
AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they
normally exhibit protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded,
on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. BB indicates
the lowest degree of speculation and CC the highest degree
of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
FRANKLIN INVESTORS SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
of Franklin Investors Securities Trust:
We have audited the accompanying statements of assets and liabilities of the
various funds comprising Franklin Investors Securities Trust, including each
Fund's statement of investments in securities and net assets, as of October 31,
1993, and the related statements of operations and changes in net assets for the
periods indicated thereon, and the selected per share data and ratios included
under the caption "Financial Highlights" for the periods
indicated in Note 12. 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 investments
and cash held by the custodian as of October 31, 1993, and confirmation by
correspondence with brokers as to securities purchased but not received at that
date, or other auditing procedures where confirmations from brokers were not
received. 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 various funds comprising Franklin Investors Securities Trust as
of October 31, 1993, the results of their operations and the changes in their
net assets for the periods indicated thereon, and the financial highlights
for each of the periods indicated in Note 12, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND
San Francisco, California
December 6, 1993
23
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS .3%
FINANCIAL SERVICES .2%
US 16,200 (d)Grupo Financiero Bancomer, ADS................................................ $ 471,066
------------
HOME BUILDING
US 2,302 (a)NVR, Inc...................................................................... 23,308
------------
METALS .1%
US 7,000 Kloof Gold Mining Co., Ltd., ADR.............................................. 70,000
US 3,000 Orange Free State Investments, Ltd., ADR...................................... 105,750
------------
175,750
------------
TOTAL COMMON STOCKS (COST $614,341)...................................... 670,124
------------
WARRANTS
HOME BUILDING
US 1,193 (a)NVR, Inc...................................................................... 5,816
------------
RESTAURANTS/FOOD SERVICES
US 115 (a)Foodmaker, Inc................................................................ 1,393
------------
TOTAL WARRANTS (COST $5,230)............................................. 7,209
------------
PREFERRED STOCKS .4%
FINANCIAL SERVICES
US 30,000 Nortel Communications, Inc., Series B, ADR (Cost $450,000).................... 555,000
------------
FACE
AMOUNT
-------------
BONDS, NOTES, BILLS & DEBENTURES 83.4%
ARGENTINA 4.8%
US 14,000,000 Republic of Argentina, 4.00%, 03/31/23........................................ 9,292,500
------------
AUSTRALIA 2.1%
AUS 2,396,000 Fanmac Strip, 13.95%, 05/15/06................................................ 1,747,205
AUS 3,000,000 Queensland Treasury Corp., 8.00%, 05/14/03.................................... 2,181,459
AUS 450,000 (f)Snowy Mountain Hydro, notes, 0.00%, 02/01/97.................................. 236,746
------------
4,165,410
------------
CANADA 14.1%
CAN 16,000,000 (f)Canadian Strip, 0.00%, 03/01/08............................................... 3,776,172
CAN 5,000,000 Government of Canada, 10.00%, 06/01/08........................................ 4,685,549
CAN 450,000 Hydro-Quebec, Eurobonds, 11.00%, 02/09/99..................................... 397,332
CAN 1,150,000 Ontario-Hydro, Eurobonds, 10.875%, 01/08/96................................... 965,367
CAN 3,000,000 Ontario-Hydro, Eurobonds, 9.00%, 06/24/02..................................... 2,491,393
CAN 3,500,000 Ontario-Hydro, Eurobonds, 8.90%, 08/18/22..................................... 2,844,553
CAN 1,000,000 Province of British Columbia, 10.15%, 08/29/01................................ 894,310
CAN 12,000,000 Province of British Columbia, 8.00%, 09/09/23................................. 9,089,327
CAN 3,000,000 Province of Quebec, Eurobonds, 8.50%, 04/01/97................................ 2,438,898
------------
27,582,901
------------
DENMARK 4.1%
DAN 23,000,000 Kingdom of Denmark, 9.00%, 11/15/95........................................... 3,587,117
DAN 26,000,000 Kingdom of Denmark, 9.00%, 11/15/00........................................... 4,433,905
------------
8,021,022
------------
FRANCE 4.2%
FR 11,197,437 CB-2 Cetelem Assets Backed Securities, 9.50%, 11/20/96........................ 1,948,823
FR 550,000 French OAT Bond, 9.80%, 01/30/96.............................................. 102,253
FR 20,000,000 French OAT Bond, 7.41%, 01/25/01.............................................. 3,418,498
FR 15,400,000 Government of France, BTAN, 9.00%, 02/12/95................................... 2,728,772
------------
8,198,346
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS, NOTES, BILLS & DEBENTURES (CONT.)
GREAT BRITAIN 6.6%
UK 700,000 Halifax Building Society, floating rate deb., Series B, 5.955%, 09/30/96...... $ 1,041,053
UK 3,500,000 United Kingdom Treasury, 10.00%, 11/15/96..................................... 5,772,348
UK 3,500,000 United Kingdom Treasury, 9.75%, 08/27/02...................................... 6,165,326
------------
12,978,727
------------
ITALY 15.2%
ITY 10,000,000,000 Buoni Poliennali del Tesoro (BTPS), 9.625%, 06/01/03.......................... 6,869,245
ITY 13,000,000,000 Certificati di Credito del Tesoro (CCTS), 11.20%, 01/20/00.................... 8,108,042
ITY 15,000,000,000 Certificati di Credito del Tesoro (CCTS), 10.50%, 08/01/00.................... 9,383,057
ITY 1,710,000,000 Deutshcebank Finance, 12.375%, 11/07/94....................................... 1,091,713
EC 1,500,000 Government of Italy, 9.25%, 03/07/11.......................................... 1,963,082
UK 1,200,000 Government of Italy, 10.50%, 04/28/14......................................... 2,220,008
------------
29,635,147
------------
MEXICO 1.2%
US 700,000 United Mexican States, FRN, 5.00%, 03/31/08................................... 669,375
US 600,000 United Mexican States, FRN, 4.25%, 12/31/19................................... 521,250
US 1,400,000 United Mexican States, Series B, 6.25%, 12/31/19.............................. 1,137,500
------------
2,328,125
------------
NEW ZEALAND 8.5%
NWZ 16,250,000 Electricity Corp. of New Zealand, 10.00%, 10/15/01............................ 11,057,578
NWZ 8,000,000 Government of New Zealand, 10.00%, 03/15/02................................... 5,607,819
------------
16,665,397
------------
SOUTH AFRICA 3.1%
SA 29,350,000 ESCOM, E168, 11.00%, 06/01/08................................................. 6,072,034
------------
SPAIN 8.0%
SP 500,000,000 Government of Spain, 13.65%, 03/15/94......................................... 3,769,173
SP 300,000,000 Government of Spain, 12.00%, 07/15/94......................................... 2,272,226
SP 600,000,000 Government of Spain, 11.40%, 07/15/95......................................... 4,670,886
SP 240,000,000 Government of Spain, 13.45%, 04/15/96......................................... 1,988,086
SP 365,000,000 Government of Spain, 11.60%, 01/15/97......................................... 2,970,551
------------
15,670,922
------------
SWEDEN 7.2%
SWD 10,000,000 Staten Bostadsfinansier, 13.00%, 09/20/95..................................... 1,351,637
SWD 91,000,000 Staten Bostadsfinansier, 11.00%, 01/21/99..................................... 12,712,801
------------
14,064,438
------------
UNITED STATES 1.3%
US 2,000,000 Tele-Communications, Inc., cvt. sub. deb., 9.80%, 02/01/12.................... 2,525,634
------------
VENEZUELA 3.0%
US 4,000,000 Republic of Venezuela, 4.313%, 12/18/07....................................... 2,950,000
US 4,000,000 Republic of Venezuela, 6.75%, 03/31/20........................................ 2,985,000
------------
5,935,000
------------
TOTAL BONDS, NOTES, BILLS & DEBENTURES (COST $163,416,679)............... 163,135,603
------------
TOTAL COMMON STOCKS, WARRANTS, PREFERRED STOCKS, AND BONDS,
NOTES, BILLS & DEBENTURES (COST $164,486,250).......................... 164,367,936
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM SECURITIES 11.1%
GOVERNMENT AGENCIES 5.7%
MEX 16,670,000 (f)Mexican Federal Treasury Certificates (CETES), 0.00%, 03/24/94............... $ 5,070,768
US 5,220,000 (d,f)Offshore Mexican Junior Bond, 0.00%, 07/20/94................................. 6,133,500
------------
TOTAL GOVERNMENT AGENCIES (COST $10,809,397)............................. 11,204,268
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $175,295,647)....... 175,572,204
------------
RECEIVABLES FROM REPURCHASE AGREEMENTS 5.4%
$ 4,740,000(h) Bank of America Government Securities, Inc., 2.98%, 11/01/93
(Maturity Value $5,051,254)
Collateral: U.S. Treasury Notes, 7.75%, 03/31/96............................ 5,050,000
5,435,000(h) Daiwa Securities of America, Inc., 2.95%, 11/01/93
(Maturity Value $5,526,358)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94............................ 5,525,000
------------
TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS (COST $10,575,000).......... 10,575,000
------------
TOTAL INVESTMENTS (COST $185,870,647) 95.2%............................ 186,147,204
OTHER ASSETS AND LIABILITIES, NET 4.8%................................. 9,479,309
------------
NET ASSETS 100.0%...................................................... $195,626,513
============
At October 31, 1993, the net unrealized depreciation based on the cost of
investments for income tax purposes of $186,149,185 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost.................................... $ 8,159,227
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value.................................... (8,161,208)
------------
Net unrealized depreciation............................................... $ (1,981)
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
BTAN - Treasury Bond at Fixed Interest Rate
FRN - Floating Rate Notes
OAT - Obligations Assumable by the Treasurer
COUNTRY LEGEND:
AUS - Australia
CAN - Canada
DAN - Denmark
EC - European Community
FR - France
ITY - Italy
MEX - Mexico
NWZ - New Zealand
SA - South Africa
SP - Spain
SWD - Sweden
UK - United Kingdom
US - United States
*Securities traded in currency of country indicated.
(a)Non-income producing.
(d)See Note 10 regarding Rule 144A securities.
(f)Zero coupon bonds. Accretion rate may vary.
(h)Face amount for repurchase agreements is for the underlying collateral.
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
FACE FRANKLIN SHORT-INTERMEDIATE VALUE
AMOUNT U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Securities 100.4%
$25,000,000 U.S. Treasury Notes, 7.50%, 11/15/01........................................................... $ 28,562,250
6,000,000 U.S. Treasury Notes, 6.00%, 10/15/99........................................................... 6,296,220
17,000,000 (f)U.S. Treasury Strips, 0.00%, 02/15/99.......................................................... 13,099,010
12,000,000 U.S. Treasury Notes, 6.375%, 01/15/99.......................................................... 12,809,880
8,000,000 U.S. Treasury Notes, 4.75%, 08/31/98........................................................... 7,979,920
4,000,000 U.S. Treasury Notes, 5.125%, 06/30/98.......................................................... 4,057,480
10,000,000 U.S. Treasury Notes, 5.125%, 03/31/98.......................................................... 10,159,300
6,000,000 U.S. Treasury Notes, 5.50%, 09/30/97........................................................... 6,198,720
6,500,000 U.S. Treasury Notes, 6.75%, 02/28/97........................................................... 6,965,140
5,000,000 U.S. Treasury Notes, 6.25%, 01/31/97........................................................... 5,279,650
4,000,000 U.S. Treasury Notes, 6.125%, 12/31/96.......................................................... 4,208,720
20,000,000 (f)U.S. Treasury Strips, 0.00%, 08/15/96.......................................................... 17,752,660
74,000,000 U.S. Treasury Notes, 4.25%, 05/15/96........................................................... 74,161,320
5,000,000 (f)U.S. Treasury Strips, 0.00%, 05/15/96.......................................................... 4,495,885
80,010,000 (f)U.S. Treasury Strips, 0.00%, 02/15/96.......................................................... 72,830,463
------------
TOTAL INVESTMENTS (COST $266,425,895) 100.4%....................................... 274,856,618
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.4)%................................... (1,178,637)
------------
NET ASSETS 100.0%................................................................... $273,677,981
============
At October 31, 1993, the net unrealized appreciation based on the cost of investment
for income tax purposes of $266,425,895 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost............................................................. $ 8,490,803
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value............................................................. (60,080)
------------
Net unrealized appreciation................................................................. $ 8,430,723
============
</TABLE>
(f)Zero coupon bonds. Accretion rate may vary.
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS & WARRANTS
HOME BUILDERS
3,872 (a)NVR LP, warrant (cost $16,456).......................................................... $ 18,876
----------
CONVERTIBLE PREFERRED STOCKS 32.2%
AUTOMOTIVE 2.2%
4,400 Ford Motor Co., $4.20 cum. cvt. pfd., Series A.......................................... 460,900
10,300 General Motors Corp., $2.86 cvt. pfd., Series E......................................... 584,525
----------
1,045,425
----------
BANKING 4.3%
5,100 Ahmanson (H.F.) & Co., $3.00 cvt. pfd., Series D........................................ 251,813
7,570 Bank of America, $3.25 cvt. pfd., Series G.............................................. 439,060
7,000 (d)Chemical Bank, $5.00 cvt. pfd........................................................... 587,125
6,800 (d)Citicorp, $5.375 cvt. pfd............................................................... 744,600
----------
2,022,598
----------
BROADCAST/MEDIA .7%
5,800 Evergreen Media Corp., $3.00 cvt. pfd., Series A........................................ 312,475
----------
CONSTRUCTION 1.0%
8,700 (d)McDermott International, $2.875 cum. cvt. pfd., Series C................................ 457,838
----------
ENERGY 2.1%
7,300 Ashland Oil, $3.12 cum. cvt. pfd........................................................ 455,337
10,000 (d)Occidental Petroleum Corp., $3.875 cvt. pfd............................................. 555,000
----------
1,010,337
----------
FINANCIAL SERVICES .8%
6,000 (d)Equitable Cos., $3.00 cvt. pfd., Series C.............................................. 381,750
----------
GOLD .3%
2,600 Battle Mountain Gold, $3.25 cvt. pfd.................................................... 156,975
----------
INDUSTRIAL EQUIPMENT .9%
14,000 Cooper Industries, $1.60 cvt. pfd....................................................... 444,500
----------
LEASING .9%
7,600 GATX Corp., $3.875 cvt. pfd., Series A.................................................. 408,500
----------
LONG DISTANCE/TELECOM 4.8%
30,000 LCI International, Inc., $1.25 cvt. pfd................................................. 885,000
15,000 (d)Mobile Telecommunication, $2.25 cvt. pfd................................................ 641,250
20,000 (d)Philippine Long Distance Telephone Company, $1.44 cvt. pfd.............................. 750,000
----------
2,276,250
----------
METAL & RESOURCES 1.1%
9,200 Armco, Inc., $3.625 cvt. pfd., Series A.................................................. 501,400
----------
OIL & GAS 5.1%
4,000 (d)Diamond Shamrock, $2.50 cvt. pfd......................................................... 230,000
12,000 Gerrity Oil & Gas, $1.50 cvt. pfd........................................................ 306,000
11,100 Maxus Energy Corp., $4.00 cum. cvt. pfd.................................................. 532,800
9,600 Noble Drilling Corp., $2.25 cvt. pfd..................................................... 524,400
12,662 Santa Fe Energy, $1.40 cvt. pfd.......................................................... 251,657
11,100 Snyder Oil Corp., $1.50 cvt. pfd......................................................... 333,000
5,000 (d)Transco Energy, $3.50 cvt. pfd........................................................... 258,750
----------
2,436,607
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
REAL ESTATE .7%
6,250 Catellus Development, $3.75 cvt. pfd., Series A.......................................... $ 357,812
-----------
REAL ESTATE INVESTMENT TRUST 1.1%
18,300 Merry Land & Investment, $1.75 cvt. pfd., Series A....................................... 519,263
-----------
RESTAURANTS .8%
15,100 Flagstar Cos., Inc., $2.25 cvt. pfd., Series A........................................... 362,400
-----------
SAVINGS & LOANS 2.3%
9,700 Great Western Financial, $4.375 cvt. pfd................................................. 590,487
7,900 Roosevelt Financial Group, $3.25 cvt. pfd................................................ 519,425
-----------
1,109,912
-----------
SEMICONDUCTORS .7%
5,000 National Semiconductor, $3.25 cvt. pfd................................................... 347,500
-----------
TEXTILES 1.2%
10,000 (d,j)Fieldcrest Cannon, $3.00 cvt. pfd........................................................ 590,000
-----------
TRANSPORTATION 1.2%
10,000 (d)American Airlines, $3.00 cvt. pfd........................................................ 546,250
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $12,729,082)............................... 15,287,792
-----------
FACE
AMOUNT
- ----------
CONVERTIBLE BONDS 64.7%
ADVERTISING 3.9%
$1,750,000 (d)Omnicom Group, cvt. deb., 4.50%, 09/01/00................................................ 1,850,625
-----------
APPAREL .6%
250,000 L.A. Gear, Inc., cvt. sub. notes, 7.75%, 11/30/02........................................ 281,250
-----------
BANKING 1.2%
500,000 Banco National de Mexico, cvt. deb., 7.00%, 12/15/99..................................... 547,500
-----------
BIOTECHNOLOGY 1.8%
650,000 Centocor, Inc., Eurobond cvt. sub. deb., 6.75%, 10/16/01................................. 487,500
400,000 (d)Genzyme Corp., cvt. sub. deb., 6.75%, 10/01/01........................................... 400,000
-----------
887,500
-----------
BROADCAST/MEDIA 3.4%
400,000 (d)All American Communications, cvt. deb., 6.50%, 10/01/03.................................. 402,000
300,000 (d)RHI Entertainment, Inc., cvt. sub. deb., 6.50%, 06/01/03................................. 387,000
2,000,000 (f)Time Warner, Inc., cvt. liquid yield option notes, 0.00%, 06/22/13....................... 822,500
-----------
1,611,500
-----------
BUILDING MATERIALS .6%
175,000 (d)Owens Corning Fiberglass Corp., cvt. junior sub. deb., 8.00%, 12/30/05................... 285,469
-----------
CABLE 1.7%
2,005,000 (f)Rogers Communication, Inc., cvt. liquid yield option sub. notes, 0.00%, 05/20/13......... 812,025
-----------
ELECTRONIC 1.5%
350,000 Sensormatic Electric Corp., cvt. sub. deb., 7.00%, 05/15/01.............................. 705,250
-----------
GAMING 1.3%
500,000 WMS Industries, cvt. deb., 6.00%, 10/01/02............................................... 597,500
-----------
GROCERY/FOOD 3.3%
500,000 (d)Food Lion, Inc., cvt. sub. deb., 5.00%, 06/01/03......................................... 525,000
500,000 Kroger Co., cvt. junior sub. deb., 6.375%, 12/01/99...................................... 621,875
400,000 (d)Kroger Co., cvt. junior sub. deb., 8.25%, 04/15/11....................................... 424,000
-----------
1,570,875
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
HEALTH CARE 8.6%
$ 300,000 Hillhaven Corp, cvt. sub. deb., 7.75%, 11/01/12.......................................... $ 418,500
400,000 Integrated Health Services, cvt. sub. deb., 6.00%, 01/01/03.............................. 456,000
400,000 (d)Medical Care International, Inc., cvt. sub. deb., 6.75%, 10/01/06........................ 368,000
250,000 Omnicare, Inc., cvt. sub. notes, 5.75%, 10/01/03......................................... 288,750
1,000,000 Quantum Health Resources, cvt. sub. deb., 4.75%, 10/10/00................................ 1,090,000
2,000,000 (e)Roche Holdings, cvt., 0.00%, 09/23/08.................................................... 1,047,500
500,000 Vencor, Inc., cvt. sub. notes, 6.00%, 10/01/02........................................... 477,500
-----------
4,146,250
-----------
INDUSTRIAL EQUIPMENT 1.0%
300,000 Mark IV Industries, Inc., cvt. sub. deb., 6.25%, 02/15/07................................ 469,500
-----------
INSURANCE COMPANIES 3.6%
500,000 Horace Mann Educators Corp., cvt. sub. notes, 4.00%, 12/01/99............................ 510,000
500,000 Leucadia National Corp., cvt., 5.25%, 02/01/03........................................... 512,500
400,000 (d)Scor U.S. Corp., cvt. sub. deb., 5.25%, 04/01/00......................................... 391,500
250,000 Trenwick Group, Inc., cvt. deb., 6.00%, 12/15/99......................................... 281,250
-----------
1,695,250
-----------
LONG DISTANCE/TELECOM 3.9%
500,000 (d,f)Cellular Communications, Inc., cvt. sub. notes, 0.00%, 07/27/99.......................... 387,500
495,000 Cellular, Inc., cvt. sub. deb., 6.75%, 07/15/09.......................................... 482,625
1,000,000 (f)ComCast Cellular, cvt. sub. deb., Series B, 0.00%, 03/05/00.............................. 620,000
300,000 Compania Telefonos de Chile, cvt. sub., ADS, 4.50%, 01/15/03............................. 372,000
-----------
1,862,125
-----------
METAL/MINING 1.2%
500,000 (d)Homestake Mining Co., cvt. sub., 5.50%, 06/23/00......................................... 562,500
-----------
OIL & GAS 6.1%
396,000 Amoco Canada Petroleum Co., Ltd., cvt. sub. deb., Series A, 7.375%, 09/01/13............. 488,070
975,000 Noble Affiliates, cvt. sub. notes, 4.25%, 11/01/03....................................... 1,000,594
550,000 Pennzoil Co., cvt. sub. deb., 6.50%, 01/15/03............................................ 713,625
550,000 Presidio Oil Co., cvt. sub. deb., 9.00%, 03/15/15........................................ 445,500
200,000 (d)Seacor Holdings, Inc., cvt. sub. deb., 6.00%, 07/01/03................................... 234,000
-----------
2,881,789
-----------
POLLUTION CONTROL 1.4%
400,000 Air & Water Technology, cvt. sub. deb., 8.00%, 05/15/02.................................. 382,000
290,000 Sanifill, Inc., cvt. sub. deb., 7.50%, 06/01/06.......................................... 286,375
-----------
668,375
-----------
PUBLISHING/NEWSPAPERS 1.0%
1,500,000 (f)Hollinger, Inc., cvt. sub. notes, 0.00%, 10/05/13........................................ 466,875
-----------
REAL ESTATE 2.1%
1,000,000 (d)Henderson Capital International, cvt. deb., 4.00%, 10/27/96.............................. 1,002,500
-----------
REAL ESTATE INVESTMENT TRUST 4.1%
525,000 MediTrust, cvt. deb., 9.00%, 01/01/02.................................................... 660,844
1,250,000 Mid Atlantic Realty Trust, cvt. sub. deb., 7.625%, 09/15/03.............................. 1,268,750
-----------
1,929,594
-----------
RETAIL 2.4%
200,000 Home Depot, Inc., cvt. sub. notes, 4.50%, 02/15/97....................................... 244,000
300,000 Michael Stores, cvt., 4.75%, 01/15/03.................................................... 343,500
200,000 Pier One Imports, Inc., cvt. sub. notes, 6.875%, 04/01/02................................ 221,000
300,000 Staples, Inc., cvt. sub. deb., 5.00%, 11/01/99........................................... 310,500
-----------
1,119,000
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
SEMICONDUCTORS 1.8%
$ 900,000 (f)Motorola, Inc., cvt. liquid yield option sub. notes, 0.00%, 09/07/09.................... $ 861,750
-----------
SOFTWARE .7%
250,000 Sterling Software, cvt. sub. deb., 5.75%, 02/01/03....................................... 321,250
-----------
STEEL 1.3%
500,000 Essar Gujarat, Ltd., cvt., 5.50%, 08/05/98............................................... 602,500
-----------
TECHNOLOGY 4.2%
700,000 Conner Peripherals, Inc., cvt. deb., 6.50%, 03/01/02..................................... 603,750
1,750,000 (d,f)Silicon Graphics, cvt. sub. deb., 0.00%, 11/02/13........................................ 790,780
600,000 (d)SynOptics Communications, Inc., cvt. sub. deb., 5.25%, 05/15/03......................... 585,000
-----------
1,979,530
-----------
TRANSPORTATION 2.0%
1,000,000 Air Express International, cvt. sub. deb., 6.00%, 01/15/03............................... 960,000
-----------
TOTAL CONVERTIBLE BONDS (COST $27,492,184).......................................... 30,678,282
-----------
SHORT TERM SECURITIES .5%
BANKING .5%
25,000 (l)Banco de Santander S.A., cvt. deb., 9.00%, 06/24/94 (Cost $205,398)...................... 244,788
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $40,443,120).................... 46,229,738
-----------
RECEIVABLES FROM REPURCHASE AGREEMENTS 4.2%
1,960,000 (h)Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $1,970,484)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94 (Cost $1,970,000)..................... $ 1,970,000
-----------
TOTAL INVESTMENTS (COST $42,413,120) 101.6%......................................... 48,199,738
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (1.6)%................................... (759,468)
-----------
NET ASSETS 100.0% .................................................................. $47,440,270
===========
At October 31, 1993, the net unrealized appreciation based on the cost of investments
for income tax purposes of $42,413,120 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost...................................................... $ 6,135,930
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value...................................................... (349,312)
-----------
Net unrealized appreciation.......................................................... $ 5,786,618
===========
(a)Non-income producing.
(d)See Note 10 regarding Rule 144A securities.
(f)Zero coupon bonds. Accretion rate may vary.
(h)Face amount for repurchase agreements is for the underlying collateral.
(j)See Note 1 regarding securities purchased on a when-issued or to-be-announced basis.
(l)Face amount stated in foreign currencies, value in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 99.7%
184,156,840 U.S. Government ARM Portfolio (Note 1)...................................................... $1,808,420,173
--------------
TOTAL INVESTMENTS (COST $1,843,714,150) 99.7%........................................... 1,808,420,173
OTHER ASSETS AND LIABILITIES, NET .3%................................................... 5,083,843
--------------
NET ASSETS 100.0%....................................................................... $1,813,504,016
==============
At October 31, 1993, the net unrealized depreciation based on the cost of investments
for income tax purposes of $1,843,825,431 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost......................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value......................................................... (35,405,258)
--------------
Net unrealized depreciation............................................................. $ (35,405,258)
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 65.4%
CHEMICALS 8.0%
15,700 Chemed Corp................................................................................ $ 492,588
13,200 Dow Chemical Co............................................................................ 732,600
13,300 duPont, (E.I.) de Nemours & Co............................................................. 635,075
10,200 Imperial Chemical Industries, Plc., ADR.................................................... 438,600
16,000 Olin Corp.................................................................................. 742,000
16,200 Union Carbide Corp......................................................................... 319,950
-----------
3,360,813
-----------
CONGLOMERATES 3.5%
41,800 Hanson, Plc., Sponsored ADR................................................................ 841,225
29,000 Ogden, Corp................................................................................ 696,000
-----------
1,537,225
-----------
FINANCE 5.3%
45,000 Ahmanson (H.F.) & Co....................................................................... 815,625
30,000 Corporacion Bancaria de Espana, S.A., ADR.................................................. 667,500
38,300 Great Western Financial Corp............................................................... 732,487
-----------
2,215,612
-----------
INSURANCE 4.6%
9,700 Aetna Life & Casualty Co................................................................... 637,774
9,000 CIGNA Corp................................................................................. 604,125
19,400 Travelers Corp............................................................................. 683,850
-----------
1,925,749
-----------
MEDICAL SUPPLIES 1.1%
19,200 Baxter International, Inc.................................................................. 456,000
-----------
NATURAL GAS 1.7%
5,000 Laclede Gas Co............................................................................. 241,250
14,800 Sonat, Inc................................................................................. 460,650
-----------
701,900
-----------
OIL-INTEGRATED-INTERNATIONAL 9.0%
6,500 Atlantic Richfield Co...................................................................... 716,625
6,700 Chevron Corp............................................................................... 649,900
10,000 Exxon Corp................................................................................. 653,750
8,600 Mobil Corp................................................................................. 700,900
4,800 Royal Dutch Petroleum Co................................................................... 507,600
8,500 Texaco, Inc................................................................................ 579,063
-----------
3,807,838
-----------
PAPER & FOREST PRODUCTS 1.6%
15,400 Potlatch Corp.............................................................................. 675,675
-----------
PHARMACEUTICAL 6.6%
11,800 American Home Products Corp................................................................ 737,500
16,600 Bristol-Myers Squibb Co.................................................................... 975,250
16,900 Merck & Co., Inc........................................................................... 542,913
15,600 Zeneca Group, Plc, ADR..................................................................... 532,350
-----------
2,788,013
-----------
PHOTOGRAPHY 1.2%
7,900 Eastman Kodak Co........................................................................... 497,700
-----------
PUBLISHING 1.6%
9,900 Dun & Bradstreet Corp...................................................................... 663,300
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
RETAIL STORES 1.4%
24,900 K-mart Corp................................................................................ $ 610,050
-----------
STEEL 1.3%
9,800 Carpenter Technology Corp.................................................................. 536,550
-----------
TOBACCO 3.1%
18,100 American Brands, Inc....................................................................... 624,450
12,900 Philip Morris Cos., Inc.................................................................... 693,375
-----------
1,317,825
-----------
TRANSPORTATION 1.3%
24,500 Yellow Corp................................................................................ 563,500
-----------
UTILITIES - ELECTRIC 6.2%
10,200 Delmarva Power & Light Co.................................................................. 244,800
14,600 FPL Group, Inc............................................................................. 574,875
3,500 New England Electric System................................................................ 146,124
14,900 Ohio Edison Co............................................................................. 359,463
19,800 Pacificorp................................................................................. 388,575
24,900 SCEcorp.................................................................................... 522,900
8,500 Texas Utilities Co......................................................................... 382,500
-----------
2,619,237
-----------
UTILITIES - TELEPHONE 7.9%
10,300 BellSouth Corp............................................................................. 646,325
16,300 GTE Corp................................................................................... 647,925
21,300 NYNEX Corp................................................................................. 899,925
9,500 Pacific Telesis Group...................................................................... 521,313
11,900 U.S. West, Inc............................................................................. 596,488
-----------
3,311,976
-----------
TOTAL COMMON STOCKS (COST $23,552,506) 27,588,963
-----------
CONVERTIBLE PREFERRED STOCKS 20.7%
10,900 (d)American Airlines, $3.00 cvt. pfd.......................................................... 595,413
4,000 Battle Mountain Gold, $3.25 cvt. pfd....................................................... 241,500
6,000 Burlington Northern, $6.25 cvt. pfd., Series A............................................. 409,500
6,600 (d)Chemical Bank, $5.00 cvt. pfd.............................................................. 553,575
6,000 (d)Citicorp, $5.375 cum. cvt. adj. rate pfd................................................... 657,000
11,100 Delta Airlines, $3.50 cvt. pfd., Series C.................................................. 636,863
4,200 Evergreen Media Corp., $3.00 cvt. pfd., Series A........................................... 226,275
1,500 Ford Motor Co., $4.20 cum. cvt. pfd., Series A............................................. 157,125
11,100 General Motors Corp., $3.31 cvt. pfd., Series A............................................ 530,025
8,600 General Motors Corp., $3.25 cvt. pfd., Series C............................................ 488,050
5,400 Great Western Financial Corp., $8.75 cvt. pfd.............................................. 328,724
8,600 K-mart Corp., $3.41 cvt. pfd............................................................... 425,700
29,000 Kaufman & Broad Homes, $1.52 cvt. pfd., Series B........................................... 616,250
7,500 (d)Kemper Co., $2.875 cvt. pfd., Series E..................................................... 373,593
9,700 (d)Occidental Petroleum Corp., $3.875 cvt. pfd................................................ 538,350
69,700 RJR Nabisco Holdings Corp., $.835 cvt. pfd................................................. 426,913
6,200 Roosevelt Financial Group, $3.25 cvt. pfd.................................................. 407,650
11,600 Tandy Corp. $2.140, cvt. pfd., Series C.................................................... 408,900
3,400 (d)Transco $3.50, cvt. pfd.................................................................... 175,950
28,500 Westinghouse Electric, $1.53 cvt. pfd...................................................... 527,250
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $7,680,093) 8,724,606
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN EQUITY INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT SECURITIES 2.5%
$1,000,000 U.S. Treasury Notes, 6.00%, 11/30/97 (Cost $997,734)....................................... $ 1,050,310
------------
TOTAL COMMON STOCKS, CONVERTIBLE PREFERRED STOCKS AND GOVERNMENT SECURITIES
(COST $32,230,333).................................................................. 37,363,879
------------
Receivables from Repurchase Agreements 11.9%
5,000,000 (h)Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $5,031,237)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94 (Cost $5,030,000)....................... 5,030,000
-----------
TOTAL INVESTMENTS (COST $37,260,333) 100.5%.......................................... 42,393,879
LIABILITIES IN EXCESS AND OTHERS ASSETS, NET (.5)%................................... (216,649)
-----------
NET ASSETS 100.0%.................................................................... $42,177,230
===========
At October 31, 1993, the net unrealized appreciation based on the cost of investments
for income tax purposes of $37,262,565 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost....................................................... $ 5,524,564
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value....................................................... (393,250)
-----------
Net unrealized appreciation........................................................... $ 5,131,314
===========
</TABLE>
(d)See Note 10 regarding Rule 144A securities.
(h)Face amount for repurchase agreements is for the underlying collateral.
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN ADJUSTABLE RATE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.7%
3,795,340 Adjustable Rate Securities Portfolio (Note 1)............................................. $38,067,265
-----------
TOTAL INVESTMENTS (COST $38,103,334) 100.7%.......................................... 38,067,265
LIABILITIES IN EXCESS AND OTHER ASSETS, NET (.7)%.................................... (258,260)
-----------
NET ASSETS 100.0%.................................................................... $37,809,005
===========
At October 31, 1993, the net unrealized depreciation based on the cost of investments
for income tax purposes of $38,104,327 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost....................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value....................................................... (37,062)
-----------
Net unrealized depreciation........................................................... $ (37,062)
===========
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN FRANKLIN ADJUSTABLE FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT FRANKLIN EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- ------------------ --------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments:
At identified cost........ $175,295,647 $266,425,895 $40,443,120 $1,843,714,150 $32,230,333 $38,103,334
============ ============ =========== ============== =========== ===========
At value.................. 175,572,204 274,856,618 46,229,738 1,808,420,173 37,363,879 38,067,265
Receivables from
repurchase agreements
at value and cost......... 10,575,000 - 1,970,000 - 5,030,000 -
Cash....................... 912,062 7,237 70,657 2,719,550 180,560 -
Receivables:
Dividends and interest.... 5,706,563 2,990,231 399,235 - 195,033 -
Investment securities
sold..................... 21,005,812 - 78,116 - 143,743 -
Capital shares sold....... 623,553 711,939 181,756 17,902,314 199,143 16,964
Unrealized appreciation on
foreign currency forward
contracts (Note 2)........ 78,055 - - - - -
Other...................... - - - - - 461
Receivable from affiliates. - - 49,139 - 45,863 -
------------ ------------ ----------- -------------- ----------- -----------
Total assets............ 214,473,249 278,566,025 48,978,641 1,829,042,037 43,158,221 38,084,690
------------ ------------ ----------- -------------- ----------- -----------
Liabilities:
Payables:
Investment securities
purchased:
Regular delivery......... 18,509,074 - 1,019,598 - 961,550 -
When-issued basis
(Note 1)................ - - 500,000 - - -
Capital shares
repurchased.............. 130,157 4,732,938 6,079 9,454,376 7,629 275,685
Dividends to shareholders. - - - 5,437,973 - -
Distribution fees......... - - - 382,505 - -
Administration fees....... - - - 157,866 - -
Management fees........... 91,627 111,680 - - - -
Shareholder servicing
cost..................... 6,151 5,050 2,100 27,137 2,201 -
Accrued expenses and
other payables........... 109,727 38,376 10,594 78,164 9,611 -
------------ ------------ ----------- -------------- ----------- -----------
Total liabilities....... 18,846,736 4,888,044 1,538,371 15,538,021 980,991 275,685
------------ ------------ ----------- -------------- ----------- -----------
Net assets, at value....... $195,626,513 $273,677,981 $47,440,270 $1,813,504,016 $42,177,230 $37,809,005
============ ============ =========== ============== =========== ===========
Net assets consist of:
Undistributed net
investment income........ $ 1,060,001 $ 75,286 $ 153,988 $ (3,106,684) $ 325,509 $ -
Unrealized appreciation
(depreciation) on
investments.............. 276,557 8,430,723 5,786,618 (35,293,977) 5,133,546 (36,069)
Unrealized depreciation
on translation of
assets and liabilities
in foreign currencies.... (98,891) - (35) - - -
Accumulated net
realized gain (loss)..... 1,614,693 2,326,356 454,206 (9,738,510) 981,826 (137)
Capital shares............ 209,784 253,410 37,092 1,856,630 28,288 37,660
Additional paid-in
capital.................. 192,564,369 262,592,206 41,008,401 1,859,786,557 35,708,061 37,807,551
------------ ------------ ----------- -------------- ----------- -----------
Net assets, at value....... $195,626,513 $273,677,981 $47,440,270 $1,813,504,016 $42,177,230 $37,809,005
============ ============ =========== ============== =========== ===========
Shares outstanding......... 20,978,367 25,340,952 3,709,205 185,663,040 2,828,752 3,765,966
============ ============ =========== ============== =========== ===========
Net asset value per share.. $9.33 $10.80 $12.79 $9.77 $14.91 $10.04
============ ============ =========== ============== =========== ===========
Representative computation
(Franklin Global Government
Income Fund) of net asset
value and offering price
per share:
Net asset value and
redemption price per share
($195,626,513 / 20,978,367) $9.33
============
Maximum offering price+*
(100/96 of $9.33)......... $9.72
============
</TABLE>
+The maximum offering price for each of the other series of the Trust is
calculated as follows: Franklin Short-Intermediate U.S. Government Securities
Fund - 100/97.75 of $10.80; Franklin Convertible Securities Fund - 100/96 of
$12.79; Franklin Adjustable U.S. Government Securities Fund - 100/97.75 of
$9.77; Franklin Equity Income Fund - 100/96 of $14.91; Franklin Adjustable Rate
Securities Fund - 100/97.75 of $10.04.
*On sales of $100,000 or more the offering price is reduced as stated in the
section of the Prospectus entitled "How to Buy Shares of the Fund."
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND
--------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Investment income:
Interest (Note 1)................................ $11,438,242 $10,176,446 $ 981,701 $ --
Dividends........................................ 25,014 -- 485,546 77,341,909
Realized foreign currency gain (loss)............ (1,783,238) -- 1,199 --
----------- ----------- ---------- ------------
Total income.............................. 9,680,018 10,176,446 1,468,446 77,341,909
----------- ----------- ---------- ------------
Expenses:
Management fees (Note 9)......................... 746,129 897,620 8,346 --
Administration fees (Note 9)..................... -- -- -- 1,798,293
Shareholder servicing costs (Note 9)............. 50,392 42,932 14,517 272,952
Distribution fees (Note 9)....................... -- -- -- 4,285,695
Reports to shareholders.......................... 51,614 47,859 22,776 351,871
Custodian fees................................... 110,758 21,297 3,747 --
Professional fees................................ 15,768 21,515 4,358 27,405
Trustees' fees and expenses...................... 6,706 10,056 1,358 96,794
Registration & filing fees....................... 3,466 -- 6,041 19,546
Amortization of organization costs
(Note 5)....................................... 788 -- -- --
Other............................................ 6,541 17,038 5,116 31,526
Payments from Manager (Note 9)................... -- -- -- --
----------- ----------- ---------- ------------
Total expenses............................ 992,162 1,058,317 66,259 6,884,082
----------- ----------- ---------- ------------
Net investment income................... 8,687,856 9,118,129 1,402,187 70,457,827
----------- ----------- ---------- ------------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss)................ 3,867,132 2,327,131 514,896 (7,642,575)
Net realized gain on written
foreign currency options which
expired (Note 3)...................... 164,812 -- -- --
Net unrealized appreciation
(depreciation):
Investments........................... 11,494,774 3,329,742 3,705,700 (11,107,442)
Translation of assets and
liabilities in foreign currencies... (348,304) -- (35) --
----------- ----------- ---------- ------------
Net realized and unrealized gain (loss) on
investments...................................... 15,178,414 5,656,873 4,220,561 (18,750,017)
----------- ----------- ---------- ------------
Net increase in net assets resulting from
operations....................................... $23,866,270 $14,775,002 $5,622,748 $ 51,707,810
=========== =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
SPECIAL EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND
-------------- ---------------
<S> <C> <C>
Investment income:
Interest (Note 1)................................ $ 141,288 $ --
Dividends........................................ 1,380,662 949,089
Realized foreign currency gain (loss)............ -- --
---------- --------
Total income.............................. 1,521,950 949,089
---------- --------
Expenses:
Management fees (Note 9)......................... 5,146 --
Administration fees (Note 9)..................... -- --
Shareholder servicing costs (Note 9)............. 15,017 4,237
Distribution fees (Note 9)....................... -- 52,449
Reports to shareholders.......................... 25,277 7,042
Custodian fees................................... 3,060 --
Professional fees................................ 4,145 5,126
Trustees' fees and expenses...................... 1,280 --
Registration & filing fees....................... 4,997 19,700
Amortization of organization costs
(Note 5)....................................... 59 --
Other............................................ 3,061 21
Payments from Manager (Note 9)................... -- (88,575)
---------- --------
Total expenses............................ 62,042 --
---------- --------
Net investment income................... 1,459,908 949,089
---------- --------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss)................ 984,058 (137)
Net realized gain on written
foreign currency options which
expired (Note 3)...................... -- --
Net unrealized appreciation
(depreciation):
Investments........................... 2,263,533 (40,575)
Translation of assets and
liabilities in foreign currencies... -- --
---------- --------
Net realized and unrealized gain (loss) on
investments...................................... 3,247,591 (40,712)
---------- --------
Net increase in net assets resulting from
operations....................................... $4,707,499 $908,377
========== ========
</TABLE>
The acccompanying notes are an integral part of these financial statements.
38
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
AND FOR THE YEAR ENDED JANUARY 31, 1993
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND
------------------------------ -------------------------------
NINE MONTHS YEAR ENDED NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93 ENDED 10/31/93 01/31/93
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 8,687,856 $ 8,823,242 $ 9,118,129 $ 10,726,589
Net realized gain on investments............ 3,867,132 614,712 2,327,131 4,383,930
Net realized gain on written foreign
currency options which expired............ 164,812 626,559 -- --
Net unrealized appreciation
(depreciation) on investments............. 11,494,774 (10,408,436) 3,329,742 3,498,538
Net unrealized appreciation
(depreciation) on translation of
assets and liabilities denominated
in foreign currencies..................... (348,304) 245,635 -- --
------------ ------------ ------------ ------------
Net increase (decrease) in
net assets resulting from
operations........................... 23,866,270 (98,288) 14,775,002 18,609,057
Distributions to shareholders:
From undistributed net
investment income........................... (8,687,856) (8,823,242) (9,354,403) (10,507,984)
From distribution in excess of net
investment income (Note 7)................ (2,174,626) (655,580) -- --
From net realized capital gains............. -- (1,269,959) (114,640) (5,408,200)
From tax return of capital
distribution (Note 7)..................... -- (1,914,600) -- --
Increase in net assets from capital
share transactions (Note 6)................... 28,723,568 87,749,900 32,990,155 68,998,817
------------ ------------ ------------ ------------
Net increase in net assets............. 41,727,356 74,988,231 38,296,114 71,691,690
Net assets:
Beginning of period......................... 153,899,157 78,910,926 235,381,867 163,690,177
------------ ------------ ------------ ------------
End of period............................... $195,626,513 $153,899,157 $273,677,981 $235,381,867
============ ============ ============ ============
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ -- $ 321,300 $ 102,695
============ ============ ============ ============
End of period............................... $ 1,060,001 $ -- $ 75,286 $ 321,300
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE
SECURITIES FUND
------------------------------
NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93
-------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 1,402,187 $ 1,353,279
Net realized gain on investments............ 514,896 1,169,942
Net realized gain on written foreign
currency options which expired............ -- --
Net unrealized appreciation
(depreciation) on investments............. 3,705,700 1,135,980
Net unrealized appreciation
(depreciation) on translation of
assets and liabilities denominated
in foreign currencies..................... (35) --
----------- -----------
Net increase (decrease) in
net assets resulting from
operations........................... 5,622,748 3,659,201
Distributions to shareholders:
From undistributed net
investment income........................... (1,518,536) (1,436,879)
From distribution in excess of net
investment income (Note 7)................ -- --
From net realized capital gains............. -- --
From tax return of capital
distribution (Note 7)..................... -- --
Increase in net assets from capital
share transactions (Note 6)................... 15,029,224 5,802,271
----------- -----------
Net increase in net assets............. 19,133,436 8,024,593
Net assets:
Beginning of period......................... 28,306,834 20,282,241
----------- -----------
End of period............................... $47,440,270 $28,306,834
=========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ 270,337 $ 353,937
=========== ===========
End of period............................... $ 153,988 $ 270,337
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
AND FOR THE YEAR ENDED JANUARY 31, 1993
U.S. Government Securities Fund Franklin Equity Income Fund Securities Fund
Nine Months Year Ended Nine Months Year Ended Nine Months Year Ended
Ended 10/31/93 01/31/93 Ended 10/31/93 01/31/93 Ended 10/31/93 01/31/93
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN EQUITY INCOME FUND
----------------------------------- -------------------------------
NINE MONTHS YEAR ENDED NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93 ENDED 10/31/93 01/31/93
---------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 70,457,827 $ 176,702,868 $ 1,459,908 $ 1,037,080
Net realized gain (loss) on
investments............................... (7,642,575) (2,095,935) 984,058 598,873
Net unrealized appreciation
(depreciation) on investments............. (11,107,442) (32,428,773) 2,263,533 1,541,457
--------------- -------------- ----------- -----------
Net increase in net assets
resulting from operations............ 51,707,810 142,178,160 4,707,499 3,177,410
Distributions to shareholders:
From undistributed net investment
income.................................... (69,480,027) (177,197,215) (1,152,084) (1,061,394)
From distribution in excess of net
investment income (Note 7)................ -- (4,177,392) -- --
From net realized capital gains............. -- (1,053,980) (205,929) (244,963)
Increase (decrease) in net assets from
capital share transactions (Note 6)........... (1,140,147,375) (501,740,946) 12,735,376 8,077,442
--------------- -------------- ----------- -----------
Net increase (decrease) in net
assets............................... (1,157,919,592) (541,991,373) 16,084,862 9,948,495
Net assets:
Beginning of period......................... 2,971,423,608 3,513,414,981 26,092,368 16,143,873
--------------- -------------- ----------- -----------
End of period............................... $ 1,813,504,016 $2,971,423,608 $42,177,230 $26,092,368
=============== ============== =========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ 494,347 $ 16,794 $ 41,108
=============== ============== =========== ===========
End of period............................... $ (3,106,684) $ -- $ 325,509 $ 16,794
=============== ============== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE RATE
SECURITIES FUND
------------------------------
NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93
-------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 949,089 $ 417,186
Net realized gain (loss) on
investments............................... (137) 34
Net unrealized appreciation
(depreciation) on investments............. (40,575) 4,506
----------- -----------
Net increase in net assets
resulting from operations............ 908,377 421,726
Distributions to shareholders:
From undistributed net investment
income.................................... (949,089) (417,186)
From distribution in excess of net
investment income (Note 7)................ -- --
From net realized capital gains............. (34) --
Increase (decrease) in net assets from
capital share transactions (Note 6)........... 25,328,996 12,516,115
----------- -----------
Net increase (decrease) in net
assets............................... 25,288,250 12,520,655
Net assets:
Beginning of period......................... 12,520,755 100
----------- -----------
End of period............................... $37,809,005 $12,520,755
=========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ --
=========== ===========
End of period............................... $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is an open-end management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended. The Trust currently has six separate funds (the Funds) in
operation consisting of five separate diversified Funds: Franklin
Short-Intermediate U.S. Government Securities Fund (the Short-Intermediate
Fund), Franklin Convertible Securities Fund (the Convertible Fund), Franklin
Adjustable U.S. Government Securities Fund (the Adjustable U.S. Government
Fund), Franklin Equity Income Fund (the Equity Income Fund), and Franklin
Adjustable Rate Securities Fund (the Adjustable Rate Fund); and one
non-diversified Fund: Franklin Global Government Income Fund (the Global Fund).
Prior to June 1, 1993, the Global Fund was known as the Global Opportunity
Income Fund. On August 17, 1993, the Board of Trustees approved the name change
of Franklin Special Equity Income Fund to Franklin Equity Income Fund effective
August 17, 1993. Each of the Funds issues a separate series of the Trust's
shares and maintains a totally separate investment portfolio.
The Adjustable Rate Fund and the Adjustable U.S. Government Fund invest
substantially all of their assets in the Adjustable Rate Securities Portfolio
and the U.S. Government Adjustable Rate Mortgage Portfolio, respectively. Both
are open-end, diversified management investment companies having the same
investment objective as the Adjustable Rate Fund and Adjustable U.S. Government
Fund. The financial statements of the U.S. Government Adjustable Rate Mortgage
Portfolio and Adjustable Rate Securities Portfolio, including the Statements of
Investments, are included elsewhere in this report and should be read in
conjunction with the financial statements of the Adjustable U.S. Government Fund
and Adjustable Rate Fund.
On June 15, 1993, the Board of Trustees authorized a change in the fiscal year
end of the Trust from January 31 of each year to October 31.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATIONS:
Portfolio securities listed on a U.S. 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, at the mean between the most recent quoted bid and asked prices. Other
securities for which market quotations are readily available are valued at
current market values, obtained from a pricing service, which are 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 securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined by
the Manager. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
current value.
The values of the Adjustable Rate Fund and the Adjustable U.S. Government Fund
reflect the Funds' proportionate interest in the net assets of the Adjustable
Rate Securities Portfolios and the U.S. Government Adjustable Rate Mortgage
Portfolio, respectively. At October 31, 1993, the Adjustable Rate Fund owns 31%
of the Adjustable Rate Securities Portfolio and Adjustable U.S. Government Fund
owns 85% of the U.S. Government Adjustable Rate Mortgage Portfolio. The
Portfolios' shares held by the Funds are valued at the net asset value of the
Portfolios.
Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner and are translated into U.S.
dollars at current market quotations of their respective currency denomination
against U.S. dollars last quoted by a major bank or, if no such quotation is
available, at the rate of exchange determined in accordance with policies
established by the Board of Trustees.
The fair values of securities restricted as to resale, or other securities for
which market quotations are not readily available, if any, are determined
following procedures approved by the Board of Trustees.
B. INCOME TAXES:
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no income tax provision is
required. Each Fund is treated as a separate entity in the determination of
compliance with the Internal Revenue Code.
41
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Short-Intermediate Fund and Adjustable Rate Fund dividend
distributions are declared each day the New York Stock Exchange is open for
business equal to an amount per day set from time to time by the Board of
Trustees and are payable to shareholders of record at the beginning of business
on the ex-date. Once each month, dividends are reinvested in additional shares
of each Fund or paid in cash as requested by the shareholders. Interest income
and estimated expenses are accrued daily. Bond discount and premium are
amortized as required by the Internal Revenue Code.
Distributions from undistributed net investment income, and net realized capital
gains from security transactions, to the extent they exceed available capital
loss carryovers, are generally made during each year to avoid the 4% excise tax
imposed on regulated investment companies by the Internal Revenue Code.
E. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of the net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
F. FOREIGN CURRENCY TRANSLATION:
The accounting records of the Trust are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, income and expenses
are translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recognized as adjustments to investment
income when reported by the custodian bank.
G. SECURITIES TRADED ON A WHEN-ISSUED (WI) BASIS:
The Funds may trade securities on a WI or delayed delivery basis with payment
and delivery scheduled for a future time, generally within two weeks. These
transactions are subject to market fluctuations and are subject to the risk that
the value at delivery may be more or less than the purchase price when the
transactions were entered into. Although the Funds will generally purchase these
securities with the intention of acquiring such securities, they may sell such
securities before the settlement date. The Funds have set aside sufficient
investment securities as collateral for securities purchased on a WI basis.
Securities purchased on a WI basis are identified on the accompanying statement
of investments in securities and net assets.
H. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS:
Effective October 31, 1993. the Funds adopted AICPA Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. As a
result, components of net assets have been reclassified to reconcile financial
statement amounts with distributions determined in accordance with income tax
regulations, as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paid-in capital............... $ (425,734) $ -- $ -- $ 4,203,966 $(891) $ --
Undistributed Net Investment
Income...................... 3,234,627 (9,740) -- (4,084,470) 891 --
Accumulated Net Realized
Gain (Loss)................. (2,808,893) 9,740 -- (119,496) -- --
</TABLE>
42
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
2. FORWARD FOREIGN CURRENCY CONTRACTS:
A forward currency contract, which is individually negotiated and privately
traded by currency traders and their customers, is an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date.
The Global Fund may enter into forward contracts with the goal of minimizing the
risk to the Fund from adverse changes in the relationship between currencies or
to enhance income. The Fund may also enter into a forward contract in relation
to a security denominated in a foreign currency in order to ``lock in'' the U.S.
dollar price of that security.
The Fund sets aside or segregates in its custodian bank sufficient cash, cash
equivalents or readily marketable debt securities as deposits or commitments
created by open forward contracts. The Fund intends to cover any of these
commitments to deliver currency under these contracts by acquiring a sufficient
amount of the underlying currency. The segregated account is marked to market on
a daily basis. The Fund could be exposed to risk if counterparties to the
contracts are unable to meet the terms of their contracts or if the value of the
foreign currency changes unfavorably.
As of October 31, 1993, the Global Fund had the following foreign currency
forward contracts outstanding:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO SELL IN EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- ---------------------------------- --------------- --------------- -----------
<S> <C> <C> <C>
500,000,000 Belgium Francs U.S. $13,336,961 11/04/93 U.S. $(381,966)
300,000,000 Belgium Francs 8,253,095 11/08/93 22,869
300,000,000 Belgium Francs 8,408,072 01/10/94 259,441
240,000,000 French Francs 40,996,208 11/09/93 181,287
61,578,000 French Francs 10,526,333 11/10/93 55,482
----------- --------
$81,520,669 137,113
=========== --------
CONTRACTS TO BUY
- ----------------------------------
13,800,000 German Deutschemarks 8,245,698 11/02/93 (17,210)
47,000,000 German Deutschemarks 28,065,566 11/02/93 (41,848)
----------- ---------
U.S. $36,311,264 (59,058)
=========== ---------
Net unrealized appreciation U.S. $ 78,055
=========
</TABLE>
3. OPTION CONTRACTS:
The Global Fund may write covered put and call options and purchase put and call
options which trade in the over-the-counter (OTC) market. OTC call options give
the holder the right to buy an underlying security or currency from an option
writer at a stated exercise price; OTC put options give the holder the right to
sell an underlying security or currency to an option writer at a stated exercise
price. OTC options are arranged directly with dealers. Because there is no
exchange, pricing is typically negotiated by reference to information from
market makers.
Transactions in purchased options for the nine months ended October 31, 1993
were as follows:
<TABLE>
<CAPTION>
CALL PUT
------------------------- ----------------------------
FACE FACE
AMOUNT AMOUNT
COST OPTIONED COST OPTIONED
---------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at January 31, 1993......... $ 315,000 7,000,000 $ -- --
Options purchased on currencies......... -- -- 164,812 3,000,000,000
Options exercised on currencies......... -- -- (164,812) (3,000,000,000)
Options exercised on security........... (315,000) (7,000,000) -- --
--------- ---------- -------- --------------
Outstanding at October 31, 1993......... $ -- -- $ -- --
========= ========== ======== ==============
</TABLE>
43
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. OPTION CONTRACTS: (CONT.)
Transactions in written options on currencies for the nine months ended October
31, 1993 were as follows:
CALL
-----------------------------
AMOUNT OF
AMOUNT OF CURRENCIES
PREMIUMS OPTIONED
--------- ---------------
Outstanding at January 31, 1993............ $ - -
Options written............................ 639,812 3,050,000,000
Options exercised.......................... (475,000) (50,000,000)
Options expired............................ (164,812) (3,000,000,000)
--------- ---------------
Outstanding at October 31, 1993............ $ - -
========= ===============
The Global Fund realized a net short term capital gain of $11,102 and $164,812
on purchased options and on premiums received on expired written options,
respectively.
4. REPURCHASE AGREEMENTS:
The Trust may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. In a repurchase agreement, the Funds purchase a U.S.
government security from a dealer or bank subject to an agreement to resell it
at a mutually agreed upon price and date. Such a transaction is accounted for as
a loan by the Funds to the seller, collateralized by the underlying security.
The transaction requires the initial collateralization of the seller's
obligation by U.S. government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Funds, with the
value of the underlying security marked to market daily to maintain coverage of
at least 100%. The collateral is delivered to the Funds' custodian and held
until resold to the dealer or bank. At October 31, 1993, all outstanding
repurchase agreements held by the Trust had been entered into on October 29,
1993.
5. ORGANIZATION COSTS
The organization costs of each Fund of the Trust were amortized on a
straight-line basis over a period of five years from the effective date of
registration under the Securities Act of 1933 for each Fund.
6. TRUST SHARES
At October 31, 1993 there were an unlimited number of shares of beneficial
interest authorized with a par value of $0.01 per share. Transactions in each of
the Trust's shares for the nine months ended October 31, 1993 and and the year
ended January 31, 1993 were as follows:
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND
--------------------------- ------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended October 31, 1993
Shares sold......................... 3,132,310 $ 28,574,215 7,951,390 $ 85,374,158 901,908 $10,897,243
Shares issued in reinvestment of
distributions...................... 524,009 4,763,243 485,716 5,219,095 83,403 1,000,357
Shares redeemed..................... (1,993,767) (18,112,506) (4,536,268) (48,709,818) (233,556) (2,786,030)
Changes from exercise of exchange
privilege:
Shares sold....................... 4,720,174 43,119,821 1,390,826 14,928,987 949,792 11,424,393
Shares redeemed................... (3,284,663) (29,621,205) (2,220,138) (23,822,267) (466,500) (5,506,739)
----------- ------------- ----------- ------------- ---------- ------------
Net increase..................... 3,098,063 $ 28,723,568 3,071,526 $ 32,990,155 1,235,047 $15,029,224
=========== ============= =========== ============= ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. TRUST SHARES (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND
--------------------------- ------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended January 31, 1993
Shares sold.......................... 7,358,674 $ 67,040,633 12,607,139 $132,712,369 516,599 $ 5,519,767
Shares issued in reinvestment of
distributions....................... 636,074 5,669,237 902,422 9,463,707 87,646 930,939
Shares redeemed...................... (1,407,590) (12,526,336) (4,479,765) (46,969,706) (297,332) (3,189,326)
Changes from exercise of exchange
privilege:
Shares sold........................ 7,755,681 70,301,582 1,596,043 16,832,882 495,630 5,357,352
Shares redeemed.................... (4,864,918) (42,735,216) (4,111,333) (43,040,435) (262,800) (2,816,461)
----------- ------------ ----------- ------------- --------- ------------
Net increase...................... 9,477,921 $ 87,749,900 6,514,506 $ 68,998,817 539,743 $ 5,802,271
=========== ============= =========== ============= ========= ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN EQUITY INCOME FUND RATE SECURITIES FUND
-------------------------------- --------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- --------------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended October 31, 1993
Shares sold........................ 31,420,134 $ 309,366,714 591,740 $ 8,424,387 1,678,030 $ 16,880,805
Shares issued in reinvestment of
distributions..................... 4,017,124 39,542,565 72,561 1,028,509 70,418 708,233
Shares redeemed.................... (119,230,775) (1,173,985,899) (199,709) (2,866,323) (529,605) (5,325,263)
Changes from exercise of exchange
privilege:
Shares sold...................... 10,303,356 101,458,808 914,654 12,979,279 2,459,907 24,746,127
Shares redeemed.................. (42,291,571) (416,529,563) (489,111) (6,830,476) (1,161,218) (11,680,906)
------------- ---------------- --------- ------------ ---------- -------------
Net increase (decrease)......... (115,781,732) $(1,140,147,375) 890,135 $12,735,376 2,517,532 $ 25,328,996
============= ================ ========= ============ ========== =============
Year ended January 31, 1993
Shares sold........................ 184,596,919 $ 1,835,078,214 376,381 $ 4,823,712 885,535 $ 8,879,231
Shares issued in reinvestment of
distributions..................... 9,042,518 89,709,984 80,587 1,039,534 29,354 294,438
Shares redeemed.................... (212,204,395) (2,107,516,937) (102,872) (1,322,898) (147,844) (1,483,055)
Changes from exercise of exchange
privilege:
Shares sold...................... 21,722,592 215,869,195 416,916 5,388,220 726,569 7,284,763
Shares redeemed.................. (53,818,376) (534,881,402) (143,473) (1,851,126) (245,190) (2,459,262)
------------- --------------- --------- ------------ ---------- -------------
Net increase (decrease)......... (50,660,742) $ (501,740,946) 627,539 $ 8,077,442 1,248,424 $ 12,516,115
============= ================ ========= ============ ========== =============
</TABLE>
7. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1993, for tax purposes, the Funds had accumulated net realized
capital gains or capital loss carryovers as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated net realized
gains..................... $ 1,893,231 $ 2,326,356 $ 454,206 _ $ 984,058 $ 856
=========== ================== =============== =============== =========== ===============
Capital loss carryovers
Expiring in:
October 31, 2000......... - - - $ 1,918,358 - -
October 31, 2001......... - - - 7,708,871 - -
----------- ------------------ --------------- --------------- ----------- ---------------
- - - $ 9,627,229 - -
=========== ================== =============== =============== =========== ===============
</TABLE>
45
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
7. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS (cont.)
For income tax purposes, the aggregate cost of securities is higher than for
financial reporting purposes at October 31, 1993 by $278,538 in the Global Fund,
$111,281 in the Adjustable U.S. Government Fund, $2,232 in the Equity Income
Fund and $993 in the Adjustable Rate Fund.
8. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the nine months ended October 31, 1993 were as
follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
------------ ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Purchases..... $132,983,344 $113,230,949 $25,461,521 $ 166,822,622 $16,742,830 $38,503,288
============ ============ =========== ============== =========== ===========
Sales......... $105,266,530 $ 80,420,910 $10,219,706 $1,319,576,579 $ 5,677,938 $12,917,405
============ ============ =========== ============== =========== ===========
</TABLE>
9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, office space and facilities to each Fund, and receives fees
computed monthly on the net assets on the last day of the month of each fund,
except for the Adjustable U.S. Government Fund and the Adjustable Rate Fund, as
follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE MONTHLY NET ASSETS
------------------- --------------------------
<S> <C>
.625 of 1% First $100 million
.500 of 1% over $100 million, up to and including $250 million
.450 of 1% over $250 million
</TABLE>
Under the terms of a separate administration agreement with the Adjustable U.S.
Government Fund and the Adjustable Rate Fund, Franklin Advisers, Inc. provides
various administrative, statistical, and other services, and receives fees
computed monthly on the net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS
------------------- ------------------------
<S> <C>
.100 of 1% First $5 billion
.090 of 1% over $5 billion, up to and including $10 billion
.080 of 1% over $10 billion
</TABLE>
Fees to which the Advisers is entitled by contracts aggregated $3,952,869 for
the nine months ended October 31, 1993. The terms of these agreements provide
that aggregate annual expenses of the Funds be limited to the extent necessary
to comply with the limitations set forth in the laws, regulations and
administrative interpretations of the states in which the Funds' shares are
registered. The Funds' expenses did not exceed these limitations; however, for
the nine months ended October 31, 1993, Franklin Advisers, Inc. reduced the
fees for the Short-Intermediate Fund, Convertible Fund and Equity Income Fund
by $160,513, $162,261, and $154,426, respectively. In addition, Franklin
Advisers, Inc. reduced the administration fee for the Adjustable Rate Securities
Fund by $20,135 and bore other expenses as reflected in the Statement of
Operations.
In its capacity as underwriter for the shares of the Trust, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Trust's shares.
Commissions received by Franklin/Templeton Distributors, Inc., and the amounts
which were subsequently paid to other dealers for the nine months ended October
31, 1993 were as follows:
46
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total commissions received.. $1,099,431 $891,309 $347,284 $945,767 $299,851 $106,062
========== ======== ======== ======== ======== ========
Paid to other dealers....... $1,023,270 $751,551 $330,298 $818,943 $288,526 $ 91,780
========== ======== ======== ======== ======== ========
</TABLE>
Commissions are deducted from the gross proceeds received from the sale of the
shares of the Trust, and as such are not expenses of the Funds.
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Funds pay costs on a per shareholder account basis. Costs
incurred for the nine months ended October 31, 1993 aggregated $400,047 of which
$369,437 was paid to Franklin/Templeton Investor Services, Inc.
Under the terms of a Distribution Agreement pursuant to Rule 12b1 of the
Investment Company Act of 1940, the Franklin Adjustable U.S. Government
Securities Fund and the Franklin Ajustable Rate Securities Fund will reimburse
Franklin/Templeton Distributors, Inc., in an amount up to 0.25% per annum which
covered costs incurred in the furnishing of promotion, offering and marketing of
the Funds' shares. Fees incurred by Franklin Adjustable U.S. Government
Securities Fund under the agreement aggregated $4,285,695 for the nine months
ended October 31, 1993. Fees which would have been incurred by Franklin
Adjustable Rate Securities Fund but were paid by Franklin Advisers, Inc.
amounted to $52,449 for the nine months ended October 31, 1993.
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
10. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Funds value these
securities as disclosed in note 1. At October 31, 1993, the Global Fund, the
Convertible Fund and the Equity Income Fund held 144A securities with a value
aggregating $6,604,566, $14,338,437 and $2,893,881 respectively, representing
3.4%, 30.2% and 6.9% of the respective Fund's net assets. See accompanying
statement of investments and net assets for specific information of such
securities.
11. CREDIT RISKS
Although the Convertible Fund has a diversified portfolio, the Fund has 64.86%
of its portfolio invested in lower rated and unrated high yield securities.
Investments in higher yield securities are accompanied by a greater degree of
credit risk and the risk tends to be more sensitive to economic conditions than
higher rated securities. The risk of loss due to default by the issuer may be
significantly greater for the holders of high yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
Although each of the Funds has a diversified investment portfolio, there are
certain credit risks, foreign currency exchange risks, or event risks due to the
manner in which the Funds are invested, which may subject the Funds more
significantly to economic changes occurring in certain industries or sectors, as
follows:
The Global Fund has investments in excess of 10% in debt securities
denominated in Canadian Dollars and Italian Lira.
47
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
12. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
year are set forth in the prospectus under the caption "Financial Highlights".
- -------------------------------------------------------------------------------
The Funds hereby designate the amounts below as qualifying for the dividends
received deduction for corporations for the nine months ended October 31, 1993.
Convertible Securities Fund........................ 34.14%
Equity Income Fund................................. 86.80%
The amounts reported above are estimated percentages and should be used for
information purposes only. Information on the final percentages that qualify for
this deduction for calendar year 1993, will be available shortly after the end
of this calendar year.
- -------------------------------------------------------------------------------
SUPPLEMENT DATED FEBRUARY 1, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN INVESTORS SECURITIES TRUST
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
DATED MARCH 1, 1994
a) The following substitutes subsection "Purchases at Net Asset Value" under
"Additional Information Regarding Fund Shares":
ADDITIONAL INFORMATION REGARDING PURCHASES
Special Net Asset Value Purchases. As discussed in the Prospectuses under
"How to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase shares of the Funds
without a front-end sales charge ("net asset value") or a contingent deferred
sales charge. Distributors or one of its affiliates may make payments, out of
its own resources, to securities dealers who initiate and are responsible for
such purchases, as indicated below. As a condition for these payments,
Distributors or its affiliates may require reimbursement from the securities
dealers with respect to certain redemptions made within 12 months of the
calendar month following purchase, as well as other conditions, all of which
may be imposed by an agreement between Distributors, or its affiliates, and
the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates,
out of its own resources, to securities dealers who initiate and are
responsible for (i) purchases of most equity and taxable-income Franklin
Templeton Funds made at net asset value by certain designated retirement
plans (excluding IRA and IRA rollovers): 1.00% on sales of $1 million but
less than $2 million, plus 0.80% on sales of $2 million but less than $3
million, plus 0.50% on sales of $3 million but less than $50 million, plus
0.25% on sales of $50 million but less than $100 million, plus 0.15% on sales
of $100 million or more; and (ii) purchases of most taxable income Franklin
Templeton Funds made at net asset value by non-designated retirement plans:
0.75% on sales of $1 million but less than $2 million, plus 0.60% on sales of
$2 million but less than $3 million, plus 0.50% on sales of $3 million but
less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purposes of additional purchases.
With respect to purchases made at net asset value by certain trust companies
and trust departments of banks and certain retirement plans of organizations
with collective retirement plan assets of $10 million or more, Distributors,
or one of its affiliates, out of its own resources, may pay up to 1% of the
amount invested.
Letter of Intent. An investor may qualify for a reduced sales charge on the
purchase of shares of the Funds, as described in the prospectus. At any time
within 90 days after the first investment which the investor wants to qualify
for the reduced sales charge, a signed Shareholder Application, with the
Letter of Intent section completed, may be filed with the Fund. After the
Letter of Intent 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 upon purchases in more than one of the Franklin
Templeton Funds will be effective only after notification to Distributors
that the investment qualifies for a discount. The shareholder's holdings in
the Franklin Templeton Funds acquired more than 90 days before the Letter of
Intent is filed will be counted towards completion of the Letter of Intent
but will not be entitled to a retroactive downward adjustment in the sales
charge. Any redemptions made by the shareholder, other than by a designated
benefit plan during the 13-month period will be subtracted from the amount of
the purchases for purposes of determining whether the terms of the Letter of
Intent have been completed. If the Letter of Intent is not completed within
the 13-month period, there will be an upward adjustment of the sales charge,
depending upon the amount actually purchased (less redemptions) during the
period. The upward adjustment does not apply to designated benefit plans. An
investor who executes a Letter of Intent prior to a change in the sales
charge structure for the Fund will be entitled to complete the Letter of
Intent at the lower of (i) the new sales charge structure; or (ii) the sales
charge structure in effect at the time the Letter of Intent was filed with
the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the
total purchases, less redemptions, equal the amount specified under the
Letter, the reserved shares will be deposited to an account in the name of
the investor or delivered to the investor or the investor's order. If the
total purchases, less redemptions, exceed the amount specified under the
Letter of Intent and is an amount which 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 of
Intent (to reflect such further quantity discount) on purchases made within
90 days before and on those made after filing the Letter. The resulting
difference in offering price will be applied to the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases. If the total purchases, less redemptions, are
less than the amount specified under the Letter, the in-
<PAGE>
vestor 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
which would have applied to the aggregate purchases if the total of such
purchases had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order.
If within 20 days after written request such difference in sales charge is
not paid, the redemption of an appropriate number of reserved shares to
realize such difference will be made. In the event of a total redemption of
the account prior to fulfillment of the Letter of Intent, the additional
sales charge due will be deducted from the proceeds of the redemption, and
the balance will be forwarded to the investor.
If a Letter of Intent is executed on behalf of a benefit plan (such plans are
described under "Purchases at Net Asset Value" in the Prospectus), the level
and any reduction in sales charge for these designated benefit plans will be
based on actual plan participation and the projected investments in the
Franklin Templeton Funds under the Letter of Intent. Benefit 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
benefit plans entitled to receive retroactive adjustments in price for
investments made before executing the Letter of Intent.
b) The paragraph "Reinvestment Date" under "Additional Information Regarding
Fund Shares" is substituted with the following language:
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 "ex-dividend date"). The processing date for
the reinvestment of dividends may vary from month to month, and does not
affect the amount or value of the shares acquired.
<PAGE>
FRANKLIN [FRANKLIN LOGO]
INVESTORS
SECURITIES TRUST
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND AND
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
STATEMENT OF
ADDITIONAL INFORMATION 777 MARINERS ISLAND BLVD., P.O. BOX 7777
MARCH 1, 1994 SAN MATEO, CA 94403-7777 1-800/DIAL BEN
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
About the Trust.......................................................... 2
The Investment Objective and Policies of Each Fund....................... 2
Trustees and Officers.................................................... 5
Administration and Other Services........................................ 8
Policies Regarding Brokers Used on Portfolio Transactions................ 10
Additional Information Regarding Purchases and Redemptions of
Fund Shares............................................................. 12
Additional Information Regarding Taxation................................ 13
The Funds' Underwriter................................................... 14
General Information...................................................... 16
Appendices............................................................... 20
Financial Statements..................................................... 23
</TABLE>
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of five separate diversified series. This
Statement of Additional Information refers only to Franklin Adjustable U.S.
Government Securities Fund (the "Adjustable U.S. Government Fund") and Franklin
Adjustable Rate Securities Fund (the "Adjustable Rate Securities Fund"). The
Adjustable U.S. Government Fund invests all of its assets in the U.S. Government
Adjustable Rate Mortgage Portfolio (the "Mortgage Portfolio") and the Adjustable
Rate Securities Fund invests all of its assets in the Adjustable Rate Securities
Portfolio (the "Securities Portfolio"). The Mortgage Portfolio and Securities
Portfolio (collectively the "Portfolios") are series of Adjustable Rate
Securities Portfolios, a separate open-end management investment company, and
are not part of the Trust.
The investment objective of the Adjustable U.S. Government Fund is to seek a
high level of current income, consistent with lower volatility of principal than
a fund which invests in long-term fixed-rate debt securities. The Adjustable
U.S. Government Fund seeks to achieve this objective by investing all of its
assets in the Mortgage Portfolio, which in turn invests primarily in adjustable
rate mortgage securities ("ARMs") or other securities collateralized by or
representing an interest in mortgages which have interest rates that are reset
at periodic intervals and are issued or guaranteed by the U.S. government, or
one of its agencies or instrumentalities.
The investment objective of the Adjustable Rate Securities Fund is to seek a
high level of current income, with lower volatility of principal than a fund
which invests in fixed-rate securities. The Adjustable Rate Securities Fund
seeks to achieve this objective by investing all of its assets in the Securities
Portfolio, which in turn invests primarily in adjustable rate securities,
including adjustable rate mortgage-backed securities, which are issued or
guaranteed by private institutions or by the U.S. government, or its agencies or
instrumentalities, collateralized by or representing an interest in mortgages
created from pools of adjustable rate mortgages, and other adjustable rate
asset-backed securities. All securities purchased by the Securities Portfolio
will be rated at least AA by Standard & Poor's Corporation ("S&P") or Aa by
Moody's Investors Service ("Moody's") or, if unrated, will be deemed to be of
comparable quality by the Portfolios' investment manager.
There, of course, can be no guarantee that the Adjustable Rate Securities Fund
or the Adjustable U.S. Government Fund's investment objective will be achieved.
Separate prospectuses for the Adjustable U.S. Government Fund and the Adjustable
Rate Securities Fund, dated March 1, 1994, each as may be amended from time to
time, provide the basic information a prospective investor should know before
invest-
1
<PAGE>
ing in any of these series of the Trust and may be obtained without charge from
the Trust or from the Trust's principal underwriter, Franklin/Templeton
Distributors, Inc. ("Distributors"), at the address listed above.
This Statement of Additional Information is not a prospectus. It contains
information in addition to and in more detail than set forth in each Prospectus.
This Statement of Additional Information is intended to provide additional
information regarding the activities and operations of the Trust, the Adjustable
Rate Securities Fund and the Adjustable U.S. Government Fund, and should be read
in conjunction with the respective Prospectuses.
A registration statement under the Investment Company Act of 1940 (the "1940
Act"), as amended from time to time, for the Portfolios is available without
charge from the Portfolios at the address listed on the cover.
ABOUT THE TRUST
- -------------------------------------------------------------------------------
The Trust is an open-end management investment company, commonly called a
"mutual fund," organized as a Massachusetts business trust on December 16, 1986.
The Trust issues its shares of beneficial interest, with a par value of $.01 per
share, in separate series, each known as a "Fund." Currently, the Trust has six
separate series, consisting of five diversified and one non-diversified series,
each of which maintains a totally separate investment portfolio. This Statement
of Additional Information pertains only to the Adjustable U.S. Government Fund
and the Adjustable Rate Securities Fund (individually, a "Fund," and
collectively, the "Funds").
THE INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND
- -------------------------------------------------------------------------------
As noted in the Prospectuses, each Fund has its own investment objective and
follows policies designed to achieve that objective. In addition, the following
restrictions have been adopted as fundamental policies for each Fund, which
means that such restrictions may not be changed without the approval of the
holders of a majority of the shares of each Fund.
The Funds may not:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 20% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of each Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of that Fund's total assets
at the time of the most recent loan. The entry into repurchase agreements is not
considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar
as a Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities, except that all
or substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and policies
of that Fund.
5. Invest more than 5% of the value of the gross assets of each Fund in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities, except that all or substantially all of the assets of each
Fund may be invested in another registered investment company having the same
investment objective and policies of that Fund.
6. Purchase the securities of any issuer which would result in owning more
than 10% of any class of the outstanding voting securities of such issuer,
except that all or substantially all of the assets of each Fund may be invested
in another registered investment company having the same investment objective
and policies of that Fund. To the extent permitted by exemptions granted under
the 1940 Act, the Funds may invest in shares of one or more money market funds
managed by Franklin Advisers, Inc. or its affiliates.
7. 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 retain securities of any issuer if, to the knowledge of the Trust, one or
more of its officers, trustees or investment adviser own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the oper-
2
<PAGE>
ation of a predecessor, except that, to the extent this restriction is
applicable, all or substantially all of the assets of each Fund may be invested
in another registered investment company having the same investment objective
and policies of that Fund.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs.
11. Invest in companies for the purpose of exercising control or management,
except that, to the extent this restriction is applicable, all or substantially
all of the assets of each Fund may be invested in another registered investment
company having the same investment objective and policies of that Fund.
12. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization; except that all or
substantially all of the assets of each Fund may be invested in another
registered investment company having the same investment objective and policies
as that Fund or except to the extent the Funds invest their uninvested daily
cash balances in shares of the Franklin Money Fund and other money market funds
in the Franklin Group of Funds provided i) the purchases and redemptions of such
money fund shares may not be subject to any purchase or redemption fees, ii) the
investments may not be subject to duplication of management fees, nor to any
charge related to the expense of distributing the Fund's shares (as determined
under Rule 12b-1 under federal securities laws) and iii) provided aggregate
investments by a Fund in any such money fund do not exceed (A) the greater of
(i) 5% of the Fund's total net assets or (ii) $2.5 million, or (B) more than 3%
of the outstanding shares of any such money fund.
13. Issue senior securities, as defined in the 1940 Act, except that this
restriction will not prevent the Funds from entering into repurchase agreements
or making borrowings, mortgages and pledges as permitted by restriction #1
above.
The investment restrictions of both the U.S. Government Adjustable Rate Mortgage
Portfolio and the Adjustable Rate Securities Portfolio are the same as the
investment restrictions of the Adjustable U.S. Government Fund and the
Adjustable Rate Securities Fund, respectively, except as indicated below and
except as necessary to reflect the policy of the Funds to invest all of their
assets in shares of the Portfolios.
The U.S. Government Adjustable Rate Mortgage Portfolio may not:
1. Borrow money or mortgage or pledge any of its assets, except that
borrowings (and a pledge of assets therefor) for temporary or emergency purposes
may be made from banks in an amount up to 20% of total asset value. The
Portfolio will not purchase additional investment securities while borrowings in
excess of 5% of total assets are outstanding.
2. Buy any securities on "margin" or sell any securities "short," except for
any delayed delivery or when-issued securities as described in the Prospectus.
3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act. To the extent permitted by exemptions which may be
granted under the 1940 Act, the Portfolio may invest in shares of one or more
money market funds managed by Franklin Advisers, Inc. or its affiliates. (The
investment restriction of the Funds', in this respect, is stated in far more
detail.)
The Adjustable Rate Securities Portfolio may not:
1. Borrow money or mortgage or pledge any of its assets in an amount
exceeding 331/3% of the value of the Portfolio's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing was made.
2. Buy any securities on "margin" or sell any securities "short," except
for any delayed delivery or when-issued securities as described in this
registration statement.
3. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act or pursuant to an exemption therefrom, granted by the
Securities and Exchange Commission ("SEC"). To the extent permitted by
exemptions which may be granted under the 1940 Act, the Portfolio may invest in
shares of one or more money market funds managed by Franklin Advisers, Inc. or
its affiliates. (The investment restriction of the Funds', in this respect, is
stated in far more detail.)
In order to change any of the foregoing restrictions, approval must be obtained
from shareholders of the Fund and Portfolio that would be affected. Such
approval requires the affirmative vote of the lesser of (i) 67% or more of the
voting securities present at a meeting if the holders of more than 50% of voting
securities are represented at that meeting or (ii) more than 50% of the
outstanding voting securities of each Fund. If a percentage restriction
contained herein is adhered to at the time of investment, a later increase or
decrease in the percentage resulting from a change in the value of portfolio
securities or the amount of net assets will not be considered a violation of any
of the foregoing restrictions.
3
<PAGE>
Other Policies. There are no restrictions or limitations on investments in
obligations of the U.S. government, or of corporations chartered by Congress as
federal government instrumentalities. In the case of each Portfolio or Fund, the
underlying assets may be retained in cash, including cash equivalents which are
Treasury bills, commercial paper and short-term bank obligations such as
certificates of deposit, bankers' acceptances and repurchase agreements. It is
intended, however, that only so much of the underlying assets of each Portfolio
or Fund be retained in cash as is deemed desirable or expedient under
then-existing market conditions. Each Fund may invest up to 10% of its net
assets in illiquid securities, a term which means securities that cannot be
disposed of within seven days in the normal course of business at approximately
the amount at which a Portfolio or Fund has valued the securities and includes,
among other things, securities with legal or contractual restrictions on resale
(although the Portfolio may invest in such securities to the extent permitted
under the federal securities laws), repurchase agreements of more than seven
days duration, and other securities which are not readily marketable.
Investments in savings deposits are generally considered illiquid and will,
together with other illiquid investments, not exceed 10% of a Fund's total net
assets. Neither Fund may invest in real estate limited partnerships or in
interests (other than publicly traded equity securities) in oil, gas, or other
mineral leases, exploration or development.
Each Fund may invest up to 5% of its total assets in inverse floaters. Inverse
floaters are instruments with floating or variable interest rates that move in
the opposite direction, at an accelerated speed, to short-term interest rates.
The Adjustable U.S. Government Fund (and the Adjustable U.S. Government
Portfolio) may invest up to 5% of its assets in super floaters. These are
instruments that float at a greater than 1 to 1 ratio with London Interbank
Offered Rate ("LIBOR") and are used as a hedge against the risk that the LIBOR
floaters become "capped" and can no longer float higher.
The Adjustable U.S. Government Fund was the first investment company in the
United States to invest primarily in mortgage backed securities based upon
adjustable rate mortgage obligations. To the extent indicated in their
respective Prospectuses, the Adjustable U.S. Government Fund and the Adjustable
Rate Securities Fund may invest through the Mortgage Portfolio and the
Securities Portfolio, respectively, in Collateralized Mortgage Obligations
("CMOs") and Real Estate Mortgage Investment Conduits ("REMICs"). CMOs and
REMICs may be issued by governmental or government-related entities or by
nongovernmental entities such as banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers. Privately issued CMOs and REMICs include obligations issued by such
non-governmental entities which are collateralized by (a) mortgage securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association (FNMA) or the Government National Mortgage
Association ("GNMA"), (b) pools of mortgages which are guaranteed by an agency
or instrumentality of the U.S. government, or (c) pools of mortgages which are
not guaranteed by an agency or instrumentality of the U.S. government and which
may or may not be guaranteed by the private issuer. The Mortgage Portfolio in
which the Adjustable U.S. Government Fund invests will not acquire any CMO or
REMIC obligation which is not either issued or guaranteed by the U.S. government
or its agencies or instrumentalities.
The Adjustable U.S Government Fund and the Adjustable Rate Securities Fund,
through the Mortgage Portfolio and the Securities Portfolio, respectively, may
purchase securities issued or guaranteed by the U.S. government, or one of its
agencies or instrumentalities, such as GNMAs, which are backed by the full faith
and credit of the U.S. Treasury. GNMA may borrow from the U.S. Treasury to the
extent needed to make payments under its guarantee. No assurances can be given,
however, that the U.S. government will provide such financial support to the
obligations of the other U.S. government agencies or instrumentalities in which
a Fund invests, since it is not obligated to do so. These agencies and
instrumentalities are supported by either the issuer's right to borrow an amount
limited to a specific line of credit from the U.S. Treasury, the discretionary
authority of the U.S. government to purchase certain obligations of an agency or
instrumentality, or the credit of the agency or instrumentality.
Several of the investment companies registered under the 1940 Act managed by
Franklin Advisers, Inc. ("Franklin Group of Funds"), including the Adjustable
U.S. Government Fund and the Adjustable Rate Securities Fund, through their
investments in the Mortgage Portfolio and the Securities Portfolio,
respectively, are major purchasers of government securities and will seek to
negotiate attractive prices for such securities and to pass on any savings
derived from such negotiations to their shareholders in the form of higher
current yields.
The Adjustable Rate Securities Fund may invest through the Securities Portfolio
a portion of its assets in asset-backed securities. The rate of principal
payment on asset-backed securities generally de-
4
<PAGE>
pends on the rate of principal payments received on the underlying assets. Such
rate of payments may be affected by economic and various other factors.
Therefore, the yield may be difficult to predict and actual yield to maturity
may be more or less than the anticipated yield to maturity. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entities issuing the securities
are insulated from the credit risk of the originator or affiliated entities, and
the amount of credit support provided to the securities.
Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, such securities may contain
elements of credit support. Such credit support falls into two categories: (i)
liquidity protection, and (ii) protection against losses resulting from ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that the receipt of payments due on the underlying pool is
timely. Protection against losses resulting from ultimate default enhances the
likelihood of payments of the obligations on at least some of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Securities Portfolio will not pay any additional fees for such
credit support, although the existence of credit support may increase the price
of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payments of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
TRUSTEES AND OFFICERS
- -------------------------------------------------------------------------------
The Board of Trustees has the responsibility for the overall management of the
Trust, including general supervision and review of the investment activities of
each Fund. The trustees, in turn, elect the officers of the Trust who are
responsible for administering the day-to-day operations of the Trust. The
affiliations of the officers and trustees and their principal occupations for
the past five years are listed below. Trustees who are deemed to be "interested
persons" of the Trust, as defined in the 1940 Act, are indicated by an asterisk
(*).
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Frank H. Abbott, III Trustee President and Director, Abbott Corporation
1045 Sansome St. (an investment company); Director, Vacu-Dry
San Francisco, CA 94111 Co. (a food processing company) and Mother
Lode Gold Mines Consolidated; and director,
trustee or managing general partner, as the
case may be, of most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
Harris J. Ashton Trustee President, Chief Executive Officer and
General Host Corporation Chairman of the Board, General Host
Metro Center, 1 Station Place Corporation (nursery and craft centers);
Stamford, CT 06904-2045 Director, RBC Holdings, Inc. (a bank holding
company) and Bar-S Foods; director of
certain of the investment companies in the
Templeton Group of Funds; and director,
trustee or managing general partner, as the
case may be, of most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
S. Joseph Fortunato Trustee Member of the law firm of Pitney, Hardin,
Park Avenue at Morris County Kipp & Szuch; Director of General Host
P. O. Box 1945 Corporation; director of certain of the
Morristown, NJ 07962-1945 investment companies in the Templeton Group
of Funds; and director, trustee or managing
general partner, as the case may be, of most
of the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------
David W. Garbellano Trustee Private Investor; Assistant Secretary/
111 New Montgomery St., #402 Treasurer and Director, Berkeley Science
San Francisco, CA 94105 Corporation (a venture capital company);
and director, trustee or managing general
partner, as the case may be, of most of the
investment companies in the Franklin Group
of Funds.
- ------------------------------------------------------------------------------------------------------
*Edward B. Jamieson President Senior Vice President and Portfolio Manager,
777 Mariners Island Boulevard and Trustee Franklin Advisers, Inc.; and officer and/or
San Mateo, CA 94404 director or trustee of some of the
investment companies in the Franklin Group
of Funds.
- ------------------------------------------------------------------------------------------------------
*Charles B. Johnson Chairman President and Director, Franklin Resources,
777 Mariners Island Blvd. of the Board Inc. and Franklin/Templeton Distributors,
San Mateo, CA 94404 and Trustee Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.
and General Host Corporation; director of
certain of the investment companies in the
Templeton Group of Funds; and officer and/or
director, trustee or managing general
partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and
of most of the investment companies in the
Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
*Rupert H. Johnson, Jr. Vice President Executive Vice President and Director,
777 Mariners Island Blvd. and Trustee Franklin Resources, Inc. and Franklin/
San Mateo, CA 94404 Templeton Distributors, Inc.; President and
Director, Franklin Advisers, Inc.; Director,
Franklin/Templeton Investor Services, Inc.;
director of certain of the investment
companies in the Templeton Group of Funds;
and officer and/or director, trustee or
managing general partner, as the case may
be, of most other subsidiaries of Franklin
Resources, Inc. and of most of the
investment companies in the Franklin Group
of Funds.
- ------------------------------------------------------------------------------------------------------
Frank W. T. LaHaye Trustee General Partner, Peregrine Associates and
20833 Stevens Creek Blvd. Miller & LaHaye, which are General Partners
Suite 102 of Peregrine Ventures and Peregrine Ventures
Cupertino, CA 95014 II (venture capital firms); Chairman of the
Board and Director, Quarterdeck Office
Systems, Inc.; Director, FischerImaging
Corporation; and director or trustee, as the
case may be, of most of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gordon S. Macklin Trustee Chairman, White River Corporation (financial
8212 Burning Tree Road services); Director, Fundamerican
Bethesda, MD 20817 Enterprises Holdings, Inc., Martin Marietta
Corporation, and MCI Communications
Corporation; director of certain of the
investment companies in the Templeton Group
of Funds; and director, trustee or managing
general partner, as the case may be, of most
of the investment companies in the Franklin
Group of Funds; formerly, Chairman,
Hambrecht and Quist Group; Director, H & Q
Healthcare Investors; and President,
National Association of Securities Dealers,
Inc.
- ------------------------------------------------------------------------------------------------------
Andrew R. Johnson Vice President Senior Vice President, Franklin Advisers,
777 Mariners Island Blvd. Inc.; employee of Franklin Resources, Inc.
San Mateo, CA 94404 and its subsidiaries in administrative and
portfolio management capacities; and officer
of some of the investment companies in the
Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
Charles E. Johnson Vice President Senior Vice President, Franklin Resources,
777 Mariners Island Blvd. Inc. and Franklin/Templeton Distributors,
San Mateo CA 94404 Inc.; President, Franklin Institutional
Services Corporation; director of certain of
the investment companies in the Templeton
Group of Funds; officer and/or director, as
the case may be, of some of the subsidiaries
of Franklin Resources, Inc.; and officer
and/or director or trustee, as the case may
be, of some of the investment companies in
the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
Harmon E. Burns Vice President Executive Vice President, Secretary and
777 Mariners Island Blvd. Director, Franklin Resources, Inc.;
San Mateo, CA 94404 Executive Vice President and Director,
Franklin/Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers,
Inc.; Director, Franklin/Templeton Investor
Services, Inc.; director of certain of the
investment companies in the Templeton Group
of Funds; officer and/or director, as the
case may be, of other subsidiaries of
Franklin Resources, Inc.; and officer and/or
director or trustee of all the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
Kenneth V. Domingues Vice President Senior Vice President, Franklin Resources,
777 Mariners Island Blvd. and Treasurer Inc. and Franklin Advisers, Inc.; Vice
San Mateo, CA 94404 President, Franklin/Templeton Distributors,
Inc.; officer or director, as the case may
be, of other subsidiaries of Franklin
Resources, Inc.; and officer and/or managing
general partner, as the case may be, of all
the investment companies in the Franklin
Group of Funds.
- ------------------------------------------------------------------------------------------------------
Edward V. McVey Vice President Senior Vice President/National Sales
777 Mariners Island Blvd. Manager, Franklin/Templeton Distributors,
San Mateo, CA 94404 Inc.; and officer of many of the investment
companies in the Franklin Group of Funds.
- ------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES
NAME AND ADDRESS WITH THE TRUST PRINCIPAL OCCUPATIONS DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deborah R. Gatzek Vice President Senior Vice President - Legal, Franklin
777 Mariners Island Blvd. and Secretary Resources, Inc. and Franklin/Templeton
San Mateo, CA 94404 Distributors, Inc.; Vice President, Franklin
Advisers, Inc.; and officer of all the
investment companies in the Franklin Group
of Funds.
- ------------------------------------------------------------------------------------------------------
</TABLE>
The officers and trustees of the Trust are also officers and trustees of
Adjustable Rate Securities Portfolios, except as follows: Edward B. Jamieson,
President and Trustee of the Trust, is not an officer or trustee of Adjustable
Rate Securities Portfolios. The following trustees of the Adjustable Rate
Securities Portfolios are not trustees of the Trust:
Charles E. Johnson
777 Mariners Island Blvd.
San Mateo CA 94404
President and Trustee of Adjustable Rate Securities Portfolios
Senior Vice President, Franklin Resources, Inc. and Franklin/Templeton
Distributors, Inc.; President, Franklin Institutional Services Corporation;
director of certain of the investment companies in the Templeton Group of Funds;
officer and/or director, as the case may be, of some of the subsidiaries of
Franklin Resources, Inc.; and officer and/or director or trustee, as the case
may be, of some of the investment companies in the Franklin Group of Funds.
William J. Lippman
One Parker Plaza
Fort Lee, NJ 07024
Trustee of Adjustable Rate Securities Portfolios
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc.,
Franklin/Templeton Distributors, Inc. and Franklin Management, Inc.; officer
and/or director or trustee of many funds in the Franklin Group of Funds.
As indicated above, certain trustees and officers hold positions with other
companies in the Franklin Group of Fundsr. Trustees not affiliated with the
investment manager are currently paid fees of $925 per month, plus $925 per
meeting attended and are reimbursed for expenses incurred in connection with
attending such meetings. These fees to the trustees and payment for
reimbursement of their expenses are paid pro rata by each series of the Trust
based on net assets. For the nine-month period ended October 31, 1993, the
Adjustable U.S. Government Fund's pro-rata share totaled $96,794. The Adjustable
Rate Securities Fund has not as yet commenced paying its pro-rata share. No
officer or trustees received any other compensation directly from the Trust. As
of December 7, 1993, the trustees and officers, as a group, owned of record and
beneficially 58,731 shares of the Adjustable U.S. Government Fund and did not
own any shares of the Adjustable Rate Securities Fund, or less than 1% of the
total outstanding shares of each Fund. Certain officers or trustees who are
shareholders of Franklin Resources, Inc. may be deemed to receive indirect
remuneration by virtue of their participation, if any, in the fees paid to its
subsidiaries. Charles B. Johnson, Rupert H. Johnson, Jr. and Andrew R. Johnson
are brothers. Charles E. Johnson is the son of Charles B. Johnson and the nephew
of Rupert H. Johnson and Andrew R. Johnson.
ADMINISTRATION AND OTHER SERVICES
- -------------------------------------------------------------------------------
Franklin Advisers, Inc. ("Advisers") acts as the investment manager of the
Mortgage Portfolio and Securities Portfolio and the administrator of the
Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund.
Advisers is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"),
a publicly owned holding company whose shares are listed on the New York Stock
Exchange ("Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services. Advisers and other
subsidiary companies of Resources currently manage over $117 billion in assets
for over 3.3 million shareholders. The preceding table indicates those officers
and trustees who are also affiliated persons of Distributors and Advisers.
The Board of Trustees, with all disinterested trustees as well as the
interested trustees voting in favor, have adopted written procedures designed to
deal with potential conflicts of interest which may arise from the fact of
having generally the same persons serving on each trust's Board of Trustees. The
Board of Trustees has determined that there are no conflicts of interest
presented by this arrangement at the present time. See Appendix B for a summary
of these procedures.
Each Fund has entered into separate administration agreements with Advisers for
the provision of various administrative, statistical, and other services.
Pursuant to the administration agreements, each Fund is obligated to pay
Advisers (as administrator) a monthly fee equal to an annual rate of 10/100 of
1% for the first $5 billion of such Fund's average
8
<PAGE>
daily net assets; 9/100 of 1% of net assets in excess of $5 billion up to $10
billion; and 8/100 of 1% of net assets in excess of $10 billion.
The Mortgage Portfolio and Securities Portfolio, in which the Adjustable U.S.
Government Fund and the Adjustable Rate Securities Fund, respectively, invest
all their assets, have separate management agreements with Advisers
(collectively referred to as the "Management Agreements"). There are no
management agreements for the Adjustable U.S. Government Fund and the Adjustable
Rate Securities Fund.
Pursuant to the Management Agreements, Advisers provides investment research
and portfolio management services, including the selection of securities for the
Portfolios to purchase, hold or sell and the selection of brokers through whom
each Portfolio's securities transactions are executed. Advisers' activities are
subject to the review and supervision of the Board of Trustees of the Portfolios
and of the Trust to whom Advisers renders periodic reports of investment
activities. Advisers, at its own expense, furnishes each Portfolio with office
space and office furnishings, facilities and equipment required for managing the
business affairs of each Portfolio; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. Advisers is covered by fidelity
insurance on its officers, directors and employees for the protection of the
Portfolios and the Trust. Each Portfolio bears all of its expenses not assumed
by Advisers. See the Statement of Operations in the financial statements at the
end of this Statement of Additional Information for additional details of these
expenses.
Each Fund and each Portfolio will pay all applicable expenses related to its
operation not borne by Advisers, including, but not limited to: the
administration fee (the management fee in the case of the Portfolios), the costs
of custodian services, expenses of issue, repurchase or redemption of shares,
brokerage fees, taxes, interest, the cost of reports and notices to
shareholders, transfer expenses, the costs of dividend disbursing and
shareholder recordkeeping services, auditing and legal fees, the fees of
independent trustees and the salaries of any officers or employees who are not
affiliated with Advisers, its pro rata portion of the premiums on any fidelity
bond covering each Fund or Portfolio, the costs and expense of registering and
maintaining the registration of each Fund and its shares under federal and
applicable state laws, including the printing of Prospectuses sent to existing
shareholders, and the expense of obtaining the price quotations for the current
market value of each Fund's portfolio securities for use in calculating the
daily net asset value per share.
Pursuant to the Management Agreements, the Securities Portfolio and the Mortgage
Portfolio, in which the Adjustable Securities Fund and the Adjustable U.S.
Government Fund, respectively, invest all their assets, are obligated to pay
Advisers a monthly fee equal to an annual rate of 40/100 of 1% for the first $5
billion of its average daily net assets; plus 35/100 of 1% of its net assets in
excess of $5 billion up to and including $10 billion; 33/100 of 1% of its net
assets in excess of $10 billion up to $15 billion and 30/100 of 1% of its net
assets in excess of $15 billion. The Management Agreements specify that the
management fee will be reduced to the extent necessary to comply with the most
stringent limits on the expenses which may be borne by a Fund as prescribed by
any state in which the Fund's shares are offered for sale. The most stringent
current limit requires Advisers to reduce or eliminate its fee to the extent
that aggregate operating expenses of the Fund (excluding interest, taxes,
brokerage commissions and extraordinary expenses such as litigation costs) would
otherwise exceed in any fiscal year 21/2% of the first $30 million of average
net assets of the Fund, 2% of the next $70 million of average net assets of the
Fund and 11/2% of average net assets of the Fund in excess of $100 million.
Expense reductions have not been necessary based on state requirements.
As noted in the Prospectus of each Fund, Advisers has determined for an
indefinite period of time to limit or not to impose its fees with respect to
each Fund in order to reduce the total expenses of the Funds, which may have the
effect of increasing the yield to the shareholders of such Fund. For the
Adjustable U.S. Government Fund, the Manager has determined to reduce its
management fee from the Mortgage Portfolio and may also reduce the
administration fee from that Fund to ensure that the total aggregate operating
expenses of that Fund and the Mortgage Portfolio are not higher than what that
Fund's total operating expenses would have been under the terms of the prior
management agreement with the Fund. This arrangement to limit expenses may be
terminated by Advisers at any time.
Prior to June 1, 1991, the Adjustable U.S. Government Fund had a management
agreement with Advisers which provided for investment research and portfolio
management services. The table below sets forth the management fees that would
have been payable by the Adjustable U.S. Government Fund and the management fees
actually paid to the Manager during the fiscal years ended January 31, 1992 and
1991.
9
<PAGE>
<TABLE>
<CAPTION>
FISCAL PERIOD MANAGEMENT MANAGEMENT
ENDED JANUARY 31 FEES ACCRUED FEES PAID
- ---------------------------------------- ------------ ----------
<S> <C> <C>
1992*................................... $3,693,960 $1,782,406
1991.................................... $2,633,010 $ 85,187
</TABLE>
*February 1, 1991 through May 31, 1991
The table below sets forth on a per Fund basis the administration fees paid to
Advisers for the fiscal period ended January 31, 1992, for the fiscal year ended
January 31, 1993 and the nine-month period ended October 31, 1993.
<TABLE>
<CAPTION>
ADMINISTRATION ADMINISTRATIVE
PERIOD FEES ACCRUED FEES PAID
- ---------------------------------------- -------------- --------------
<S> <C> <C>
OCTOBER 31, 1993
Adjustable U.S. Government Fund......... $1,798,293 $1,798,293
Adjustable Rate Securities Fund......... $ 20,135 $ 0
JANUARY 31, 1993
Adjustable U.S. Government Fund......... $3,473,010 $2,811,776
Adjustable Rate Securities Fund......... $ 7,126 $ 0
1992*
Adjustable U.S. Government Fund......... $2,058,480 $ 146,926
</TABLE>
*From June 1, 1991, through January 31, 1992
The Management Agreements for the Mortgage Portfolio and the Securities
Portfolio are in effect until April 30, 1994. Thereafter, they may continue in
effect for successive annual periods, providing such continuance is specifically
approved at least annually by a vote of the Portfolio's Board of Trustees or by
a vote of the holders of a majority of each Portfolio's outstanding voting
securities, and in either event by a majority vote of the Portfolios' trustees
who are not parties to the Management Agreements or interested persons of any
such party (other than as trustees of the Portfolios), cast in person at a
meeting called for that purpose. The Management Agreements may be terminated
without penalty at any time by the Portfolios or by Advisers on 30 days' written
notice and will automatically terminate in the event of their assignment, as
defined in the 1940 Act.
The table below sets forth on a per Portfolio basis the management fees that
would have been payable by each Portfolio and the management fees actually paid
to the Manager during the fiscal period ended January 31, 1992, the fiscal year
ended January 31, 1993 and the nine-month period ended October 31, 1993.
<TABLE>
<CAPTION>
FISCAL PERIOD MANAGEMENT MANAGEMENT
ENDED JANUARY 31, 1992 FEES ACCRUED FEES PAID
- -------------------------------------------------- ------------ -----------
<S> <C> <C>
Mortgage Portfolio Effective date 5/20/91......... $ 8,321,762 $ 6,297,974
Securities Portfolio Effective date 12/26/91...... $ 0 $ 0
<CAPTION>
FISCAL YEAR
ENDED JANUARY 31, 1993
- --------------------------------------------------
<S> <C> <C>
Mortgage Portfolio................................ $18,538,661 $13,194,882
Securities Portfolio.............................. $ 93,016 $ 0
<CAPTION>
FISCAL PERIOD
ENDED OCTOBER 31, 1993
- ----------------------------------------
<S> <C> <C>
Mortgage Portfolio................................ $ 9,965,963 $ 6,534,699
Securities Portfolio.............................. $ 222,753 $ 20,602
</TABLE>
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly owned subsidiary of Resources, is the shareholder
servicing agent for the Funds and acts as the Funds' transfer agent and
dividend-paying agent. Investor Services is compensated by the Funds on the
basis of a fixed fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of each
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand, 333 Market St., San Francisco, California 94105, are the
Trust's independent auditors. During the period ended October 31, 1993, their
auditing services consisted of rendering an opinion on the financial statements
of the Funds and the Portfolios included in the Trust's Annual Report and this
Statement of Additional Information.
POLICIES REGARDING BROKERS USED ON PORTFOLIO TRANSACTIONS
- -------------------------------------------------------------------------------
Under the current Management Agreements with Advisers, the selection of brokers
and dealers to execute portfolio transactions in each Portfolio is made by
Advisers in accordance with criteria set forth in the Management Agreements and
any directions which the Board of Trustees of the Portfolios may give.
When placing a portfolio transaction, Advisers attempts to obtain the best net
price and execution of the transaction. On portfolio transactions which are done
on a securities exchange, the amount of com-
10
<PAGE>
mission paid by a Portfolio is negotiated between Advisers and the broker
executing the transaction. Advisers seeks to obtain the lowest commission rate
available from brokers which are felt to be capable of efficient execution of
the transactions. The determination and evaluation of the reasonableness of the
brokerage commissions paid in connection with portfolio transactions are based
to a large degree on the professional opinions of the persons responsible for
the placement and review of such transactions. These opinions are formed on the
basis of, among other things, the experience of these individuals in the
securities industry and information available to them concerning the level of
commissions being paid by other institutional investors of comparable size.
Advisers will ordinarily place orders for the purchase and sale of
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. As a general rule, the Portfolios do not purchase bonds in
underwritings where it is not given any choice, or only limited choice, in the
designation of dealers to receive the commission.The Trust and the Portfolios
will seek to obtain prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in
the selection of a broker to execute a trade. If it is felt to be in the
Portfolios' (and the Funds') best interests, Advisers may place portfolio
transactions with brokers who provide the types of services described below,
even if it means the Portfolios (and thus, the Funds) will have to pay a higher
commission than would be the case if no weight were given to the broker's
furnishing of these services. This will be done only if, in the opinion of
Advisers, the amount of any additional commission is reasonable in relation to
the value of the services. Higher commissions will be paid only when the
brokerage and research services received are bona fide and produce a direct
benefit to the Portfolios (and thus, the Funds) to assist Advisers in carrying
out its responsibilities to the Portfolios (and thus, the Funds), or when it is
otherwise in the best interest of the Portfolios (and thus, the Funds) to do so,
whether or not such data may also be useful to Advisers in advising other
clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, Advisers may decide to execute transactions through brokers
who provide quotations and other services to the Portfolios (and thus, the
Funds), specifically including the quotations necessary to determine the value
of a Portfolio's net assets, in such amount of total brokerage as may reasonably
be required in light of such services, and through brokers who supply research,
statistical and other data to the Portfolios and Advisers in such amount of
total brokerage as may reasonably be required.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers 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 staff 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. Provided that the
Trust's (and the Portfolios') officers are satisfied that the best execution is
obtained, the sale of Trust shares may also be considered as a factor in the
selection of securities dealers to execute the Portfolios' portfolio
transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when a Portfolio
tenders securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Portfolios, any portfolio
securities tendered by the Portfolios will be tendered through Distributors if
it is legally permissible to do so. In turn, the next management fee payable to
Advisers under the Management Agreements will be reduced by the amount of any
fees received by Distributors in cash, less any costs and expenses incurred in
connection therewith.
If purchases or sales of securities of the Portfolios or one or more other
investment companies or clients supervised by Advisers are considered at or
about the same time, transactions in such 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. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Portfolios (and the Funds) are concerned. In other cases
it is possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the Portfolios (and
the Funds).
11
<PAGE>
Since inception, the Adjustable U.S. Government Fund paid no brokerage
commissions. For the initial fiscal period ended January 31, 1992 and for the
fiscal year ended January 31, 1993, and the period ended October 31, 1993, the
Adjustable Rate Securities Fund paid no brokerage commissions. As of October 31,
1993, the Funds did not own securities of its regular broker-dealers.
ADDITIONAL INFORMATION REGARDING PURCHASES AND REDEMPTIONS OF FUND SHARES
- -------------------------------------------------------------------------------
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of the Funds must be denominated in U.S. dollars. Each Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency or (b) honor
the transaction or make adjustments to a shareholder's account for the
transaction as of a date and with a foreign currency exchange factor determined
by the drawee bank.
Shares of the Adjustable Rate Securities Fund are eligible to receive dividends
beginning on the first business day following settlement of the purchase
transaction, through the date on which the Fund writes a check or sends a wire
on a redemption transaction.
Dividend checks which are returned to each Fund marked "unable to forward" by
the postal service will be deemed to be a request by the shareholder to change
the dividend option, and the proceeds will be reinvested in additional shares at
the net asset value until new instructions are received.
Each Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if his mail is returned as undeliverable or such Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for their location services.
Under agreements with certain banks in Taiwan, Republic of China, each Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of each Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of each Fund will be
offered with the following schedule of sales charges:
<TABLE>
<CAPTION>
SALES
SIZE OF PURCHASE CHARGE
- ---------------------------------------------------------------------- ------
<S> <C>
Up to U.S. $100,000................................................... 3%
U.S. $100,000 to U.S. $1,000,000...................................... 2%
Over U.S. $1,000,000.................................................. 1%
</TABLE>
PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS
Orders for the purchase of shares of the Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the Exchange is open for trading
and promptly transmitted to the Fund will be based upon the public offering
price determined that day. Purchase orders received by securities dealers or
other financial institutions after 1:00 p.m. Pacific time will be effected at
the Fund's public offering price on the day it is next calculated. The use of
the term "securities dealer" herein shall include other financial institutions
which pursuant to an agreement with Distributors (directly or through
affiliates) handle customer orders and accounts with the Fund. Such reference,
however, is for convenience only and does not indicate a legal conclusion of
capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
PURCHASES AT NET ASSET VALUE
As discussed in each Fund's Prospectus, certain categories of investors may
purchase shares of the Trust at net asset value (without a sales charge) or at a
reduced sales charge. The reason for this is that there is minimal or no sales
effort required with respect to these investors. In addition, governmental
entities which are prohibited by law or regulation from paying a sales charge on
their investments may acquire shares at net asset value (without a sales
charge). If certain investments at net asset value are made through a dealer who
has executed a dealer or similar agreement with Distributors, Distributors or
its affiliates may make a payment, out of their own resources, to such dealer in
an amount not to exceed 0.25% of the amount invested, paid pro rata on a
quarterly basis on average quarterly balances for a period of one year.
12
<PAGE>
REDEMPTIONS IN KIND
The Trust has committed itself to pay in cash (by check) all requests for
redemption of any Fund 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 such period. Such commitment is
irrevocable without the prior approval of the SEC. In the case of requests for
redemption in excess of such amounts, the Trustees reserve the right to make
payments in whole or in part in securities or other assets of the Fund from
which the shareholder is redeeming, 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 such circumstances, the securities distributed would be valued
at the price used to compute the Fund's net assets. Should a Fund do so, a
shareholder may incur brokerage fees in converting the securities to cash. The
Fund does not intend to redeem illiquid securities in kind; however, should it
happen, shareholders may not be able to timely recover their investment and may
also incur brokerage costs in selling such securities.
REDEMPTIONS BY THE FUNDS
Due to the relatively high cost of handling small investments, each Fund
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of each Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before a Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in his account is less than the minimum amount and allow the
shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $100.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectuses, each Fund generally calculates its net asset value
as of 1:00 p.m. Pacific time each day that the Exchange is open for trading. As
of the date of this Statement of Additional Information, the Trust is informed
that the Exchange observes the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Each Fund's portfolio securities are valued as stated in the Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of the Funds' shares are determined as of such times.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and 1:00 p.m.
Pacific time which will not be reflected in the computation of the Fund's net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities will be valued at their fair value as
determined in good faith by the Board of Trustees.
REINVESTMENT DATE
The dividend reinvestment date is the date on which additional shares are
purchased for the investor who has elected to have dividends reinvested. For the
Adjustable U.S. Government Fund this date will vary from month to month, based
on operational considerations, and is not necessarily the same date as the
record date or the payable date for cash dividends. For the Adjustable Rate
Securities Fund the dividend reinvestment date is the same date as the payable
date for cash dividends.
SPECIAL SERVICES
The Trust and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Trust. The cost of these services is not borne by the Trust.
Franklin/Templeton Investor Services, Inc. may pay certain financial
institutions which maintain omnibus accounts with the Trust on behalf of
numerous beneficial owners for recordkeeping operations performed with respect
to such beneficial owners. For each beneficial owner in the omnibus account, the
Trust may reimburse Investor Services an amount not to exceed the per account
fee which the Trust normally pays Investor Services. Such financial institutions
may also charge a fee for their services directly to their clients.
ADDITIONAL INFORMATION REGARDING TAXATION
- -------------------------------------------------------------------------------
The following information is a supplement to and should be read in conjunction
with the section in each Fund's Prospectus entitled "Taxation of the Fund and
Its Shareholders."
As stated in each Fund's Prospectus, each Fund has elected and qualified to be
treated as a regulated
13
<PAGE>
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). The trustees reserve the right not to maintain the
qualification of any Fund as a regulated investment company if they determine
such course of action to be beneficial to the shareholders. In such case, the
Fund will be subject to federal and possibly state corporate taxes on its
taxable income and gains, and distributions to shareholders will be ordinary
dividend income to the extent of the Fund's available earnings and profits.
The Code requires all funds to distribute at least 98% of their taxable ordinary
income earned during the calendar year and at least 98% of their capital gain
net income earned during the twelve-month period ending October 31 of each year
(in addition to amounts from the prior year that were neither distributed nor
taxed to the Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Fund intends as a matter of policy
to declare such dividends, if any, in December and to pay these dividends in
December or January to avoid the imposition of this tax, but does not guarantee
that its distributions will be sufficient to avoid any or all federal excise
taxes. Under the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
paid by the Fund and received by the shareholder on December 31 of the calendar
year in which they are declared.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between the shareholder's basis
in the shares and the amount realized from the transaction, subject to the rules
described below. If such shares are a capital asset in the hands of the
shareholder, gain or loss will be capital gain or loss and will be long-term for
federal income tax purposes if the shares have been held for more than one year.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding taxes to distributions received by them from the Fund and
the application of foreign tax laws to these distributions.
THE FUNDS' UNDERWRITER
Pursuant to underwriting agreements for each Fund in effect until April 30,
1994, Distributors acts as principal underwriter in a continuous public offering
for shares of the Funds.
The underwriting agreements will continue in effect for successive annual
periods, provided that their continuance is specifically approved at least
annually by the Trust's trustees or by a vote of a majority of each Fund's
outstanding voting securities, and by a vote of a majority of those trustees who
are not interested persons of the Trust (other than as trustees), Advisers or
Distributors. The agreement terminates automatically in the event of its
assignment, and may be terminated by either party on 90 days' written notice.
Distributors allows the entire underwriting commission on the sale of shares
of each Fund to the securities dealer of record, if any, on an account.
In connection with the offering of the shares of the Funds, aggregate
underwriting commissions for the fiscal periods ended January 31, 1991, 1992,
1993 and October 31, 1993, were as indicated below.
<TABLE>
<CAPTION>
JANUARY 31 OCTOBER 31
---------------------------------------------------------------------------------------------
1991 1992 1993 1993
---------------------- ---------------------- --------------------- -------------------
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
RECEIVED RETAINED RECEIVED RETAINED RECEIVED RETAINED RECEIVED RETAINED
----------- -------- ----------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable U.S.
Government Fund....... $29,048,222 $143,857 $40,789,217 $382,488 $7,527,107 $759,529 $945,767 $126,824
Adjustable Rate
Securities Fund*....... $ 0 $ 0 $ 152,205 $ 16,292 $106,062 $ 14,282
</TABLE>
*Effective date 12/26/91
14
<PAGE>
DISTRIBUTION EXPENSES
The Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund have
each adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan(s)"), whereby each Fund may pay up to a maximum of 0.25% per annum (1/4 of
1%) of its average daily net assets for expenses incurred in the promotion and
distribution of its shares.
Pursuant to the Plans, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for actual expenses incurred in
the distribution and promotion of each Fund's shares, including, but not limited
to, the printing of prospectuses and reports used for sales purposes, expenses
of preparation and distribution of sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, and fees paid to dealers or others as a distribution or service fee
for servicing shareholders of the Fund.
In addition to the payments to which Distributors or others are entitled under
the Plan, the 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 payments for the financing of any activity
primarily intended to result in the sale of shares of the Fund 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.
In no event shall the aggregate asset-based sales charges which include payments
made under the Plan, plus any other payments deemed to be made pursuant to the
Plan, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d).
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. No interested person or trustee of the
Trust has a direct or indirect financial interest in the Plan. The Plan does not
permit unreimbursed expenses incurred in a particular year to be carried over to
or reimbursed in subsequent years.
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. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If a bank
were prohibited from providing such services, its customers who are shareholders
of a Fund would be permitted to remain shareholders of that Fund and alternate
means for continuing the servicing of such shareholders would be sought. In such
an event, changes in the services provided might occur and such shareholders
might no longer be able to avail themselves of any automatic investment or other
services then being provided by the bank. It is not expected that shareholders
would suffer any adverse financial consequences as a result of any of these
changes. Securities laws of states in which each Fund's shares are offered for
sale may differ from the interpretations of federal law expressed herein, and
banks and financial institutions selling shares of the Funds may be required to
register as dealers pursuant to state law.
The Board of Trustees has determined that a consistent cash flow resulting
from the sale of new shares is necessary and appropriate to meet redemptions and
to take advantage of buying opportunities of portfolio securities without having
to make unwarranted liquidations of other portfolio securities. The Board of
Trustees, therefore, felt that it would benefit each Fund to have monies
available for the direct distribution activities of Distributors or others in
promoting the sale of its shares. The Board of Trustees, including the
noninterested trustees, concluded that, in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plans will benefit each Fund and its shareholders.
The Adjustable Rate Securities Fund's Plan has been approved by Resources, its
initial shareholder, and by the trustees, including those trustees who are not
interested persons, as defined in the 1940 Act. The Adjustable U.S. Government
Fund's Plan has been approved by the Fund's public shareholders and by the Board
of Trustees, including those trustees who are not interested persons as defined
in the 1940 Act. The Plans are renewable annually by a vote of the Trust's Board
of Trustees, including a majority vote of the trustees who are noninterested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Plan, cast in person at a meeting called for that purpose. It
is also required that the selection and nomination of such trustees be done by
the noninterested trustees. The Plans and any agreement entered into pursuant to
this Plan may be terminated at any time, without any penalty, by vote of a
majority of the outstanding voting securities of the Fund or by a vote of a
majority of the noninterested trustees
15
<PAGE>
on not more than 60 days' written notice, or by Distributors on not more than
60 days' written notice, and shall terminate automatically in the event of any
act that constitutes an assignment of the Administration Agreements between the
Funds and Advisers, the Management Agreements between the Portfolios and
Advisers or the Distribution Agreement between the Funds and 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 spent for distribution expenses or in any other material way without
approval by a majority of each Fund's outstanding shares, and all such material
amendments to the Plans or any related agreements shall be approved by a vote of
the noninterested trustees, 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 of Trustees 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 nine-month period ended October 31, 1993, the Adjustable U.S. Government
Fund incurred fees of $4,285,695 in distribution expenses under the Plan, all of
which were paid as service fees to broker- dealers. The amount which would have
been incurred by the Adjustable Rate Securities Fund pursuant to the Plan which
was borne by Advisers was $52,449, all of which was used to reimburse
Distributors for compensation to dealers.
GENERAL INFORMATION
- ------------------------------------------------------------------------------
As noted in the Prospectuses, each Fund may from time to time quote various
performance figures to illustrate that Fund's past performance. It may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every nonstandardized performance quotation furnished by a
Fund be accompanied by certain standardized performance information computed as
required by the SEC. Current yield and average annual compounded total return
quotations used by a Fund are based on the standardized methods of computing
performance mandated by the SEC. An explanation of those and other methods used
by each Fund to compute or express performance follows.
TOTAL RETURN
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods, or fractional
portion thereof, that would equate an initial hypothetical $1,000 investment to
its ending redeemable value. The calculation assumes the maximum sales charge is
deducted from the initial $1,000 purchase order, all income dividends and
capital gains are reinvested at net asset value (without a sales charge) on the
reinvestment dates during the period. The quotation assumes the account was
completely redeemed at the end of each one-, five- and ten- year period and the
deduction of all applicable charges and fees.
In considering the quotations set forth below, investors should remember that
the maximum sales charge reflected in each quotation is a one-time fee (charged
on all direct purchases) which will have its greatest impact during the early
stages of an investor's investment in a Fund. The actual performance of an
investment will be affected less by this charge the longer an investor retains
the investment in a Fund. The average annual compounded rates of return for the
Adjustable U.S. Government Fund and the Adjustable Rate Securities Fund for the
indicated periods ended on October 31, 1993, were as follows:
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR INCEPTION
-------- --------- ---------
<S> <C> <C> <C>
Adjustable U.S.
Government Fund*................ 0.62% 6.62% 6.51%
Adjustable Rate
Securities Fund*................ 3.08% 4.28%
</TABLE>
*Adjustable U.S. Government Fund and Adjustable Rate Securities Fund commenced
operations on March 15, 1988, and December 26, 1991, respectively.
These figures were calculated according to the SEC formula:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-,
five- or ten-year periods (or fractional portion thereof)
16
<PAGE>
As discussed in each Prospectus, each Fund may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as each Fund's average annual compounded rate, except that such
quotations will be based on each Fund's actual return for a specified period
rather than to their average return over one-, five- or ten-year periods, or
fractional portion thereof.
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR INCEPTION
-------- --------- ---------
<S> <C> <C> <C>
Adjustable U.S.
Government Fund*................ 0.62% 37.77% 46.31%
Adjustable Rate
Securities Fund*................ 3.08% 8.07%
</TABLE>
YIELD
Current yield reflects the income per share earned by each Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the 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 during the base period. The
yield for each Fund for the 30-day period ended on October 31, 1993, was as
follows:
<TABLE>
<CAPTION>
30-DAY
YIELD
------
<S> <C>
Adjustable U.S. Government Fund...................................... 2.90%
Adjustable Rate Securities Fund...................................... 3.82%
</TABLE>
These figures were obtained using the following SEC formula:
Yield = 2 [(a-b + 1)6 -1]
---
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE
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 the Funds' shareholders.
Amounts paid to shareholders are reflected in the quoted current "distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by a Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout, or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains and is calculated over a different period of time.
The current distribution rate for the Funds for the period ended on January 31,
1993, was as follows:
<TABLE>
<S> <C>
Adjustable U.S. Government Fund...................................... 3.36%
Adjustable Rate Securities Fund...................................... 3.82%
</TABLE>
VOLATILITY
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative 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 the
Standard & Poor's 500 Stock Index. 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 premise is that
greater volatility connotes greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are permitted to purchase
shares of a Fund at net asset value, sales literature pertaining to a Fund may
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance, as described elsewhere in this
Statement of Additional Information, with the substitution of net asset value
for the public offering price.
Sales literature referring to the use of each 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.
Regardless of the method used, past performance is not necessarily indicative
of future results, but is an indication of the return to shareholders only for
the limited historical period used.
17
<PAGE>
The Funds may include in their advertising or sales material information
relating to investment objectives and performance results of funds belonging to
the Templeton Group of Funds. Resources is the parent company of the advisers
and underwriter of both the Franklin Group of Funds and Templeton Group of
Funds.
COMPARISONS AND ADVERTISEMENTS
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements and other materials regarding each
Fund may discuss various measures of a Fund's 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.
Such comparisons may include, but are not limited to, the following examples:
a) Dow Jones Composite Average or its component averages - unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 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.
c) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry. Rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
d) 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.
e) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity and fixed-income funds.
f) 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.
g) 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.
h) 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, notes and bonds, and
inflation.
i) Savings and Loan Historical Interest Rates - as published in the U.S. Savings
& Loan League Fact Book.
j) Salomon Brothers Broad Bond Index or its component indices - the Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
k) Salomon Brothers Composite Index or its component indices - the High Yield
Index measures yields, price and total return for Long-Term High-Yield Index,
Intermediate-Term High-Yield Index and Long-Term Utility High-Yield Index.
l) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
m) Standard & Poor's Bond Indices - measure yield and price of Corporate,
Municipal, and Government Bonds.
n) Other taxable investments, including certificates of deposit accounts
(MMDAs), checking accounts, savings accounts, money market mutual funds, and
repurchase accounts.
o) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill Lynch, Pierce,
Fenner & Smith, Lehman Brothers and Bloomberg L.P.
p) Internal Business communications Money Fund Report - industry averages for
seven-day annualized and compounded yields of taxable, tax-free and government
money funds.
q) Merrill Lynch Corporate Master Index - reflects Investment Grade (BB/Baa or
better) corporate debt. It represents a cross-section of industries with
maturities ranging from 1 to 15 years.
From time to time, advertisements or information for a Fund may include a
discussion of certain attributes or benefits to be derived by an investment in
the Fund. Such advertisements or information may also compare a Fund's
performance to the return on certificates of deposit or other investments.
Investors should be aware, however, that an investment in a Fund involves the
risk of fluctuation of principal value, a risk generally not present in an
investment
18
<PAGE>
in a certificate of deposit issued by a bank. For example, as the general level
of interest rates rise, the value of a Fund's fixed-income investments, as well
as the value of its shares which 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.
Certificates of deposit are frequently insured by an agency of the U.S.
government. An investment in each Fund is not insured by any federal, state or
private entity.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the Funds' portfolios, that the indices and averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by each Fund to calculate
their figures. In addition there can be no assurance that each Fund will
continue its performance as compared to such other averages.
From time to time, the Adjustable U.S. Government Fund may advertise offers for
the general public to attend free seminars where a guest speaker will discuss
the benefits of investing in Franklin's professionally managed portfolio of U.S.
government securities. In addition, advertisements or information for the
Adjustable U.S. Government Fund may include a discussion of certain attributes
or benefits to be derived by an investment in the Fund. Such advertisements or
information may include symbols, headlines, or other material which highlight or
summarize the information discussed in more detail in the communication. Among
the benefits to be derived from an investment in the Fund is its relatively low
fluctuation in principal value. Compared to thirty-year U.S. Treasury bonds and
ten- year U.S. Treasury notes, shares of the Adjustable U.S. Government Fund
fluctuated less in principal value over the last two years. During the same time
period, this Fund's current yield was higher than the yield on money market
funds, certificates of deposit or thirty- year Treasury bonds. Of course, U.S.
Treasury bonds and notes are backed by the full faith and credit of the U.S.
government and are not subject to principal or interest fluctuation if held to
maturity. Certificates of deposit are frequently insured by an agency of the
U.S. government, and money market funds generally maintain an absolutely stable
net asset value of $1.00 per share. An investment in the Adjustable U.S.
Government Fund lacks these characteristics.
In addition, in promoting the sale of Fund shares, advertisements or information
for each of the Funds may also include quotes from Benjamin Franklin, especially
Poor Richard's Almanac.
Shareholders should note that the investment results of the Funds will fluctuate
over time, and any presentation of a Fund's current yield or total return for
any period should not be considered as a representation of what an investment
may earn or what a shareholder's yield or total return may be in any future
period. Shareholders should also note that, although the Funds believe that
there are substantial benefits to be realized by investing in their shares, such
investments also involve certain risks. (See the discussion of investment
objectives and policies in each Fund's Prospectus.)
OTHER FEATURES AND BENEFITS
Each Fund may help investors achieve various investment goals, such as
accumulating money for retirement, saving for a down payment on a home, college
cost and/or other long-term goals. The Franklin College Costs Planner may assist
an investor 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 an investor through the steps to start a retirement savings program. Of
course, an investment in either Fund cannot guarantee that such goals will be
met.
The Funds of the Trust are members of the Franklin/Templeton Group, one of the
largest mutual fund organizations in the United States 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 45 years and
now services more than 2.4 million shareholder accounts. In 1992, Franklin, a
leader in managing fixed-income mutual funds and an innovator in creating
domestic equity funds, joined forces with Templeton Worldwide, Inc., a pioneer
in international investing. Together, the Franklin/Templeton Group has over $117
billion in assets under management for more than 3.3 million shareholder
accounts and offers 97 U.S.-based mutual funds. The Fund may identify itself by
its Quotron or CUSIP number.
The Dalbar Surveys, Inc. broker/dealer survey has ranked Franklin number one of
36 mutual fund groups in service quality for 1993. One other fund group was also
ranked number one. Franklin has
19
<PAGE>
been ranked number one in service quality by Dalbar for five of the past six
years.
As of February 24, 1994, the principal shareholders of the Fund, beneficial or
of record, their addresses and the amount of their share ownership were as
follows:
<TABLE>
<CAPTION>
SHARES PERCENTAGE
------- ----------
<S> <C> <C>
ADJUSTABLE RATE SECURITIES FUND
Branford Savings Bank 262,558 7.48%
45 S. Main St.
Branford, CT 06405
</TABLE>
From time to time, the number of shares of each Fund 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.
MISCELLANEOUS
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of
Trust assets for any shareholder held personally liable for obligations of the
Trust. The Declaration of Trust provides that the Trust shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. All such rights are
limited to the assets of the Funds of which a shareholder holds shares. The
Declaration of Trust further provides that the Trust may maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance) for
the protection of the Trust, its shareholders, trustees, officers, employees and
agents to cover possible tort and other liabilities. Furthermore, the activities
of the Trust as an investment company, as distinguished from an operating
company, would not likely give rise to liabilities in excess of the Trust's
total assets. Thus, the remote risk of a shareholder's incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Trust itself is unable to meet its
obligations.
OWNERSHIP AND AUTHORITY DISPUTES
In the event of disputes involving multiple claims of ownership or authority
to control a shareholder's account, a Fund has the right (but has no obligation)
to: (a) freeze the account and require the written agreement of all persons
deemed by the Funds to have a potential property interest in the account, prior
to 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 Internal Revenue Service in response
to a Notice of Levy.
ADDITIONAL INFORMATION FOR INSTITUTIONAL INVESTORS
As the investments permitted to the Adjustable U.S. Government Fund through
its investments in shares of the Mortgage Portfolio are primarily in adjustable
rate mortgage securities issued or guaranteed by the U.S. government or its
agencies and instrumentalities, the shares of the Adjustable U.S. Government
Fund may be eligible for investment by federally chartered credit unions,
federally chartered savings and loan associations, and national banks. The
Adjustable U.S. Government Fund may be a permissible investment for certain
state chartered institutions as well, including state and local government
authorities and agencies. Because the investments of the Adjustable Rate
Securities Fund through its investments in shares of the Securities Portfolio
are primarily in adjustable rate securities, including adjustable rate mortgage
securities collateralized by or representing an interest in mortgages created
from pools of adjustable rate mortgages, which are issued or guaranteed by the
U.S. government, its agencies or instrumentalities, or such securities that have
been issued by private issuers, the shares of the Adjustable Rate Securities
Fund may or may not be eligible for investment by such institutions. ANY
FINANCIAL INSTITUTION CONSIDERING AN INVESTMENT IN THE ADJUSTABLE U.S.
GOVERNMENT FUND AND THE ADJUSTABLE RATE SECURITIES FUND SHOULD REFER TO THE
APPLICABLE LAWS AND REGULATIONS GOVERNING THEIR OPERATIONS IN ORDER TO DETERMINE
IF THESE FUNDS ARE A PERMISSIBLE INVESTMENT.
APPENDIX A
- -------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa - Bonds which are 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 by an 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.
20
<PAGE>
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long- term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be 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 which are 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 which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - This is the highest rating assigned by Standard & Poor's 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,
they differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
APPENDIX B
- -------------------------------------------------------------------------------
SUMMARY OF PROCEDURES TO MONITOR CONFLICTS OF INTEREST
The Boards of Trustees of the Adjustable Rate Securities Portfolios, on behalf
of its series ("master fund[s]"), and of the Trust, on behalf of certain of its
series which participate in a master/feeder fund structure ("feeder fund[s]"),
(both of which, except in the case of three trustees, are composed of the same
individuals) recognize that there is the potential for certain conflicts of
interest to arise between the master fund and the feeder funds in this format.
Such potential conflicts of interest could include, among others: the creation
of additional feeder funds with different fee structures; the creation of
additional feeder funds which could have controlling voting interests in any
pass-through voting which could affect investment and other policies; a proposal
to increase fees at the master fund level; and any consideration of changes in
fundamental policies at the master fund level which may or may not be acceptable
to a particular feeder fund.
In recognition of the potential for conflicts of interest to develop, the Boards
of Trustees have adopted certain procedures, pursuant to which i) the
independent members of each Board of Trustees will review the master/feeder fund
structure at least annually, as well as on an ongoing basis, and report to their
respective full Board of Trustees after each annual review; ii) if the
independent
21
<PAGE>
trustees determine that a situation or proposal presents a potential conflict,
they will request a written analysis from the master fund management describing
whether such apparent potential conflict of interest will impede the operation
of any of the constituent feeder funds and the interests of the feeder fund's
shareholders; and iii) upon receipt of the analysis, such trustees shall review
the analysis and present their conclusion to the full Board of Trustees.
If no actual conflict is deemed to exist, the independent trustees will
recommend that no further action be taken. If the analysis is inconclusive, they
may submit the matter to and be guided by the opinion of an independent legal
counsel issued in a written opinion. If a conflict is deemed to exist, they may
recommend one or more of the following courses of action: i) suggest a course of
action designed to eliminate the potential conflict of interest; ii) if
appropriate, request that the full Board of Trustees submit the potential
conflict to shareholders for resolution; iii) recommend to the full Board of
Trustees that the affected feeder fund no longer invest in its designated master
fund and propose either a search for a new master fund in which to invest the
feeder fund's assets or the hiring of an investment manager to manage the feeder
fund's assets in accordance with its objectives and policies; iv) recommend to
the full Board of Trustees that a new group of trustees be recommended to the
shareholders of the Trust for approval; or v) recommend such other action as may
be considered appropriate.
22
FRANKLIN INVESTORS SECURITIES TRUST
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
of Franklin Investors Securities Trust:
We have audited the accompanying statements of assets and liabilities of the
various funds comprising Franklin Investors Securities Trust, including each
Fund's statement of investments in securities and net assets, as of October 31,
1993, and the related statements of operations and changes in net assets for the
periods indicated thereon, and the selected per share data and ratios included
under the caption "Financial Highlights" for the periods
indicated in Note 12. 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 investments
and cash held by the custodian as of October 31, 1993, and confirmation by
correspondence with brokers as to securities purchased but not received at that
date, or other auditing procedures where confirmations from brokers were not
received. 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 various funds comprising Franklin Investors Securities Trust as
of October 31, 1993, the results of their operations and the changes in their
net assets for the periods indicated thereon, and the financial highlights
for each of the periods indicated in Note 12, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND
San Francisco, California
December 6, 1993
23
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS .3%
FINANCIAL SERVICES .2%
US 16,200 (d)Grupo Financiero Bancomer, ADS................................................ $ 471,066
------------
HOME BUILDING
US 2,302 (a)NVR, Inc...................................................................... 23,308
------------
METALS .1%
US 7,000 Kloof Gold Mining Co., Ltd., ADR.............................................. 70,000
US 3,000 Orange Free State Investments, Ltd., ADR...................................... 105,750
------------
175,750
------------
TOTAL COMMON STOCKS (COST $614,341)...................................... 670,124
------------
WARRANTS
HOME BUILDING
US 1,193 (a)NVR, Inc...................................................................... 5,816
------------
RESTAURANTS/FOOD SERVICES
US 115 (a)Foodmaker, Inc................................................................ 1,393
------------
TOTAL WARRANTS (COST $5,230)............................................. 7,209
------------
PREFERRED STOCKS .4%
FINANCIAL SERVICES
US 30,000 Nortel Communications, Inc., Series B, ADR (Cost $450,000).................... 555,000
------------
FACE
AMOUNT
-------------
BONDS, NOTES, BILLS & DEBENTURES 83.4%
ARGENTINA 4.8%
US 14,000,000 Republic of Argentina, 4.00%, 03/31/23........................................ 9,292,500
------------
AUSTRALIA 2.1%
AUS 2,396,000 Fanmac Strip, 13.95%, 05/15/06................................................ 1,747,205
AUS 3,000,000 Queensland Treasury Corp., 8.00%, 05/14/03.................................... 2,181,459
AUS 450,000 (f)Snowy Mountain Hydro, notes, 0.00%, 02/01/97.................................. 236,746
------------
4,165,410
------------
CANADA 14.1%
CAN 16,000,000 (f)Canadian Strip, 0.00%, 03/01/08............................................... 3,776,172
CAN 5,000,000 Government of Canada, 10.00%, 06/01/08........................................ 4,685,549
CAN 450,000 Hydro-Quebec, Eurobonds, 11.00%, 02/09/99..................................... 397,332
CAN 1,150,000 Ontario-Hydro, Eurobonds, 10.875%, 01/08/96................................... 965,367
CAN 3,000,000 Ontario-Hydro, Eurobonds, 9.00%, 06/24/02..................................... 2,491,393
CAN 3,500,000 Ontario-Hydro, Eurobonds, 8.90%, 08/18/22..................................... 2,844,553
CAN 1,000,000 Province of British Columbia, 10.15%, 08/29/01................................ 894,310
CAN 12,000,000 Province of British Columbia, 8.00%, 09/09/23................................. 9,089,327
CAN 3,000,000 Province of Quebec, Eurobonds, 8.50%, 04/01/97................................ 2,438,898
------------
27,582,901
------------
DENMARK 4.1%
DAN 23,000,000 Kingdom of Denmark, 9.00%, 11/15/95........................................... 3,587,117
DAN 26,000,000 Kingdom of Denmark, 9.00%, 11/15/00........................................... 4,433,905
------------
8,021,022
------------
FRANCE 4.2%
FR 11,197,437 CB-2 Cetelem Assets Backed Securities, 9.50%, 11/20/96........................ 1,948,823
FR 550,000 French OAT Bond, 9.80%, 01/30/96.............................................. 102,253
FR 20,000,000 French OAT Bond, 7.41%, 01/25/01.............................................. 3,418,498
FR 15,400,000 Government of France, BTAN, 9.00%, 02/12/95................................... 2,728,772
------------
8,198,346
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS, NOTES, BILLS & DEBENTURES (CONT.)
GREAT BRITAIN 6.6%
UK 700,000 Halifax Building Society, floating rate deb., Series B, 5.955%, 09/30/96...... $ 1,041,053
UK 3,500,000 United Kingdom Treasury, 10.00%, 11/15/96..................................... 5,772,348
UK 3,500,000 United Kingdom Treasury, 9.75%, 08/27/02...................................... 6,165,326
------------
12,978,727
------------
ITALY 15.2%
ITY 10,000,000,000 Buoni Poliennali del Tesoro (BTPS), 9.625%, 06/01/03.......................... 6,869,245
ITY 13,000,000,000 Certificati di Credito del Tesoro (CCTS), 11.20%, 01/20/00.................... 8,108,042
ITY 15,000,000,000 Certificati di Credito del Tesoro (CCTS), 10.50%, 08/01/00.................... 9,383,057
ITY 1,710,000,000 Deutshcebank Finance, 12.375%, 11/07/94....................................... 1,091,713
EC 1,500,000 Government of Italy, 9.25%, 03/07/11.......................................... 1,963,082
UK 1,200,000 Government of Italy, 10.50%, 04/28/14......................................... 2,220,008
------------
29,635,147
------------
MEXICO 1.2%
US 700,000 United Mexican States, FRN, 5.00%, 03/31/08................................... 669,375
US 600,000 United Mexican States, FRN, 4.25%, 12/31/19................................... 521,250
US 1,400,000 United Mexican States, Series B, 6.25%, 12/31/19.............................. 1,137,500
------------
2,328,125
------------
NEW ZEALAND 8.5%
NWZ 16,250,000 Electricity Corp. of New Zealand, 10.00%, 10/15/01............................ 11,057,578
NWZ 8,000,000 Government of New Zealand, 10.00%, 03/15/02................................... 5,607,819
------------
16,665,397
------------
SOUTH AFRICA 3.1%
SA 29,350,000 ESCOM, E168, 11.00%, 06/01/08................................................. 6,072,034
------------
SPAIN 8.0%
SP 500,000,000 Government of Spain, 13.65%, 03/15/94......................................... 3,769,173
SP 300,000,000 Government of Spain, 12.00%, 07/15/94......................................... 2,272,226
SP 600,000,000 Government of Spain, 11.40%, 07/15/95......................................... 4,670,886
SP 240,000,000 Government of Spain, 13.45%, 04/15/96......................................... 1,988,086
SP 365,000,000 Government of Spain, 11.60%, 01/15/97......................................... 2,970,551
------------
15,670,922
------------
SWEDEN 7.2%
SWD 10,000,000 Staten Bostadsfinansier, 13.00%, 09/20/95..................................... 1,351,637
SWD 91,000,000 Staten Bostadsfinansier, 11.00%, 01/21/99..................................... 12,712,801
------------
14,064,438
------------
UNITED STATES 1.3%
US 2,000,000 Tele-Communications, Inc., cvt. sub. deb., 9.80%, 02/01/12.................... 2,525,634
------------
VENEZUELA 3.0%
US 4,000,000 Republic of Venezuela, 4.313%, 12/18/07....................................... 2,950,000
US 4,000,000 Republic of Venezuela, 6.75%, 03/31/20........................................ 2,985,000
------------
5,935,000
------------
TOTAL BONDS, NOTES, BILLS & DEBENTURES (COST $163,416,679)............... 163,135,603
------------
TOTAL COMMON STOCKS, WARRANTS, PREFERRED STOCKS, AND BONDS,
NOTES, BILLS & DEBENTURES (COST $164,486,250).......................... 164,367,936
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM SECURITIES 11.1%
GOVERNMENT AGENCIES 5.7%
MEX 16,670,000 (f)Mexican Federal Treasury Certificates (CETES), 0.00%, 03/24/94............... $ 5,070,768
US 5,220,000 (d,f)Offshore Mexican Junior Bond, 0.00%, 07/20/94................................. 6,133,500
------------
TOTAL GOVERNMENT AGENCIES (COST $10,809,397)............................. 11,204,268
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $175,295,647)....... 175,572,204
------------
RECEIVABLES FROM REPURCHASE AGREEMENTS 5.4%
$ 4,740,000(h) Bank of America Government Securities, Inc., 2.98%, 11/01/93
(Maturity Value $5,051,254)
Collateral: U.S. Treasury Notes, 7.75%, 03/31/96............................ 5,050,000
5,435,000(h) Daiwa Securities of America, Inc., 2.95%, 11/01/93
(Maturity Value $5,526,358)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94............................ 5,525,000
------------
TOTAL RECEIVABLES FROM REPURCHASE AGREEMENTS (COST $10,575,000).......... 10,575,000
------------
TOTAL INVESTMENTS (COST $185,870,647) 95.2%............................ 186,147,204
OTHER ASSETS AND LIABILITIES, NET 4.8%................................. 9,479,309
------------
NET ASSETS 100.0%...................................................... $195,626,513
============
At October 31, 1993, the net unrealized depreciation based on the cost of
investments for income tax purposes of $186,149,185 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost.................................... $ 8,159,227
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value.................................... (8,161,208)
------------
Net unrealized depreciation............................................... $ (1,981)
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
BTAN - Treasury Bond at Fixed Interest Rate
FRN - Floating Rate Notes
OAT - Obligations Assumable by the Treasurer
COUNTRY LEGEND:
AUS - Australia
CAN - Canada
DAN - Denmark
EC - European Community
FR - France
ITY - Italy
MEX - Mexico
NWZ - New Zealand
SA - South Africa
SP - Spain
SWD - Sweden
UK - United Kingdom
US - United States
*Securities traded in currency of country indicated.
(a)Non-income producing.
(d)See Note 10 regarding Rule 144A securities.
(f)Zero coupon bonds. Accretion rate may vary.
(h)Face amount for repurchase agreements is for the underlying collateral.
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
FACE FRANKLIN SHORT-INTERMEDIATE VALUE
AMOUNT U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Securities 100.4%
$25,000,000 U.S. Treasury Notes, 7.50%, 11/15/01........................................................... $ 28,562,250
6,000,000 U.S. Treasury Notes, 6.00%, 10/15/99........................................................... 6,296,220
17,000,000 (f)U.S. Treasury Strips, 0.00%, 02/15/99.......................................................... 13,099,010
12,000,000 U.S. Treasury Notes, 6.375%, 01/15/99.......................................................... 12,809,880
8,000,000 U.S. Treasury Notes, 4.75%, 08/31/98........................................................... 7,979,920
4,000,000 U.S. Treasury Notes, 5.125%, 06/30/98.......................................................... 4,057,480
10,000,000 U.S. Treasury Notes, 5.125%, 03/31/98.......................................................... 10,159,300
6,000,000 U.S. Treasury Notes, 5.50%, 09/30/97........................................................... 6,198,720
6,500,000 U.S. Treasury Notes, 6.75%, 02/28/97........................................................... 6,965,140
5,000,000 U.S. Treasury Notes, 6.25%, 01/31/97........................................................... 5,279,650
4,000,000 U.S. Treasury Notes, 6.125%, 12/31/96.......................................................... 4,208,720
20,000,000 (f)U.S. Treasury Strips, 0.00%, 08/15/96.......................................................... 17,752,660
74,000,000 U.S. Treasury Notes, 4.25%, 05/15/96........................................................... 74,161,320
5,000,000 (f)U.S. Treasury Strips, 0.00%, 05/15/96.......................................................... 4,495,885
80,010,000 (f)U.S. Treasury Strips, 0.00%, 02/15/96.......................................................... 72,830,463
------------
TOTAL INVESTMENTS (COST $266,425,895) 100.4%....................................... 274,856,618
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.4)%................................... (1,178,637)
------------
NET ASSETS 100.0%................................................................... $273,677,981
============
At October 31, 1993, the net unrealized appreciation based on the cost of investment
for income tax purposes of $266,425,895 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost............................................................. $ 8,490,803
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value............................................................. (60,080)
------------
Net unrealized appreciation................................................................. $ 8,430,723
============
</TABLE>
(f)Zero coupon bonds. Accretion rate may vary.
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS & WARRANTS
HOME BUILDERS
3,872 (a)NVR LP, warrant (cost $16,456).......................................................... $ 18,876
----------
CONVERTIBLE PREFERRED STOCKS 32.2%
AUTOMOTIVE 2.2%
4,400 Ford Motor Co., $4.20 cum. cvt. pfd., Series A.......................................... 460,900
10,300 General Motors Corp., $2.86 cvt. pfd., Series E......................................... 584,525
----------
1,045,425
----------
BANKING 4.3%
5,100 Ahmanson (H.F.) & Co., $3.00 cvt. pfd., Series D........................................ 251,813
7,570 Bank of America, $3.25 cvt. pfd., Series G.............................................. 439,060
7,000 (d)Chemical Bank, $5.00 cvt. pfd........................................................... 587,125
6,800 (d)Citicorp, $5.375 cvt. pfd............................................................... 744,600
----------
2,022,598
----------
BROADCAST/MEDIA .7%
5,800 Evergreen Media Corp., $3.00 cvt. pfd., Series A........................................ 312,475
----------
CONSTRUCTION 1.0%
8,700 (d)McDermott International, $2.875 cum. cvt. pfd., Series C................................ 457,838
----------
ENERGY 2.1%
7,300 Ashland Oil, $3.12 cum. cvt. pfd........................................................ 455,337
10,000 (d)Occidental Petroleum Corp., $3.875 cvt. pfd............................................. 555,000
----------
1,010,337
----------
FINANCIAL SERVICES .8%
6,000 (d)Equitable Cos., $3.00 cvt. pfd., Series C.............................................. 381,750
----------
GOLD .3%
2,600 Battle Mountain Gold, $3.25 cvt. pfd.................................................... 156,975
----------
INDUSTRIAL EQUIPMENT .9%
14,000 Cooper Industries, $1.60 cvt. pfd....................................................... 444,500
----------
LEASING .9%
7,600 GATX Corp., $3.875 cvt. pfd., Series A.................................................. 408,500
----------
LONG DISTANCE/TELECOM 4.8%
30,000 LCI International, Inc., $1.25 cvt. pfd................................................. 885,000
15,000 (d)Mobile Telecommunication, $2.25 cvt. pfd................................................ 641,250
20,000 (d)Philippine Long Distance Telephone Company, $1.44 cvt. pfd.............................. 750,000
----------
2,276,250
----------
METAL & RESOURCES 1.1%
9,200 Armco, Inc., $3.625 cvt. pfd., Series A.................................................. 501,400
----------
OIL & GAS 5.1%
4,000 (d)Diamond Shamrock, $2.50 cvt. pfd......................................................... 230,000
12,000 Gerrity Oil & Gas, $1.50 cvt. pfd........................................................ 306,000
11,100 Maxus Energy Corp., $4.00 cum. cvt. pfd.................................................. 532,800
9,600 Noble Drilling Corp., $2.25 cvt. pfd..................................................... 524,400
12,662 Santa Fe Energy, $1.40 cvt. pfd.......................................................... 251,657
11,100 Snyder Oil Corp., $1.50 cvt. pfd......................................................... 333,000
5,000 (d)Transco Energy, $3.50 cvt. pfd........................................................... 258,750
----------
2,436,607
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
SHARES/ VALUE
WARRANTS FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS & WARRANTS (CONT.)
REAL ESTATE .7%
6,250 Catellus Development, $3.75 cvt. pfd., Series A.......................................... $ 357,812
-----------
REAL ESTATE INVESTMENT TRUST 1.1%
18,300 Merry Land & Investment, $1.75 cvt. pfd., Series A....................................... 519,263
-----------
RESTAURANTS .8%
15,100 Flagstar Cos., Inc., $2.25 cvt. pfd., Series A........................................... 362,400
-----------
SAVINGS & LOANS 2.3%
9,700 Great Western Financial, $4.375 cvt. pfd................................................. 590,487
7,900 Roosevelt Financial Group, $3.25 cvt. pfd................................................ 519,425
-----------
1,109,912
-----------
SEMICONDUCTORS .7%
5,000 National Semiconductor, $3.25 cvt. pfd................................................... 347,500
-----------
TEXTILES 1.2%
10,000 (d,j)Fieldcrest Cannon, $3.00 cvt. pfd........................................................ 590,000
-----------
TRANSPORTATION 1.2%
10,000 (d)American Airlines, $3.00 cvt. pfd........................................................ 546,250
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $12,729,082)............................... 15,287,792
-----------
FACE
AMOUNT
- ----------
CONVERTIBLE BONDS 64.7%
ADVERTISING 3.9%
$1,750,000 (d)Omnicom Group, cvt. deb., 4.50%, 09/01/00................................................ 1,850,625
-----------
APPAREL .6%
250,000 L.A. Gear, Inc., cvt. sub. notes, 7.75%, 11/30/02........................................ 281,250
-----------
BANKING 1.2%
500,000 Banco National de Mexico, cvt. deb., 7.00%, 12/15/99..................................... 547,500
-----------
BIOTECHNOLOGY 1.8%
650,000 Centocor, Inc., Eurobond cvt. sub. deb., 6.75%, 10/16/01................................. 487,500
400,000 (d)Genzyme Corp., cvt. sub. deb., 6.75%, 10/01/01........................................... 400,000
-----------
887,500
-----------
BROADCAST/MEDIA 3.4%
400,000 (d)All American Communications, cvt. deb., 6.50%, 10/01/03.................................. 402,000
300,000 (d)RHI Entertainment, Inc., cvt. sub. deb., 6.50%, 06/01/03................................. 387,000
2,000,000 (f)Time Warner, Inc., cvt. liquid yield option notes, 0.00%, 06/22/13....................... 822,500
-----------
1,611,500
-----------
BUILDING MATERIALS .6%
175,000 (d)Owens Corning Fiberglass Corp., cvt. junior sub. deb., 8.00%, 12/30/05................... 285,469
-----------
CABLE 1.7%
2,005,000 (f)Rogers Communication, Inc., cvt. liquid yield option sub. notes, 0.00%, 05/20/13......... 812,025
-----------
ELECTRONIC 1.5%
350,000 Sensormatic Electric Corp., cvt. sub. deb., 7.00%, 05/15/01.............................. 705,250
-----------
GAMING 1.3%
500,000 WMS Industries, cvt. deb., 6.00%, 10/01/02............................................... 597,500
-----------
GROCERY/FOOD 3.3%
500,000 (d)Food Lion, Inc., cvt. sub. deb., 5.00%, 06/01/03......................................... 525,000
500,000 Kroger Co., cvt. junior sub. deb., 6.375%, 12/01/99...................................... 621,875
400,000 (d)Kroger Co., cvt. junior sub. deb., 8.25%, 04/15/11....................................... 424,000
-----------
1,570,875
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
HEALTH CARE 8.6%
$ 300,000 Hillhaven Corp, cvt. sub. deb., 7.75%, 11/01/12.......................................... $ 418,500
400,000 Integrated Health Services, cvt. sub. deb., 6.00%, 01/01/03.............................. 456,000
400,000 (d)Medical Care International, Inc., cvt. sub. deb., 6.75%, 10/01/06........................ 368,000
250,000 Omnicare, Inc., cvt. sub. notes, 5.75%, 10/01/03......................................... 288,750
1,000,000 Quantum Health Resources, cvt. sub. deb., 4.75%, 10/10/00................................ 1,090,000
2,000,000 (e)Roche Holdings, cvt., 0.00%, 09/23/08.................................................... 1,047,500
500,000 Vencor, Inc., cvt. sub. notes, 6.00%, 10/01/02........................................... 477,500
-----------
4,146,250
-----------
INDUSTRIAL EQUIPMENT 1.0%
300,000 Mark IV Industries, Inc., cvt. sub. deb., 6.25%, 02/15/07................................ 469,500
-----------
INSURANCE COMPANIES 3.6%
500,000 Horace Mann Educators Corp., cvt. sub. notes, 4.00%, 12/01/99............................ 510,000
500,000 Leucadia National Corp., cvt., 5.25%, 02/01/03........................................... 512,500
400,000 (d)Scor U.S. Corp., cvt. sub. deb., 5.25%, 04/01/00......................................... 391,500
250,000 Trenwick Group, Inc., cvt. deb., 6.00%, 12/15/99......................................... 281,250
-----------
1,695,250
-----------
LONG DISTANCE/TELECOM 3.9%
500,000 (d,f)Cellular Communications, Inc., cvt. sub. notes, 0.00%, 07/27/99.......................... 387,500
495,000 Cellular, Inc., cvt. sub. deb., 6.75%, 07/15/09.......................................... 482,625
1,000,000 (f)ComCast Cellular, cvt. sub. deb., Series B, 0.00%, 03/05/00.............................. 620,000
300,000 Compania Telefonos de Chile, cvt. sub., ADS, 4.50%, 01/15/03............................. 372,000
-----------
1,862,125
-----------
METAL/MINING 1.2%
500,000 (d)Homestake Mining Co., cvt. sub., 5.50%, 06/23/00......................................... 562,500
-----------
OIL & GAS 6.1%
396,000 Amoco Canada Petroleum Co., Ltd., cvt. sub. deb., Series A, 7.375%, 09/01/13............. 488,070
975,000 Noble Affiliates, cvt. sub. notes, 4.25%, 11/01/03....................................... 1,000,594
550,000 Pennzoil Co., cvt. sub. deb., 6.50%, 01/15/03............................................ 713,625
550,000 Presidio Oil Co., cvt. sub. deb., 9.00%, 03/15/15........................................ 445,500
200,000 (d)Seacor Holdings, Inc., cvt. sub. deb., 6.00%, 07/01/03................................... 234,000
-----------
2,881,789
-----------
POLLUTION CONTROL 1.4%
400,000 Air & Water Technology, cvt. sub. deb., 8.00%, 05/15/02.................................. 382,000
290,000 Sanifill, Inc., cvt. sub. deb., 7.50%, 06/01/06.......................................... 286,375
-----------
668,375
-----------
PUBLISHING/NEWSPAPERS 1.0%
1,500,000 (f)Hollinger, Inc., cvt. sub. notes, 0.00%, 10/05/13........................................ 466,875
-----------
REAL ESTATE 2.1%
1,000,000 (d)Henderson Capital International, cvt. deb., 4.00%, 10/27/96.............................. 1,002,500
-----------
REAL ESTATE INVESTMENT TRUST 4.1%
525,000 MediTrust, cvt. deb., 9.00%, 01/01/02.................................................... 660,844
1,250,000 Mid Atlantic Realty Trust, cvt. sub. deb., 7.625%, 09/15/03.............................. 1,268,750
-----------
1,929,594
-----------
RETAIL 2.4%
200,000 Home Depot, Inc., cvt. sub. notes, 4.50%, 02/15/97....................................... 244,000
300,000 Michael Stores, cvt., 4.75%, 01/15/03.................................................... 343,500
200,000 Pier One Imports, Inc., cvt. sub. notes, 6.875%, 04/01/02................................ 221,000
300,000 Staples, Inc., cvt. sub. deb., 5.00%, 11/01/99........................................... 310,500
-----------
1,119,000
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
SEMICONDUCTORS 1.8%
$ 900,000 (f)Motorola, Inc., cvt. liquid yield option sub. notes, 0.00%, 09/07/09.................... $ 861,750
-----------
SOFTWARE .7%
250,000 Sterling Software, cvt. sub. deb., 5.75%, 02/01/03....................................... 321,250
-----------
STEEL 1.3%
500,000 Essar Gujarat, Ltd., cvt., 5.50%, 08/05/98............................................... 602,500
-----------
TECHNOLOGY 4.2%
700,000 Conner Peripherals, Inc., cvt. deb., 6.50%, 03/01/02..................................... 603,750
1,750,000 (d,f)Silicon Graphics, cvt. sub. deb., 0.00%, 11/02/13........................................ 790,780
600,000 (d)SynOptics Communications, Inc., cvt. sub. deb., 5.25%, 05/15/03......................... 585,000
-----------
1,979,530
-----------
TRANSPORTATION 2.0%
1,000,000 Air Express International, cvt. sub. deb., 6.00%, 01/15/03............................... 960,000
-----------
TOTAL CONVERTIBLE BONDS (COST $27,492,184).......................................... 30,678,282
-----------
SHORT TERM SECURITIES .5%
BANKING .5%
25,000 (l)Banco de Santander S.A., cvt. deb., 9.00%, 06/24/94 (Cost $205,398)...................... 244,788
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $40,443,120).................... 46,229,738
-----------
RECEIVABLES FROM REPURCHASE AGREEMENTS 4.2%
1,960,000 (h)Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $1,970,484)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94 (Cost $1,970,000)..................... $ 1,970,000
-----------
TOTAL INVESTMENTS (COST $42,413,120) 101.6%......................................... 48,199,738
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (1.6)%................................... (759,468)
-----------
NET ASSETS 100.0% .................................................................. $47,440,270
===========
At October 31, 1993, the net unrealized appreciation based on the cost of investments
for income tax purposes of $42,413,120 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost...................................................... $ 6,135,930
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value...................................................... (349,312)
-----------
Net unrealized appreciation.......................................................... $ 5,786,618
===========
(a)Non-income producing.
(d)See Note 10 regarding Rule 144A securities.
(f)Zero coupon bonds. Accretion rate may vary.
(h)Face amount for repurchase agreements is for the underlying collateral.
(j)See Note 1 regarding securities purchased on a when-issued or to-be-announced basis.
(l)Face amount stated in foreign currencies, value in U.S. dollars.
The accompanying notes are an integral part of these financial statements.
31
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 99.7%
184,156,840 U.S. Government ARM Portfolio (Note 1)...................................................... $1,808,420,173
--------------
TOTAL INVESTMENTS (COST $1,843,714,150) 99.7%........................................... 1,808,420,173
OTHER ASSETS AND LIABILITIES, NET .3%................................................... 5,083,843
--------------
NET ASSETS 100.0%....................................................................... $1,813,504,016
==============
At October 31, 1993, the net unrealized depreciation based on the cost of investments
for income tax purposes of $1,843,825,431 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost......................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value......................................................... (35,405,258)
--------------
Net unrealized depreciation............................................................. $ (35,405,258)
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 65.4%
CHEMICALS 8.0%
15,700 Chemed Corp................................................................................ $ 492,588
13,200 Dow Chemical Co............................................................................ 732,600
13,300 duPont, (E.I.) de Nemours & Co............................................................. 635,075
10,200 Imperial Chemical Industries, Plc., ADR.................................................... 438,600
16,000 Olin Corp.................................................................................. 742,000
16,200 Union Carbide Corp......................................................................... 319,950
-----------
3,360,813
-----------
CONGLOMERATES 3.5%
41,800 Hanson, Plc., Sponsored ADR................................................................ 841,225
29,000 Ogden, Corp................................................................................ 696,000
-----------
1,537,225
-----------
FINANCE 5.3%
45,000 Ahmanson (H.F.) & Co....................................................................... 815,625
30,000 Corporacion Bancaria de Espana, S.A., ADR.................................................. 667,500
38,300 Great Western Financial Corp............................................................... 732,487
-----------
2,215,612
-----------
INSURANCE 4.6%
9,700 Aetna Life & Casualty Co................................................................... 637,774
9,000 CIGNA Corp................................................................................. 604,125
19,400 Travelers Corp............................................................................. 683,850
-----------
1,925,749
-----------
MEDICAL SUPPLIES 1.1%
19,200 Baxter International, Inc.................................................................. 456,000
-----------
NATURAL GAS 1.7%
5,000 Laclede Gas Co............................................................................. 241,250
14,800 Sonat, Inc................................................................................. 460,650
-----------
701,900
-----------
OIL-INTEGRATED-INTERNATIONAL 9.0%
6,500 Atlantic Richfield Co...................................................................... 716,625
6,700 Chevron Corp............................................................................... 649,900
10,000 Exxon Corp................................................................................. 653,750
8,600 Mobil Corp................................................................................. 700,900
4,800 Royal Dutch Petroleum Co................................................................... 507,600
8,500 Texaco, Inc................................................................................ 579,063
-----------
3,807,838
-----------
PAPER & FOREST PRODUCTS 1.6%
15,400 Potlatch Corp.............................................................................. 675,675
-----------
PHARMACEUTICAL 6.6%
11,800 American Home Products Corp................................................................ 737,500
16,600 Bristol-Myers Squibb Co.................................................................... 975,250
16,900 Merck & Co., Inc........................................................................... 542,913
15,600 Zeneca Group, Plc, ADR..................................................................... 532,350
-----------
2,788,013
-----------
PHOTOGRAPHY 1.2%
7,900 Eastman Kodak Co........................................................................... 497,700
-----------
PUBLISHING 1.6%
9,900 Dun & Bradstreet Corp...................................................................... 663,300
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (CONT.)
RETAIL STORES 1.4%
24,900 K-mart Corp................................................................................ $ 610,050
-----------
STEEL 1.3%
9,800 Carpenter Technology Corp.................................................................. 536,550
-----------
TOBACCO 3.1%
18,100 American Brands, Inc....................................................................... 624,450
12,900 Philip Morris Cos., Inc.................................................................... 693,375
-----------
1,317,825
-----------
TRANSPORTATION 1.3%
24,500 Yellow Corp................................................................................ 563,500
-----------
UTILITIES - ELECTRIC 6.2%
10,200 Delmarva Power & Light Co.................................................................. 244,800
14,600 FPL Group, Inc............................................................................. 574,875
3,500 New England Electric System................................................................ 146,124
14,900 Ohio Edison Co............................................................................. 359,463
19,800 Pacificorp................................................................................. 388,575
24,900 SCEcorp.................................................................................... 522,900
8,500 Texas Utilities Co......................................................................... 382,500
-----------
2,619,237
-----------
UTILITIES - TELEPHONE 7.9%
10,300 BellSouth Corp............................................................................. 646,325
16,300 GTE Corp................................................................................... 647,925
21,300 NYNEX Corp................................................................................. 899,925
9,500 Pacific Telesis Group...................................................................... 521,313
11,900 U.S. West, Inc............................................................................. 596,488
-----------
3,311,976
-----------
TOTAL COMMON STOCKS (COST $23,552,506) 27,588,963
-----------
CONVERTIBLE PREFERRED STOCKS 20.7%
10,900 (d)American Airlines, $3.00 cvt. pfd.......................................................... 595,413
4,000 Battle Mountain Gold, $3.25 cvt. pfd....................................................... 241,500
6,000 Burlington Northern, $6.25 cvt. pfd., Series A............................................. 409,500
6,600 (d)Chemical Bank, $5.00 cvt. pfd.............................................................. 553,575
6,000 (d)Citicorp, $5.375 cum. cvt. adj. rate pfd................................................... 657,000
11,100 Delta Airlines, $3.50 cvt. pfd., Series C.................................................. 636,863
4,200 Evergreen Media Corp., $3.00 cvt. pfd., Series A........................................... 226,275
1,500 Ford Motor Co., $4.20 cum. cvt. pfd., Series A............................................. 157,125
11,100 General Motors Corp., $3.31 cvt. pfd., Series A............................................ 530,025
8,600 General Motors Corp., $3.25 cvt. pfd., Series C............................................ 488,050
5,400 Great Western Financial Corp., $8.75 cvt. pfd.............................................. 328,724
8,600 K-mart Corp., $3.41 cvt. pfd............................................................... 425,700
29,000 Kaufman & Broad Homes, $1.52 cvt. pfd., Series B........................................... 616,250
7,500 (d)Kemper Co., $2.875 cvt. pfd., Series E..................................................... 373,593
9,700 (d)Occidental Petroleum Corp., $3.875 cvt. pfd................................................ 538,350
69,700 RJR Nabisco Holdings Corp., $.835 cvt. pfd................................................. 426,913
6,200 Roosevelt Financial Group, $3.25 cvt. pfd.................................................. 407,650
11,600 Tandy Corp. $2.140, cvt. pfd., Series C.................................................... 408,900
3,400 (d)Transco $3.50, cvt. pfd.................................................................... 175,950
28,500 Westinghouse Electric, $1.53 cvt. pfd...................................................... 527,250
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $7,680,093) 8,724,606
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN EQUITY INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT SECURITIES 2.5%
$1,000,000 U.S. Treasury Notes, 6.00%, 11/30/97 (Cost $997,734)....................................... $ 1,050,310
------------
TOTAL COMMON STOCKS, CONVERTIBLE PREFERRED STOCKS AND GOVERNMENT SECURITIES
(COST $32,230,333).................................................................. 37,363,879
------------
Receivables from Repurchase Agreements 11.9%
5,000,000 (h)Daiwa Securities of America, Inc., 2.95%, 11/01/93 (Maturity Value $5,031,237)
Collateral: U.S. Treasury Notes, 5.00%, 06/30/94 (Cost $5,030,000)....................... 5,030,000
-----------
TOTAL INVESTMENTS (COST $37,260,333) 100.5%.......................................... 42,393,879
LIABILITIES IN EXCESS AND OTHERS ASSETS, NET (.5)%................................... (216,649)
-----------
NET ASSETS 100.0%.................................................................... $42,177,230
===========
At October 31, 1993, the net unrealized appreciation based on the cost of investments
for income tax purposes of $37,262,565 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost....................................................... $ 5,524,564
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value....................................................... (393,250)
-----------
Net unrealized appreciation........................................................... $ 5,131,314
===========
</TABLE>
(d)See Note 10 regarding Rule 144A securities.
(h)Face amount for repurchase agreements is for the underlying collateral.
The accompanying notes are an integral part of these financial statements.
35
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN ADJUSTABLE RATE SECURITIES FUND (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.7%
3,795,340 Adjustable Rate Securities Portfolio (Note 1)............................................. $38,067,265
-----------
TOTAL INVESTMENTS (COST $38,103,334) 100.7%.......................................... 38,067,265
LIABILITIES IN EXCESS AND OTHER ASSETS, NET (.7)%.................................... (258,260)
-----------
NET ASSETS 100.0%.................................................................... $37,809,005
===========
At October 31, 1993, the net unrealized depreciation based on the cost of investments
for income tax purposes of $38,104,327 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost....................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value....................................................... (37,062)
-----------
Net unrealized depreciation........................................................... $ (37,062)
===========
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN FRANKLIN ADJUSTABLE FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT FRANKLIN EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- ------------------ --------------- ------------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Investments:
At identified cost........ $175,295,647 $266,425,895 $40,443,120 $1,843,714,150 $32,230,333 $38,103,334
============ ============ =========== ============== =========== ===========
At value.................. 175,572,204 274,856,618 46,229,738 1,808,420,173 37,363,879 38,067,265
Receivables from
repurchase agreements
at value and cost......... 10,575,000 - 1,970,000 - 5,030,000 -
Cash....................... 912,062 7,237 70,657 2,719,550 180,560 -
Receivables:
Dividends and interest.... 5,706,563 2,990,231 399,235 - 195,033 -
Investment securities
sold..................... 21,005,812 - 78,116 - 143,743 -
Capital shares sold....... 623,553 711,939 181,756 17,902,314 199,143 16,964
Unrealized appreciation on
foreign currency forward
contracts (Note 2)........ 78,055 - - - - -
Other...................... - - - - - 461
Receivable from affiliates. - - 49,139 - 45,863 -
------------ ------------ ----------- -------------- ----------- -----------
Total assets............ 214,473,249 278,566,025 48,978,641 1,829,042,037 43,158,221 38,084,690
------------ ------------ ----------- -------------- ----------- -----------
Liabilities:
Payables:
Investment securities
purchased:
Regular delivery......... 18,509,074 - 1,019,598 - 961,550 -
When-issued basis
(Note 1)................ - - 500,000 - - -
Capital shares
repurchased.............. 130,157 4,732,938 6,079 9,454,376 7,629 275,685
Dividends to shareholders. - - - 5,437,973 - -
Distribution fees......... - - - 382,505 - -
Administration fees....... - - - 157,866 - -
Management fees........... 91,627 111,680 - - - -
Shareholder servicing
cost..................... 6,151 5,050 2,100 27,137 2,201 -
Accrued expenses and
other payables........... 109,727 38,376 10,594 78,164 9,611 -
------------ ------------ ----------- -------------- ----------- -----------
Total liabilities....... 18,846,736 4,888,044 1,538,371 15,538,021 980,991 275,685
------------ ------------ ----------- -------------- ----------- -----------
Net assets, at value....... $195,626,513 $273,677,981 $47,440,270 $1,813,504,016 $42,177,230 $37,809,005
============ ============ =========== ============== =========== ===========
Net assets consist of:
Undistributed net
investment income........ $ 1,060,001 $ 75,286 $ 153,988 $ (3,106,684) $ 325,509 $ -
Unrealized appreciation
(depreciation) on
investments.............. 276,557 8,430,723 5,786,618 (35,293,977) 5,133,546 (36,069)
Unrealized depreciation
on translation of
assets and liabilities
in foreign currencies.... (98,891) - (35) - - -
Accumulated net
realized gain (loss)..... 1,614,693 2,326,356 454,206 (9,738,510) 981,826 (137)
Capital shares............ 209,784 253,410 37,092 1,856,630 28,288 37,660
Additional paid-in
capital.................. 192,564,369 262,592,206 41,008,401 1,859,786,557 35,708,061 37,807,551
------------ ------------ ----------- -------------- ----------- -----------
Net assets, at value....... $195,626,513 $273,677,981 $47,440,270 $1,813,504,016 $42,177,230 $37,809,005
============ ============ =========== ============== =========== ===========
Shares outstanding......... 20,978,367 25,340,952 3,709,205 185,663,040 2,828,752 3,765,966
============ ============ =========== ============== =========== ===========
Net asset value per share.. $9.33 $10.80 $12.79 $9.77 $14.91 $10.04
============ ============ =========== ============== =========== ===========
Representative computation
(Franklin Global Government
Income Fund) of net asset
value and offering price
per share:
Net asset value and
redemption price per share
($195,626,513 / 20,978,367) $9.33
============
Maximum offering price+*
(100/96 of $9.33)......... $9.72
============
</TABLE>
+The maximum offering price for each of the other series of the Trust is
calculated as follows: Franklin Short-Intermediate U.S. Government Securities
Fund - 100/97.75 of $10.80; Franklin Convertible Securities Fund - 100/96 of
$12.79; Franklin Adjustable U.S. Government Securities Fund - 100/97.75 of
$9.77; Franklin Equity Income Fund - 100/96 of $14.91; Franklin Adjustable Rate
Securities Fund - 100/97.75 of $10.04.
*On sales of $100,000 or more the offering price is reduced as stated in the
section of the Prospectus entitled "How to Buy Shares of the Fund."
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND
--------------- ------------------ --------------- -------------------
<S> <C> <C> <C> <C>
Investment income:
Interest (Note 1)................................ $11,438,242 $10,176,446 $ 981,701 $ --
Dividends........................................ 25,014 -- 485,546 77,341,909
Realized foreign currency gain (loss)............ (1,783,238) -- 1,199 --
----------- ----------- ---------- ------------
Total income.............................. 9,680,018 10,176,446 1,468,446 77,341,909
----------- ----------- ---------- ------------
Expenses:
Management fees (Note 9)......................... 746,129 897,620 8,346 --
Administration fees (Note 9)..................... -- -- -- 1,798,293
Shareholder servicing costs (Note 9)............. 50,392 42,932 14,517 272,952
Distribution fees (Note 9)....................... -- -- -- 4,285,695
Reports to shareholders.......................... 51,614 47,859 22,776 351,871
Custodian fees................................... 110,758 21,297 3,747 --
Professional fees................................ 15,768 21,515 4,358 27,405
Trustees' fees and expenses...................... 6,706 10,056 1,358 96,794
Registration & filing fees....................... 3,466 -- 6,041 19,546
Amortization of organization costs
(Note 5)....................................... 788 -- -- --
Other............................................ 6,541 17,038 5,116 31,526
Payments from Manager (Note 9)................... -- -- -- --
----------- ----------- ---------- ------------
Total expenses............................ 992,162 1,058,317 66,259 6,884,082
----------- ----------- ---------- ------------
Net investment income................... 8,687,856 9,118,129 1,402,187 70,457,827
----------- ----------- ---------- ------------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss)................ 3,867,132 2,327,131 514,896 (7,642,575)
Net realized gain on written
foreign currency options which
expired (Note 3)...................... 164,812 -- -- --
Net unrealized appreciation
(depreciation):
Investments........................... 11,494,774 3,329,742 3,705,700 (11,107,442)
Translation of assets and
liabilities in foreign currencies... (348,304) -- (35) --
----------- ----------- ---------- ------------
Net realized and unrealized gain (loss) on
investments...................................... 15,178,414 5,656,873 4,220,561 (18,750,017)
----------- ----------- ---------- ------------
Net increase in net assets resulting from
operations....................................... $23,866,270 $14,775,002 $5,622,748 $ 51,707,810
=========== =========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
SPECIAL EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND
-------------- ---------------
<S> <C> <C>
Investment income:
Interest (Note 1)................................ $ 141,288 $ --
Dividends........................................ 1,380,662 949,089
Realized foreign currency gain (loss)............ -- --
---------- --------
Total income.............................. 1,521,950 949,089
---------- --------
Expenses:
Management fees (Note 9)......................... 5,146 --
Administration fees (Note 9)..................... -- --
Shareholder servicing costs (Note 9)............. 15,017 4,237
Distribution fees (Note 9)....................... -- 52,449
Reports to shareholders.......................... 25,277 7,042
Custodian fees................................... 3,060 --
Professional fees................................ 4,145 5,126
Trustees' fees and expenses...................... 1,280 --
Registration & filing fees....................... 4,997 19,700
Amortization of organization costs
(Note 5)....................................... 59 --
Other............................................ 3,061 21
Payments from Manager (Note 9)................... -- (88,575)
---------- --------
Total expenses............................ 62,042 --
---------- --------
Net investment income................... 1,459,908 949,089
---------- --------
Realized and unrealized gain (loss)
on investments:
Net realized gain (loss)................ 984,058 (137)
Net realized gain on written
foreign currency options which
expired (Note 3)...................... -- --
Net unrealized appreciation
(depreciation):
Investments........................... 2,263,533 (40,575)
Translation of assets and
liabilities in foreign currencies... -- --
---------- --------
Net realized and unrealized gain (loss) on
investments...................................... 3,247,591 (40,712)
---------- --------
Net increase in net assets resulting from
operations....................................... $4,707,499 $908,377
========== ========
</TABLE>
The acccompanying notes are an integral part of these financial statements.
38
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
AND FOR THE YEAR ENDED JANUARY 31, 1993
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND
------------------------------ -------------------------------
NINE MONTHS YEAR ENDED NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93 ENDED 10/31/93 01/31/93
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 8,687,856 $ 8,823,242 $ 9,118,129 $ 10,726,589
Net realized gain on investments............ 3,867,132 614,712 2,327,131 4,383,930
Net realized gain on written foreign
currency options which expired............ 164,812 626,559 -- --
Net unrealized appreciation
(depreciation) on investments............. 11,494,774 (10,408,436) 3,329,742 3,498,538
Net unrealized appreciation
(depreciation) on translation of
assets and liabilities denominated
in foreign currencies..................... (348,304) 245,635 -- --
------------ ------------ ------------ ------------
Net increase (decrease) in
net assets resulting from
operations........................... 23,866,270 (98,288) 14,775,002 18,609,057
Distributions to shareholders:
From undistributed net
investment income........................... (8,687,856) (8,823,242) (9,354,403) (10,507,984)
From distribution in excess of net
investment income (Note 7)................ (2,174,626) (655,580) -- --
From net realized capital gains............. -- (1,269,959) (114,640) (5,408,200)
From tax return of capital
distribution (Note 7)..................... -- (1,914,600) -- --
Increase in net assets from capital
share transactions (Note 6)................... 28,723,568 87,749,900 32,990,155 68,998,817
------------ ------------ ------------ ------------
Net increase in net assets............. 41,727,356 74,988,231 38,296,114 71,691,690
Net assets:
Beginning of period......................... 153,899,157 78,910,926 235,381,867 163,690,177
------------ ------------ ------------ ------------
End of period............................... $195,626,513 $153,899,157 $273,677,981 $235,381,867
============ ============ ============ ============
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ -- $ 321,300 $ 102,695
============ ============ ============ ============
End of period............................... $ 1,060,001 $ -- $ 75,286 $ 321,300
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN CONVERTIBLE
SECURITIES FUND
------------------------------
NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93
-------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 1,402,187 $ 1,353,279
Net realized gain on investments............ 514,896 1,169,942
Net realized gain on written foreign
currency options which expired............ -- --
Net unrealized appreciation
(depreciation) on investments............. 3,705,700 1,135,980
Net unrealized appreciation
(depreciation) on translation of
assets and liabilities denominated
in foreign currencies..................... (35) --
----------- -----------
Net increase (decrease) in
net assets resulting from
operations........................... 5,622,748 3,659,201
Distributions to shareholders:
From undistributed net
investment income........................... (1,518,536) (1,436,879)
From distribution in excess of net
investment income (Note 7)................ -- --
From net realized capital gains............. -- --
From tax return of capital
distribution (Note 7)..................... -- --
Increase in net assets from capital
share transactions (Note 6)................... 15,029,224 5,802,271
----------- -----------
Net increase in net assets............. 19,133,436 8,024,593
Net assets:
Beginning of period......................... 28,306,834 20,282,241
----------- -----------
End of period............................... $47,440,270 $28,306,834
=========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ 270,337 $ 353,937
=========== ===========
End of period............................... $ 153,988 $ 270,337
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
AND FOR THE YEAR ENDED JANUARY 31, 1993
U.S. Government Securities Fund Franklin Equity Income Fund Securities Fund
Nine Months Year Ended Nine Months Year Ended Nine Months Year Ended
Ended 10/31/93 01/31/93 Ended 10/31/93 01/31/93 Ended 10/31/93 01/31/93
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN EQUITY INCOME FUND
----------------------------------- -------------------------------
NINE MONTHS YEAR ENDED NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93 ENDED 10/31/93 01/31/93
---------------- --------------- -------------- ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 70,457,827 $ 176,702,868 $ 1,459,908 $ 1,037,080
Net realized gain (loss) on
investments............................... (7,642,575) (2,095,935) 984,058 598,873
Net unrealized appreciation
(depreciation) on investments............. (11,107,442) (32,428,773) 2,263,533 1,541,457
--------------- -------------- ----------- -----------
Net increase in net assets
resulting from operations............ 51,707,810 142,178,160 4,707,499 3,177,410
Distributions to shareholders:
From undistributed net investment
income.................................... (69,480,027) (177,197,215) (1,152,084) (1,061,394)
From distribution in excess of net
investment income (Note 7)................ -- (4,177,392) -- --
From net realized capital gains............. -- (1,053,980) (205,929) (244,963)
Increase (decrease) in net assets from
capital share transactions (Note 6)........... (1,140,147,375) (501,740,946) 12,735,376 8,077,442
--------------- -------------- ----------- -----------
Net increase (decrease) in net
assets............................... (1,157,919,592) (541,991,373) 16,084,862 9,948,495
Net assets:
Beginning of period......................... 2,971,423,608 3,513,414,981 26,092,368 16,143,873
--------------- -------------- ----------- -----------
End of period............................... $ 1,813,504,016 $2,971,423,608 $42,177,230 $26,092,368
=============== ============== =========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ 494,347 $ 16,794 $ 41,108
=============== ============== =========== ===========
End of period............................... $ (3,106,684) $ -- $ 325,509 $ 16,794
=============== ============== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE RATE
SECURITIES FUND
------------------------------
NINE MONTHS YEAR ENDED
ENDED 10/31/93 01/31/93
-------------- ------------
<S> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income....................... $ 949,089 $ 417,186
Net realized gain (loss) on
investments............................... (137) 34
Net unrealized appreciation
(depreciation) on investments............. (40,575) 4,506
----------- -----------
Net increase in net assets
resulting from operations............ 908,377 421,726
Distributions to shareholders:
From undistributed net investment
income.................................... (949,089) (417,186)
From distribution in excess of net
investment income (Note 7)................ -- --
From net realized capital gains............. (34) --
Increase (decrease) in net assets from
capital share transactions (Note 6)........... 25,328,996 12,516,115
----------- -----------
Net increase (decrease) in net
assets............................... 25,288,250 12,520,655
Net assets:
Beginning of period......................... 12,520,755 100
----------- -----------
End of period............................... $37,809,005 $12,520,755
=========== ===========
Undistributed net investment income
included in net assets:
Beginning of period......................... $ -- $ --
=========== ===========
End of period............................... $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is an open-end management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended. The Trust currently has six separate funds (the Funds) in
operation consisting of five separate diversified Funds: Franklin
Short-Intermediate U.S. Government Securities Fund (the Short-Intermediate
Fund), Franklin Convertible Securities Fund (the Convertible Fund), Franklin
Adjustable U.S. Government Securities Fund (the Adjustable U.S. Government
Fund), Franklin Equity Income Fund (the Equity Income Fund), and Franklin
Adjustable Rate Securities Fund (the Adjustable Rate Fund); and one
non-diversified Fund: Franklin Global Government Income Fund (the Global Fund).
Prior to June 1, 1993, the Global Fund was known as the Global Opportunity
Income Fund. On August 17, 1993, the Board of Trustees approved the name change
of Franklin Special Equity Income Fund to Franklin Equity Income Fund effective
August 17, 1993. Each of the Funds issues a separate series of the Trust's
shares and maintains a totally separate investment portfolio.
The Adjustable Rate Fund and the Adjustable U.S. Government Fund invest
substantially all of their assets in the Adjustable Rate Securities Portfolio
and the U.S. Government Adjustable Rate Mortgage Portfolio, respectively. Both
are open-end, diversified management investment companies having the same
investment objective as the Adjustable Rate Fund and Adjustable U.S. Government
Fund. The financial statements of the U.S. Government Adjustable Rate Mortgage
Portfolio and Adjustable Rate Securities Portfolio, including the Statements of
Investments, are included elsewhere in this report and should be read in
conjunction with the financial statements of the Adjustable U.S. Government Fund
and Adjustable Rate Fund.
On June 15, 1993, the Board of Trustees authorized a change in the fiscal year
end of the Trust from January 31 of each year to October 31.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATIONS:
Portfolio securities listed on a U.S. 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, at the mean between the most recent quoted bid and asked prices. Other
securities for which market quotations are readily available are valued at
current market values, obtained from a pricing service, which are 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 securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined by
the Manager. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
current value.
The values of the Adjustable Rate Fund and the Adjustable U.S. Government Fund
reflect the Funds' proportionate interest in the net assets of the Adjustable
Rate Securities Portfolios and the U.S. Government Adjustable Rate Mortgage
Portfolio, respectively. At October 31, 1993, the Adjustable Rate Fund owns 31%
of the Adjustable Rate Securities Portfolio and Adjustable U.S. Government Fund
owns 85% of the U.S. Government Adjustable Rate Mortgage Portfolio. The
Portfolios' shares held by the Funds are valued at the net asset value of the
Portfolios.
Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner and are translated into U.S.
dollars at current market quotations of their respective currency denomination
against U.S. dollars last quoted by a major bank or, if no such quotation is
available, at the rate of exchange determined in accordance with policies
established by the Board of Trustees.
The fair values of securities restricted as to resale, or other securities for
which market quotations are not readily available, if any, are determined
following procedures approved by the Board of Trustees.
B. INCOME TAXES:
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no income tax provision is
required. Each Fund is treated as a separate entity in the determination of
compliance with the Internal Revenue Code.
41
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (cont.)
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Short-Intermediate Fund and Adjustable Rate Fund dividend
distributions are declared each day the New York Stock Exchange is open for
business equal to an amount per day set from time to time by the Board of
Trustees and are payable to shareholders of record at the beginning of business
on the ex-date. Once each month, dividends are reinvested in additional shares
of each Fund or paid in cash as requested by the shareholders. Interest income
and estimated expenses are accrued daily. Bond discount and premium are
amortized as required by the Internal Revenue Code.
Distributions from undistributed net investment income, and net realized capital
gains from security transactions, to the extent they exceed available capital
loss carryovers, are generally made during each year to avoid the 4% excise tax
imposed on regulated investment companies by the Internal Revenue Code.
E. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of the net assets of each Fund to the combined net assets. In all other
respects, expenses are charged to each Fund as incurred on a specific
identification basis.
F. FOREIGN CURRENCY TRANSLATION:
The accounting records of the Trust are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, income and expenses
are translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recognized as adjustments to investment
income when reported by the custodian bank.
G. SECURITIES TRADED ON A WHEN-ISSUED (WI) BASIS:
The Funds may trade securities on a WI or delayed delivery basis with payment
and delivery scheduled for a future time, generally within two weeks. These
transactions are subject to market fluctuations and are subject to the risk that
the value at delivery may be more or less than the purchase price when the
transactions were entered into. Although the Funds will generally purchase these
securities with the intention of acquiring such securities, they may sell such
securities before the settlement date. The Funds have set aside sufficient
investment securities as collateral for securities purchased on a WI basis.
Securities purchased on a WI basis are identified on the accompanying statement
of investments in securities and net assets.
H. CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS:
Effective October 31, 1993. the Funds adopted AICPA Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. As a
result, components of net assets have been reclassified to reconcile financial
statement amounts with distributions determined in accordance with income tax
regulations, as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Paid-in capital............... $ (425,734) $ -- $ -- $ 4,203,966 $(891) $ --
Undistributed Net Investment
Income...................... 3,234,627 (9,740) -- (4,084,470) 891 --
Accumulated Net Realized
Gain (Loss)................. (2,808,893) 9,740 -- (119,496) -- --
</TABLE>
42
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
2. FORWARD FOREIGN CURRENCY CONTRACTS:
A forward currency contract, which is individually negotiated and privately
traded by currency traders and their customers, is an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date.
The Global Fund may enter into forward contracts with the goal of minimizing the
risk to the Fund from adverse changes in the relationship between currencies or
to enhance income. The Fund may also enter into a forward contract in relation
to a security denominated in a foreign currency in order to ``lock in'' the U.S.
dollar price of that security.
The Fund sets aside or segregates in its custodian bank sufficient cash, cash
equivalents or readily marketable debt securities as deposits or commitments
created by open forward contracts. The Fund intends to cover any of these
commitments to deliver currency under these contracts by acquiring a sufficient
amount of the underlying currency. The segregated account is marked to market on
a daily basis. The Fund could be exposed to risk if counterparties to the
contracts are unable to meet the terms of their contracts or if the value of the
foreign currency changes unfavorably.
As of October 31, 1993, the Global Fund had the following foreign currency
forward contracts outstanding:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS TO SELL IN EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
- ---------------------------------- --------------- --------------- -----------
<S> <C> <C> <C>
500,000,000 Belgium Francs U.S. $13,336,961 11/04/93 U.S. $(381,966)
300,000,000 Belgium Francs 8,253,095 11/08/93 22,869
300,000,000 Belgium Francs 8,408,072 01/10/94 259,441
240,000,000 French Francs 40,996,208 11/09/93 181,287
61,578,000 French Francs 10,526,333 11/10/93 55,482
----------- --------
$81,520,669 137,113
=========== --------
CONTRACTS TO BUY
- ----------------------------------
13,800,000 German Deutschemarks 8,245,698 11/02/93 (17,210)
47,000,000 German Deutschemarks 28,065,566 11/02/93 (41,848)
----------- ---------
U.S. $36,311,264 (59,058)
=========== ---------
Net unrealized appreciation U.S. $ 78,055
=========
</TABLE>
3. OPTION CONTRACTS:
The Global Fund may write covered put and call options and purchase put and call
options which trade in the over-the-counter (OTC) market. OTC call options give
the holder the right to buy an underlying security or currency from an option
writer at a stated exercise price; OTC put options give the holder the right to
sell an underlying security or currency to an option writer at a stated exercise
price. OTC options are arranged directly with dealers. Because there is no
exchange, pricing is typically negotiated by reference to information from
market makers.
Transactions in purchased options for the nine months ended October 31, 1993
were as follows:
<TABLE>
<CAPTION>
CALL PUT
------------------------- ----------------------------
FACE FACE
AMOUNT AMOUNT
COST OPTIONED COST OPTIONED
---------- ----------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at January 31, 1993......... $ 315,000 7,000,000 $ -- --
Options purchased on currencies......... -- -- 164,812 3,000,000,000
Options exercised on currencies......... -- -- (164,812) (3,000,000,000)
Options exercised on security........... (315,000) (7,000,000) -- --
--------- ---------- -------- --------------
Outstanding at October 31, 1993......... $ -- -- $ -- --
========= ========== ======== ==============
</TABLE>
43
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. OPTION CONTRACTS: (CONT.)
Transactions in written options on currencies for the nine months ended October
31, 1993 were as follows:
CALL
-----------------------------
AMOUNT OF
AMOUNT OF CURRENCIES
PREMIUMS OPTIONED
--------- ---------------
Outstanding at January 31, 1993............ $ - -
Options written............................ 639,812 3,050,000,000
Options exercised.......................... (475,000) (50,000,000)
Options expired............................ (164,812) (3,000,000,000)
--------- ---------------
Outstanding at October 31, 1993............ $ - -
========= ===============
The Global Fund realized a net short term capital gain of $11,102 and $164,812
on purchased options and on premiums received on expired written options,
respectively.
4. REPURCHASE AGREEMENTS:
The Trust may enter into repurchase agreements with government securities
dealers recognized by the Federal Reserve Board and/or member banks of the
Federal Reserve System. In a repurchase agreement, the Funds purchase a U.S.
government security from a dealer or bank subject to an agreement to resell it
at a mutually agreed upon price and date. Such a transaction is accounted for as
a loan by the Funds to the seller, collateralized by the underlying security.
The transaction requires the initial collateralization of the seller's
obligation by U.S. government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Funds, with the
value of the underlying security marked to market daily to maintain coverage of
at least 100%. The collateral is delivered to the Funds' custodian and held
until resold to the dealer or bank. At October 31, 1993, all outstanding
repurchase agreements held by the Trust had been entered into on October 29,
1993.
5. ORGANIZATION COSTS
The organization costs of each Fund of the Trust were amortized on a
straight-line basis over a period of five years from the effective date of
registration under the Securities Act of 1933 for each Fund.
6. TRUST SHARES
At October 31, 1993 there were an unlimited number of shares of beneficial
interest authorized with a par value of $0.01 per share. Transactions in each of
the Trust's shares for the nine months ended October 31, 1993 and and the year
ended January 31, 1993 were as follows:
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND
--------------------------- ------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended October 31, 1993
Shares sold......................... 3,132,310 $ 28,574,215 7,951,390 $ 85,374,158 901,908 $10,897,243
Shares issued in reinvestment of
distributions...................... 524,009 4,763,243 485,716 5,219,095 83,403 1,000,357
Shares redeemed..................... (1,993,767) (18,112,506) (4,536,268) (48,709,818) (233,556) (2,786,030)
Changes from exercise of exchange
privilege:
Shares sold....................... 4,720,174 43,119,821 1,390,826 14,928,987 949,792 11,424,393
Shares redeemed................... (3,284,663) (29,621,205) (2,220,138) (23,822,267) (466,500) (5,506,739)
----------- ------------- ----------- ------------- ---------- ------------
Net increase..................... 3,098,063 $ 28,723,568 3,071,526 $ 32,990,155 1,235,047 $15,029,224
=========== ============= =========== ============= ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. TRUST SHARES (CONT.)
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND
--------------------------- ------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended January 31, 1993
Shares sold.......................... 7,358,674 $ 67,040,633 12,607,139 $132,712,369 516,599 $ 5,519,767
Shares issued in reinvestment of
distributions....................... 636,074 5,669,237 902,422 9,463,707 87,646 930,939
Shares redeemed...................... (1,407,590) (12,526,336) (4,479,765) (46,969,706) (297,332) (3,189,326)
Changes from exercise of exchange
privilege:
Shares sold........................ 7,755,681 70,301,582 1,596,043 16,832,882 495,630 5,357,352
Shares redeemed.................... (4,864,918) (42,735,216) (4,111,333) (43,040,435) (262,800) (2,816,461)
----------- ------------ ----------- ------------- --------- ------------
Net increase...................... 9,477,921 $ 87,749,900 6,514,506 $ 68,998,817 539,743 $ 5,802,271
=========== ============= =========== ============= ========= ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND FRANKLIN EQUITY INCOME FUND RATE SECURITIES FUND
-------------------------------- --------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- --------------- --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended October 31, 1993
Shares sold........................ 31,420,134 $ 309,366,714 591,740 $ 8,424,387 1,678,030 $ 16,880,805
Shares issued in reinvestment of
distributions..................... 4,017,124 39,542,565 72,561 1,028,509 70,418 708,233
Shares redeemed.................... (119,230,775) (1,173,985,899) (199,709) (2,866,323) (529,605) (5,325,263)
Changes from exercise of exchange
privilege:
Shares sold...................... 10,303,356 101,458,808 914,654 12,979,279 2,459,907 24,746,127
Shares redeemed.................. (42,291,571) (416,529,563) (489,111) (6,830,476) (1,161,218) (11,680,906)
------------- ---------------- --------- ------------ ---------- -------------
Net increase (decrease)......... (115,781,732) $(1,140,147,375) 890,135 $12,735,376 2,517,532 $ 25,328,996
============= ================ ========= ============ ========== =============
Year ended January 31, 1993
Shares sold........................ 184,596,919 $ 1,835,078,214 376,381 $ 4,823,712 885,535 $ 8,879,231
Shares issued in reinvestment of
distributions..................... 9,042,518 89,709,984 80,587 1,039,534 29,354 294,438
Shares redeemed.................... (212,204,395) (2,107,516,937) (102,872) (1,322,898) (147,844) (1,483,055)
Changes from exercise of exchange
privilege:
Shares sold...................... 21,722,592 215,869,195 416,916 5,388,220 726,569 7,284,763
Shares redeemed.................. (53,818,376) (534,881,402) (143,473) (1,851,126) (245,190) (2,459,262)
------------- --------------- --------- ------------ ---------- -------------
Net increase (decrease)......... (50,660,742) $ (501,740,946) 627,539 $ 8,077,442 1,248,424 $ 12,516,115
============= ================ ========= ============ ========== =============
</TABLE>
7. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1993, for tax purposes, the Funds had accumulated net realized
capital gains or capital loss carryovers as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated net realized
gains..................... $ 1,893,231 $ 2,326,356 $ 454,206 _ $ 984,058 $ 856
=========== ================== =============== =============== =========== ===============
Capital loss carryovers
Expiring in:
October 31, 2000......... - - - $ 1,918,358 - -
October 31, 2001......... - - - 7,708,871 - -
----------- ------------------ --------------- --------------- ----------- ---------------
- - - $ 9,627,229 - -
=========== ================== =============== =============== =========== ===============
</TABLE>
45
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
7. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS (cont.)
For income tax purposes, the aggregate cost of securities is higher than for
financial reporting purposes at October 31, 1993 by $278,538 in the Global Fund,
$111,281 in the Adjustable U.S. Government Fund, $2,232 in the Equity Income
Fund and $993 in the Adjustable Rate Fund.
8. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the nine months ended October 31, 1993 were as
follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
------------ ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Purchases..... $132,983,344 $113,230,949 $25,461,521 $ 166,822,622 $16,742,830 $38,503,288
============ ============ =========== ============== =========== ===========
Sales......... $105,266,530 $ 80,420,910 $10,219,706 $1,319,576,579 $ 5,677,938 $12,917,405
============ ============ =========== ============== =========== ===========
</TABLE>
9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, office space and facilities to each Fund, and receives fees
computed monthly on the net assets on the last day of the month of each fund,
except for the Adjustable U.S. Government Fund and the Adjustable Rate Fund, as
follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE MONTHLY NET ASSETS
------------------- --------------------------
<S> <C>
.625 of 1% First $100 million
.500 of 1% over $100 million, up to and including $250 million
.450 of 1% over $250 million
</TABLE>
Under the terms of a separate administration agreement with the Adjustable U.S.
Government Fund and the Adjustable Rate Fund, Franklin Advisers, Inc. provides
various administrative, statistical, and other services, and receives fees
computed monthly on the net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE DAILY NET ASSETS
------------------- ------------------------
<S> <C>
.100 of 1% First $5 billion
.090 of 1% over $5 billion, up to and including $10 billion
.080 of 1% over $10 billion
</TABLE>
Fees to which the Advisers is entitled by contracts aggregated $3,952,869 for
the nine months ended October 31, 1993. The terms of these agreements provide
that aggregate annual expenses of the Funds be limited to the extent necessary
to comply with the limitations set forth in the laws, regulations and
administrative interpretations of the states in which the Funds' shares are
registered. The Funds' expenses did not exceed these limitations; however, for
the nine months ended October 31, 1993, Franklin Advisers, Inc. reduced the
fees for the Short-Intermediate Fund, Convertible Fund and Equity Income Fund
by $160,513, $162,261, and $154,426, respectively. In addition, Franklin
Advisers, Inc. reduced the administration fee for the Adjustable Rate Securities
Fund by $20,135 and bore other expenses as reflected in the Statement of
Operations.
In its capacity as underwriter for the shares of the Trust, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Trust's shares.
Commissions received by Franklin/Templeton Distributors, Inc., and the amounts
which were subsequently paid to other dealers for the nine months ended October
31, 1993 were as follows:
46
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
9. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (cont.)
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Total commissions received.. $1,099,431 $891,309 $347,284 $945,767 $299,851 $106,062
========== ======== ======== ======== ======== ========
Paid to other dealers....... $1,023,270 $751,551 $330,298 $818,943 $288,526 $ 91,780
========== ======== ======== ======== ======== ========
</TABLE>
Commissions are deducted from the gross proceeds received from the sale of the
shares of the Trust, and as such are not expenses of the Funds.
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Funds pay costs on a per shareholder account basis. Costs
incurred for the nine months ended October 31, 1993 aggregated $400,047 of which
$369,437 was paid to Franklin/Templeton Investor Services, Inc.
Under the terms of a Distribution Agreement pursuant to Rule 12b1 of the
Investment Company Act of 1940, the Franklin Adjustable U.S. Government
Securities Fund and the Franklin Ajustable Rate Securities Fund will reimburse
Franklin/Templeton Distributors, Inc., in an amount up to 0.25% per annum which
covered costs incurred in the furnishing of promotion, offering and marketing of
the Funds' shares. Fees incurred by Franklin Adjustable U.S. Government
Securities Fund under the agreement aggregated $4,285,695 for the nine months
ended October 31, 1993. Fees which would have been incurred by Franklin
Adjustable Rate Securities Fund but were paid by Franklin Advisers, Inc.
amounted to $52,449 for the nine months ended October 31, 1993.
Certain officers and trustees of the Trust are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
10. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Funds value these
securities as disclosed in note 1. At October 31, 1993, the Global Fund, the
Convertible Fund and the Equity Income Fund held 144A securities with a value
aggregating $6,604,566, $14,338,437 and $2,893,881 respectively, representing
3.4%, 30.2% and 6.9% of the respective Fund's net assets. See accompanying
statement of investments and net assets for specific information of such
securities.
11. CREDIT RISKS
Although the Convertible Fund has a diversified portfolio, the Fund has 64.86%
of its portfolio invested in lower rated and unrated high yield securities.
Investments in higher yield securities are accompanied by a greater degree of
credit risk and the risk tends to be more sensitive to economic conditions than
higher rated securities. The risk of loss due to default by the issuer may be
significantly greater for the holders of high yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
Although each of the Funds has a diversified investment portfolio, there are
certain credit risks, foreign currency exchange risks, or event risks due to the
manner in which the Funds are invested, which may subject the Funds more
significantly to economic changes occurring in certain industries or sectors, as
follows:
The Global Fund has investments in excess of 10% in debt securities
denominated in Canadian Dollars and Italian Lira.
47
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
12. FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding throughout each
year are set forth in the prospectus under the caption "Financial Highlights".
- -------------------------------------------------------------------------------
The Funds hereby designate the amounts below as qualifying for the dividends
received deduction for corporations for the nine months ended October 31, 1993.
Convertible Securities Fund........................ 34.14%
Equity Income Fund................................. 86.80%
The amounts reported above are estimated percentages and should be used for
information purposes only. Information on the final percentages that qualify for
this deduction for calendar year 1993, will be available shortly after the end
of this calendar year.
- -------------------------------------------------------------------------------
ADJUSTABLE RATE SECURITIES PORTFOLIOS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Adjustable Rate Securities Portfolios:
We have audited the accompanying statements of assets and liabilities of the two
Portfolios comprising the Adjustable Rate Securities Portfolios (the Trust),
including each Portfolio's statement of investments in securities and net
assets, as of October 31, 1993, and the related statements of operations for the
nine months then ended, the statements of changes in net assets for each of the
periods indicated thereon, and the financial highlights for each of the periods
indicated in Note 8. These financial statements and financial highlights are the
reponsibility 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 investments and cash held by
the custodian as of October 31, 1993, confirmation by correspondence with
brokers as to securities purchased but not yet received at that date, or other
auditing procedures where confirmations from brokers were not received. 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
two Portfolios comprising the Adjustable Rate Securities Portfolios as of
October 31, 1993, the results of each Portfolio's operations for the nine months
then ended, the changes in its net assets for each of the periods indicated
thereon, and the financial highlights for each of the periods indicated in Note
8, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
San Francisco, California
December 6, 1993
49
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
FACE U.S. GOVERNMENT VALUE
AMOUNT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 88.3%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 24.0%
$14,162,695 FHLMC, Cap 9.620%, Margin 1.900% + 6 Month LIBOR, Resets Semi-Annually, 4.258%,
06/01/23 ..................................................................... $14,445,949
712,534 FHLMC, Cap 10.900%, Margin 2.280% + CMT, Resets Annually, 5.56%, 10/01/22 ...... 746,603
13,113,410 FHLMC, Cap 10.908%, Margin 2.450% + CMT, Resets Annually, 5.154%, 01/01/23 ..... 13,769,080
24,288,776 FHLMC, Cap 11.110%, Margin 2.170% + CMT, Resets Annually, 5.514%, 07/01/22 ..... 25,624,658
9,018,793 FHLMC, Cap 11.253%, Margin 1.750% + CMT, Resets Annually, 5.50%, 11/01/16 ...... 9,379,545
11,689,450 FHLMC, Cap 11.600%, Margin 2.250% + CMT, Resets Annually, 5.483%, 11/01/21 ..... 12,273,923
5,183,990 FHLMC, Cap 11.939%, Margin 2.127% + CMT, Resets Annually, 6.85%, 07/01/20 ...... 5,469,110
2,400,889 FHLMC, Cap 12.050%, Margin 2.295% + 6 Month TB, Resets Semi-Annually, 7.224%,
06/01/18 ..................................................................... 2,508,929
26,138,812 FHLMC, Cap 12.170%, Margin 2.180% + CMT, Resets Annually, 5.141%, 03/01/23 ..... 27,511,100
2,080,079 FHLMC, Cap 12.176%, Margin 2.015% + CMT, Resets Annually, 6.996%, 04/01/20 ..... 2,184,083
7,358,228 FHLMC, Cap 12.177%, Margin 2.265% + CMT, Resets Annually, 7.17%, 07/01/20 ...... 7,799,721
7,201,601 FHLMC, Cap 12.371%, Margin 1.615% + CMT, Resets Annually, 5.325%, 03/01/27 ..... 7,453,657
7,451,777 FHLMC, Cap 12.616%, Margin 2.167% + CMT, Resets Annually, 5.625%, 09/01/21 ..... 7,861,625
1,508,750 FHLMC, Cap 12.680%, Margin 2.195% + CMT, Resets Annually, 5.659%, 01/01/19 ..... 1,591,731
4,511,962 FHLMC, Cap 12.723%, Margin 2.189% + CMT, Resets Annually, 5.724%, 04/01/19 ..... 4,737,560
10,222,450 FHLMC, Cap 12.790%, Margin 2.070% + CMT, Resets Annually, 5.624%, 04/01/19 ..... 10,784,685
11,413,264 FHLMC, Cap 12.806%, Margin 2.230% + CMT, Resets Annually, 5.82%, 04/01/18 ...... 12,098,060
6,683,088 FHLMC, Cap 12.875%, Margin 1.875% + CMT, Resets Annually, 5.405%, 07/01/17 ..... 6,967,120
1,674,102 FHLMC, Cap 12.880%, Margin 2.050% + CMT, Resets Annually, 5.836%, 11/01/18 ..... 1,715,954
9,531,048 FHLMC, Cap 13.006%, Margin 2.000% + CMT, Resets Annually, 5.586%, 09/01/19 ..... 10,007,600
10,264,055 FHLMC, Cap 13.045%, Margin 1.875% + CMT, Resets Annually, 5.466%, 12/01/18 ..... 10,725,937
16,594,072 FHLMC, Cap 13.054%, Margin 1.936% + CMT, Resets Annually, 5.507%, 05/01/18 ..... 17,340,805
8,709,283 FHLMC, Cap 13.070%, Margin 2.120% + CMT, Resets Annually, 5.725%, 04/01/22 ..... 9,188,294
9,497,686 FHLMC, Cap 13.086%, Margin 2.136% + CMT, Resets Annually, 5.591%, 10/01/18 ..... 10,020,059
5,797,389 FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 5.658%, 12/01/16 ..... 6,058,271
2,934,355 FHLMC, Cap 13.160%, Margin 2.115% + CMT, Resets Annually, 5.732%, 07/01/19 ..... 3,095,744
3,497,401 FHLMC, Cap 13.203%, Margin 2.363% + CMT, Resets Annually, 5.722%, 05/01/18 ..... 3,724,732
5,217,509 FHLMC, Cap 13.226%, Margin 2.187% + CMT, Resets Annually, 5.831%, 05/01/19 ..... 5,504,472
4,354,561 FHLMC, Cap 13.239%, Margin 1.999% + CMT, Resets Annually, 5.437%, 08/01/19 ..... 4,572,289
7,837,862 FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 5.792%, 10/01/18 ..... 8,268,945
3,939,890 FHLMC, Cap 13.269%, Margin 2.249% + CMT, Resets Annually, 5.78%, 05/01/19 ...... 4,176,283
1,218,765 FHLMC, Cap 13.286%, Margin 2.164% + CMT, Resets Annually, 5.80%, 10/01/19 ...... 1,285,797
5,524,970 FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 5.758%, 03/01/19 ..... 5,828,843
1,176,222 FHLMC, Cap 13.302%, Margin 2.040% + CMT, Resets Annually, 5.676%, 04/01/18 ..... 1,240,914
3,140,279 FHLMC, Cap 13.306%, Margin 2.057% + CMT, Resets Annually, 5.701%, 12/01/18 ..... 3,312,994
4,951,302 FHLMC, Cap 13.360%, Margin 2.242% + CMT, Resets Annually, 5.676%, 07/01/20 ..... 5,248,380
9,384,069 FHLMC, Cap 13.364%, Margin 2.225% + CMT, Resets Annually, 5.717%, 07/01/19 ..... 9,947,113
16,868,335 FHLMC, Cap 13.370%, Margin 2.040% + CMT, Resets Annually, 5.647%, 04/01/19 ..... 17,711,752
13,921,840 FHLMC, Cap 13.458%, Margin 2.195% + CMT, Resets Annually, 5.707%, 02/01/19 ..... 14,687,541
1,723,822 FHLMC, Cap 13.558%, Margin 2.195% + CMT, Resets Annually, 5.859%, 02/01/19 ..... 1,775,536
11,226,464 FHLMC, Cap 13.562%, Margin 2.388% + CMT, Resets Annually, 5.814%, 07/01/21 ..... 11,956,184
17,307,332 FHLMC, Cap 13.650%, Margin 2.249% + CMT, Resets Annually, 5.688%, 07/01/20 ..... 17,999,625
20,026,321 FHLMC, Cap 13.740%, Margin 2.306% + CMT, Resets Annually, 5.752%, 04/01/21 ..... 21,328,032
1,204,178 FHLMC, Cap 13.770%, Margin 2.057% + CMT, Resets Annually, 5.697%, 02/01/19 ..... 1,270,408
10,418,000 FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 5.646%, 11/01/19 ..... 10,886,810
4,441,417 FHLMC, Cap 14.182%, Margin 2.000% + CMT, Resets Annually, 5.601%, 03/01/18 ..... 4,663,488
7,141,203 FHLMC, Cap 14.277%, Margin 2.412% + CMT, Resets Annually, 5.761%, 07/01/19 ..... 7,605,381
4,901,936 FHLMC, Cap 14.373%, Margin 2.519% + CMT, Resets Annually, 6.143%, 01/01/19 ..... 5,245,072
2,344,749 FHLMC, Cap 14.451%, Margin 2.000% + CMT, Resets Annually, 5.483%, 12/01/18 ..... 2,461,987
2,282,467 FHLMC, Cap 14.622%, Margin 1.930% + CMT, Resets Annually, 5.441%, 12/01/17 ..... 2,385,178
5,319,285 FHLMC, Cap 14.900%, Margin 2.546% + CMT, Resets Annually, 6.324%, 02/01/19 ..... 5,691,635
8,676,671 FHLMC, Cap 15.134%, Margin 1.645% + CMT, Resets Annually, 5.193%, 04/01/16 ..... 8,980,354
6,867,210 FHLMC, Cap 17.770%, Margin 1.957% + CMT, Resets Annually, 7.936%, 12/01/21 ..... 7,210,570
</TABLE>
The accompanying notes are an intergral part of these financial statements.
50
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE U.S. GOVERNMENT VALUE
AMOUNT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (CONT.)
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) (CONT.)
$13,181,835 (j)FHLMC, REMIC, Cap 9.000%, Margin .850% + 1 Month LIBOR, Resets Monthly, 3.975%,
04/15/21 .............................................................................. $ 13,050,017
1,820,013 FHLMC, REMIC, Cap 11.000%, Margin 1.050% + 1 Month LIBOR, Resets Monthly, 4.238%,
04/15/22 .............................................................................. 1,820,013
13,508,392 FHLMC, REMIC, Cap 11.000%, Margin 1.050% + 1 Month LIBOR, Resets Monthly, 4.238%,
07/15/22 .............................................................................. 13,508,392
17,227,000 FHLMC, REMIC, Cap 11.500%, Margin .800% + 1 Month LIBOR, Resets Monthly, 3.988%,
10/15/20 .............................................................................. 17,313,135
28,665,000 FHLMC, REMIC, Cap 12.000%, Margin .600% + 1 Month LIBOR, Resets Monthly, 7.09%,
04/15/22 .............................................................................. 29,381,625
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (COST $502,720,062) ........................ 511,403,300
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) 53.4%
17,064,450 FNMA, Cap 11.426%, Margin 1.937% + CMT, Resets Annually, 5.311%, 08/01/22 ............... 18,002,995
2,944,484 FNMA, Cap 11.490%, Margin 2.225% + CMT, Resets Annually, 5.60%, 09/01/21 ................ 3,135,876
10,185,870 FNMA, Cap 11.600%, Margin 2.220% + CMT, Resets Annually, 5.487%, 11/01/21 ............... 10,847,952
8,632,728 FNMA, Cap 11.665%. Margin 2.075% + CMT, Resets Annually, 5.322%, 08/01/22 ............... 9,150,692
9,980,106 FNMA, Cap 12.000%, Margin 2.200% + CMT, Resets Annually, 5.577%, 10/01/21 ............... 10,628,813
978,229 FNMA, Cap 12.037%, Margin 2.000% + CMT, Resets Annually, 6.917%, 05/01/19 ............... 1,019,804
34,454,177 FNMA, Cap 12.065%, Margin 1.930% + CMT, Resets Annually, 5.52%, 11/01/19 ................ 36,176,885
5,475,179 FNMA, Cap 12.160%, Margin 2.000% + CMT, Resets Annually, 5.423%, 10/01/21 ............... 5,776,314
10,976,067 FNMA, Cap 12.220%, Margin 1.750% + 6 Month DR, Resets Semi-Annually, 4.856%, 06/01/18.... 11,360,230
7,713,407 FNMA, Cap 12.260%, Margin 1.725% + CMT, Resets Annually, 6.946%, 01/01/19 ............... 8,060,510
8,783,887 FNMA, Cap 12.341%, Margin 1.750% + CMT, Resets Annually, 5.333%, 04/01/18 ............... 9,179,162
11,480,141 FNMA, Cap 12.368%, Margin 1.750% + CMT, Resets Annually, 5.222%, 12/01/20 ............... 11,996,747
40,196,235 FNMA, Cap 12.394%, Margin 2.200% + CMT, Resets Annually, 5.663%, 04/01/19 ............... 42,808,990
18,101,606 FNMA, Cap 12.451%, Margin 2.060% + CMT, Resets Annually, 5.581%, 01/01/30 ............... 19,187,703
22,510,064 FNMA, Cap 12.484%, Margin 1.750% + 6 Month TB, Resets Semi-Annually, 5.875%, 12/01/28.... 23,241,641
21,796,921 FNMA, Cap 12.529%, Margin 1.750% + 6 Month TB, Resets Semi-Annually, 4.906%, 01/01/20.... 22,559,813
4,978,773 FNMA, Cap 12.605%, Margin 2.536% + 6 Month TB, Resets Semi-Annually, 7.534%, 11/01/18.... 5,302,393
21,512,246 FNMA, Cap 12.637%, Margin 2.000% + NCI, Resets Annually, 6.872%, 11/01/17 ............... 22,318,955
10,091,467 FNMA, Cap 12.640%, Margin 1.264% + CMT, Resets Annually, 5.559%, 03/01/19 ............... 10,646,497
18,471,874 FNMA, Cap 12.660%, Margin 1.750% + 6 Month DR, Resets Semi-Annually, 4.87%, 01/01/19 .... 19,118,390
12,398,504 FNMA, Cap 12.705%, Margin 1.250% + COF, Resets Monthly, 5.30%, 09/01/18 ................. 12,708,466
14,572,356 FNMA, Cap 12.729%, Margin 1.875% + CMT, Resets Annually, 6.585%, 07/01/29 ............... 15,082,388
7,402,825 FNMA, Cap 12.787%, Margin 1.250% + COF, Resets Monthly, 7.481%, 01/01/19 ................ 7,587,895
7,062,520 FNMA, Cap 12.788%, Margin 2.111% + CMT, Resets Annually, 5.54%, 11/01/20 ................ 7,486,271
11,400,769 FNMA, Cap 12.804%, Margin 1.750% + CMT, Resets Annually, 5.326%, 05/01/19 ............... 11,913,803
10,612,928 FNMA, Cap 12.811%, Margin 1.750% + COF, Resets Annually, 5.234%, 01/01/22 ............... 11,090,510
11,027,857 FNMA, Cap 12.835%, Margin 2.055% + CMT, Resets Annually, 5.628%, 09/01/20 ............... 11,689,529
6,479,225 FNMA, Cap 12.840%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 7.852%, 06/01/17.... 6,900,375
13,255,843 FNMA, Cap 12.850%, Margin 2.078% + CMT, Resets Annually, 7.975%, 10/01/17 ............... 14,051,193
13,339,130 FNMA, Cap 12.890%, Margin 2.125% + 6 Month TB, Resets Semi-Annually, Monthly, 7.118%,
07/01/17 .............................................................................. 14,006,086
57,875,038 FNMA, Cap 12.911%, Margin 1.250% + COF, Resets Monthly, 5.259%, 03/01/18 ................ 59,321,913
3,327,485 FNMA, Cap 12.911%, Margin 2.000% + 6 Month DR, Resets Semi-Annually, 5.30%, 02/01/18 .... 3,477,222
11,093,064 FNMA, Cap 12.938%, Margin 1.250% + COF, Resets Monthly, 5.30%, 02/01/19 ................. 11,370,391
37,097,087 FNMA, Cap 12.964%, Margin 2.000% + COF, Resets Annually, 6.621%, 01/01/29 ............... 38,488,228
7,000,737 FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 5.606%, 12/01/19 ............... 7,420,781
10,023,958 FNMA, Cap 13.010%, Margin 2.100% + CMT, Resets Annually, 5.725%, 06/01/19 ............... 10,625,396
17,549,288 FNMA, Cap 13.017%, Margin 1.250% + COF, Resets Monthly, 5.248%, 07/01/17 ................ 17,988,020
2,049,517 FNMA, Cap 13.020%, Margin 1.950% + CMT, Resets Annually, 5.353%, 04/01/19 ............... 2,162,241
13,262,313 FNMA, Cap 13.021%, Margin 1.986% + CMT, Resets Annually, 5.696%, 07/01/22 ............... 13,991,741
30,342,698 FNMA, Cap 13.022%, Margin 1.750% + COF, Resets Annually, 5.875%, 01/01/18 ............... 31,328,835
</TABLE>
The accompanying notes are an intergral part of these financial statements.
51
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE U.S. GOVERNMENT VALUE
AMOUNT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (CONT.)
FEDERAL NATIONAL ASSOCIATION (FNMA) (CONT.)
$21,602,555 FNMA, Cap 13.030%, Margin 1.250% + COF, Resets Monthly, 6.806%, 02/01/20................ $ 22,142,619
10,504,131 FNMA, Cap 13.030%, Margin 1.750% + COF, Resets Semi-Annually, 4.963%, 12/01/20.......... 10,871,776
8,387,593 FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Annually, 5.849%, 04/01/19............... 8,890,848
22,203,366 FNMA, Cap 13.080%, Margin 2.010% + CMT, Resets Annually, 5.596%, 08/01/19............... 23,424,551
11,217,354 FNMA, Cap 13.099%, Margin 1.750% + 6 Month TB, Resets Semi-Annually, 4.937%, 07/01/20... 11,609,962
7,047,360 FNMA, Cap 13.108%, Margin 2.246% + CMT, Resets Annually, 5.78%, 01/01/20................ 7,505,438
43,403,803 FNMA, Cap 13.125%, Margin 1.250% + COF, Resets Monthly, 5.427%, 04/01/18................ 44,488,898
6,825,393 FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 5.388%, 04/01/19............... 7,166,662
5,773,125 FNMA, Cap 13.202%, Margin 2.478% + 6 Month TB, Resets Semi-Annually, 5.879%, 11/01/26... 6,148,378
3,343,519 FNMA, Cap 13.210%, Margin 1.910% + CMT, Resets Annually, 5.553%, 06/01/18............... 3,502,336
1,974,072 FNMA, Cap 13.211%, Margin 2.070% + CMT, Resets Annually, 5.758%, 05/01/18............... 2,092,516
3,017,660 FNMA, Cap 13.220%, Margin 2.065% + CMT, Resets Annually, 5.87%, 11/01/19................ 3,198,719
6,643,722 FNMA, Cap 13.249%, Margin 2.000% + CMT, Resets Annually, 5.478%, 06/01/19............... 7,009,126
7,240,137 FNMA, Cap 13.281%, Margin 2.000% + CMT, Resets Annually, 5.653%, 10/01/19............... 7,638,345
10,983,923 FNMA, Cap 13.320%, Margin 1.250% + COF, Resets Semi-Annually, 7.392%, 04/01/03.......... 11,258,521
4,966,413 FNMA, Cap 13.335%, Margin 1.750% + CMT, Resets Annually, 5.318%, 04/01/18............... 5,189,902
4,802,339 FNMA, Cap 13.346%, Margin 1.985% + CMT, Resets Annually, 5.702%, 02/01/18............... 5,066,467
4,312,561 FNMA, Cap 13.378%, Margin 1.830% + CMT, Resets Annually, 5.432%, 05/01/27............... 4,528,189
22,704,088 FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 5.664%, 09/01/22............... 23,839,293
16,892,132 FNMA, Cap 13.644%, Margin 2.011% + CMT, Resets Annually, 5.552%, 01/01/18............... 17,821,199
3,402,642 FNMA, Cap 13.659%, Margin 2.100% + CMT, Resets Annually, 5.513%, 11/01/18............... 3,606,800
12,296,820 FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 5.704%, 03/01/21............... 13,034,629
14,221,662 FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 5.651%, 12/01/20............... 15,074,962
7,501,023 FNMA, Cap 13.797%, Margin 2.220% + CMT, Resets Annually, 5.899%, 03/01/19............... 7,988,589
9,229,623 FNMA, Cap 13.800%, Margin 0.940% + 6 Month DR, Resets Semi-Annually, 6.861%, 07/01/24... 9,368,067
4,642,980 FNMA, Cap 13.885%, Margin 1.913% + CMT, Resets Annually, 5.54%, 09/01/19................ 4,875,129
8,712,019 FNMA, Cap 13.887%, Margin 2.250% + CMT, Resets Annually, 5.913%, 02/01/19............... 9,278,301
5,403,429 FNMA, Cap 13.896%, Margin 2.250% + CMT, Resets Annually, 5.956%, 12/01/18............... 5,754,652
12,146,959 FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 6.135%, 01/01/19............... 12,875,776
15,668,500 FNMA, Cap 14.077%, Margin 1.800% + CMT, Resets Annually, 5.333%, 12/01/18............... 16,373,583
33,931,390 FNMA, Cap 14.120%, Margin 1.750% + 6 Month DR, Resets Semi-Annually, 4.846%, 01/01/17... 35,118,988
6,184,089 FNMA, Cap 14.142%, Margin 2.118% + CMT, Resets Annually, 7.808%, 03/01/21............... 6,555,134
2,448,771 FNMA, Cap 14.183%, Margin 1.957% + CMT, Resets Annually, 5.409%, 11/01/17............... 2,583,454
23,677,811 FNMA, Cap 14.354%, Margin 2.070% + CMT, Resets Annually, 8.128%, 05/01/21............... 25,098,480
38,366,700 FNMA, Cap 14.670%, Margin 1.750% + 6 Month DR, Resets Semi-Annually, 4.846%, 01/01/17... 39,805,452
14,065,367 FNMA, Cap 14.887%, Margin 1.720% + CMT, Resets Annually, 5.203%, 01/01/16............... 14,733,472
5,603,049 FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 6.028%, 05/01/19............... 6,023,278
3,356,561 FNMA, Cap 14.978%, Margin 2.168% + CMT, Resets Annually, 5.625%, 02/01/20............... 3,557,955
4,507,980 FNMA, Cap 15.763%, Margin 2.325% + CMT, Resets Annually, 5.975%, 12/01/17............... 4,823,538
31,970,693 FNMA, REMIC, Cap 11.250%, Margin 0.800% + 1 Month LIBOR, Resets Monthly, 6.50.
05/25/22.............................................................................. 32,450,254
15,000,000 FNMA, REMIC, Cap 11.495%, Margin 0.800% + 1 Month LIBOR, Resets Monthly, 3.988%,
10/25/20.............................................................................. 15,112,500
7,500,000 FNMA, REMIC, Cap 11.500%, Margin 0.900% + 1 Month LIBOR, Resets Monthly, 4.088%,
11/25/20.............................................................................. 7,593,750
3,274,421 FNMA, REMIC, Cap 13.000%, Margin 1.250% + COF, Resets Monthly, 5.208%, 08/25/18......... 3,298,979
--------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (COST $1,121,990,339).................. 1,137,591,113
--------------
</TABLE>
The accompanying notes are an intergral part of these financial statements.
52
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
FACE U.S. GOVERNMENT VALUE
AMOUNT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (CONT.)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 10.9%
$ 64,430,976 GNMA, Cap 11.000%, Margin 1.500% + CMT, Resets Annually, 6.00%, 07/20/22 .................. $ 67,652,525
33,632,954 GNMA, Cap 11.500%, Margin 1.500% + CMT, Resets Annually, 6.50%, 07/20/22 .................. 35,650,931
61,365,458 GNMA, Cap 11.500%, Margin 1.500% + CMT, Resets Annually, 6.50%, 08/20/22 .................. 65,047,385
14,940,859 GNMA, Cap 11.500%, Margin 1.500% + CMT, Resets Annually, 6.50%, 07/20/23 .................. 15,837,310
9,237,044 GNMA, Cap 11.500%, Margin 1.500% + CMT, Resets Annually, 6.50%, 08/20/23 .................. 9,791,266
23,810,790 GNMA, Cap 13.000%, Margin 1.500% + CMT, Resets Annually, 6.75%, 02/20/16 .................. 25,298,965
11,698,822 GNMA, Cap 13.000%, Margin 1.500% + CMT, Resets Annually, 6.75%, 03/20/16 .................. 12,429,998
---------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $226,122,777) .................... 231,708,380
---------------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST $1,850,833,178) ....................... 1,880,702,793
---------------
OTHER SECURITIES 3.1%
328,099 (k)FHLMC, REMIC, Class G, 7.772%, 05/15/04 ................................................... 2,509,959
159,930 (k)FHLMC, REMIC, Class H, 8.522%, 05/15/06 ................................................... 2,515,703
51,183 (k)FHLMC, REMIC, Class H, 10.051%, 10/15/96 .................................................. 982,198
113,000 (k)FHLMC, REMIC, Class I, 4.207%, 08/15/02 ................................................... 1,033,950
192,332 (k)FHLMC, REMIC, Class PI, 16.209%, 01/15/21 ................................................. 2,236,825
164,925 (k)FHLMC, REMIC, Class X, 8.936%, 03/15/18 ................................................... 1,136,333
68,899 (k)FNMA, REMIC, Class D, 7.70%, 10/25/15 .................................................... 273,528
66,888 (k)FNMA, REMIC, Class E, 10.11%, 09/25/98 ................................................... 1,515,676
7,731,313 FNMA, REMIC, Class H, 7.00%, 07/25/22 .................................................... 3,285,808
68,434 (k)FNMA, REMIC, Class H, 9.386%, 04/25/18 ................................................... 277,156
92,000 (k)FNMA, REMIC, Class HC, 9.241%, 05/25/18 .................................................. 559,360
24,329 (k)FNMA, REMIC, Class IO, 10.151%, 08/25/21 ................................................. 576,107
50,000 (k)FNMA, REMIC, Class J, 9.095%, 06/25/21 ................................................... 1,775,000
222,498 (k)FNMA, REMIC, Class K, 7.85%, 03/25/07 .................................................... 3,942,664
139,616 (k)FNMA, REMIC, Class K, 8.326%, 08/25/06 ................................................... 1,620,947
116,144 (k)FNMA, REMIC, Class KA, 8.637%, 07/25/17 .................................................. 538,910
56,649 (k)FNMA, REMIC, Class L, 9.104%, 07/25/21 ................................................... 802,148
96,361 (k)FNMA, REMIC, Class M, 9.743%, 08/25/21 ................................................... 1,790,384
190,681,367 FNMA, REMIC, Class S, 4.292%, 10/25/07 ................................................... 27,839,480
77,568,880 FNMA, REMIC, Class S, 5.932%, 10/25/22 ................................................... 10,704,505
18,431 (k)FNMA, REMIC, Class ZD, 9.676%, 10/25/12 .................................................. 24,883
---------------
TOTAL OTHER SECURITIES (COST $102,263,037) ............................................ 65,941,524
---------------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES AND OTHER SECURITIES (COST $1,953,096,215)... 1,946,644,317
---------------
U.S. GOVERNMENT SECURITIES 9.2%
75,000,000 U.S. Treasury Bonds, 6.25%, 08/15/23 ...................................................... 77,952,750
43,380,000 U.S. Treasury Notes, 3.875%, 08/31/95...................................................... 43,352,672
75,325,000 U.S. Treasury Notes, 3.875%, 09/30/95...................................................... 75,206,740
---------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $196,271,342)................................... 196,512,162
---------------
TOTAL INVESTMENTS (COST $2,149,367,557) 100.6%..................................... 2,143,156,479
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.6)%................................... (12,927,467)
---------------
NET ASSETS 100.0%.................................................................. $ 2,130,229,012
===============
At October 31, 1993, the net unrealized depreciation based on the
cost of investments for income tax purposes of $2,149,417,042 was
as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost.......................................................... $ 41,276,901
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value.......................................................... (47,537,464)
---------------
Net unrealized depreciation............................................................. $ (6,260,563)
===============
</TABLE>
The accompanying notes are an intergral part of these financial statements.
53
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
U.S. GOVERNMENT
ADJUSTABLE RATE MORTGAGE PORTFOLIO
- --------------------------------------------------------------------------------
PORTFOLIO ABBREVIATIONS:
CMT - 1 Year Constant Maturity Treasury Index
COF - 11th District Cost of Funds Index
DR - Discount Rate
LIBOR - London Interbank Offered Rate
NCI - National District Cost of Funds Index
REMIC - Real Estate Mortgage Investment Conduit
TB - Treasury Bills
(k)Approximate yield. These securities have a high coupon interest rate and were
purchased at substantial premium to their original principal amounts. Monthly
premium amortization reduces considerably the net interest income earned on
these securities.
(j)See Note 1 regarding securities purchased on a to-be-announced basis.
The accompanying notes are an integral part of these financial statements.
54
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ADJUSTABLE RATE SECURITIES PORTFOLIO (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 96.9%
$ 981,960 Bear Stearns Mortgage Securities, Inc., Cap 10.000%, Margin 1.250%
COF, Resets Monthly, 5.248%, 07/25/24 .............................................. $ 981,960
3,876,906 Citicorp, Cap 12.500%, Margin 2.000%+ CMT, Resets Annually, 5.49%, 09/25/22........... 4,002,905
4,096,269 Citicorp, Cap 12.500%, Margin 2.000%+ CMT, Resets Annually, 5.217%, 10/25/22.......... 4,188,435
205,683 Citicorp, Cap 13.300%, Margin 1.250%+ COF, Resets Monthly, 5.426%, 05/25/21........... 206,712
471,057 Donaldson, Lufkin & Jenrette, Cap 12.980%, Margin 1.750% CMT,
Resets Annually, 5.27%, 01/25/21 ................................................... 491,077
4,866,993 First Boston Mortgage Securities Corp., Cap 10.816%, Margin 1.060% + 6
Month LIBOR, Resets Semi-Annually, 5.691%, 07/25/09 ................................ 5,013,002
4,459,882 Fund America, Class M, Resets Annually, 5.942%, 10/25/28 ............................. 4,649,427
4,652,726 Glendale, Cap 12.250%, Margin 1.780%+ CMT, Resets Annually, 5.267%, 12/25/29.......... 4,734,149
4,931,924 Glendale, Cap 13.000%, Margin 1.750%+ CMT, Resets Annually, 5.264%, 09/01/29.......... 5,010,527
5,963,858 GNMA, Cap 10.500%, Margin 1.500% + CMT, Resets Monthly, 5.50%, 07/20/23 .............. 6,187,503
5,000,000 (j)Greenwich Capital Acceptance, Inc., Cap 11.540%, Margin 1.750% + 6 month LIBOR,
Resets Annually, 5.54%, 12/01/18 ................................................... 5,162,500
1,680,906 Home Owners Federal Savings, Cap 13.000%, Margin 1.750% +CMT, Resets Annually,
5.270%, 12/01/17 ................................................................... 1,714,525
4,316,873 PHMS, Cap 11.370%, Margin 2.672% + CMT, Resets Annually, 5.95%, 08/25/23 ............. 4,511,132
5,102,074 PHMS, Cap 11.670%, Margin 2.670% + CMT, Resets Annually, 6.041%, 06/25/22 ............ 5,350,800
1,112,419 PHMS, Cap 12.020%, Margin 2.550% + CMT, Resets Annually, 6.041%, 03/25/22 ............ 1,151,354
5,240,352 PHMS, Cap 13.360%, Margin 2.500% + CMT, Resets Annually, 6.00%, 07/25/18 ............. 5,449,966
2,291,481 PSSF, Cap 10.875%, Margin 2.270% + CMT, Resets Annually, 5.00%, 06/20/22 ............. 2,365,954
6,435,608 (j)RFMC, Cap 11.460%, Margin 2.250% + CMT, Resets Annually, 5.18%, 11/25/17 ............. 6,709,122
1,478,000 RTC, Cap 11.400%, Margin 1.770% + CMT, Resets Annually, 5.894%, 03/25/22 ............ 1,500,170
5,587,385 RTC, Cap 12.650%, Margin 2.125% + CMT, Resets Annually, 5.522%, 11/25/17 ............ 5,755,007
2,478,345 RTC, Cap 12.660%, Margin 1.750% + 6 Month TB, Resets Semi-Annually,
5.856%, 04/26/21 ................................................................... 2,552,695
416,821 RTC, Cap 13.000%, Margin 1.500% + COF, Resets Monthly, 6.987%, 01/25/20 .............. 417,863
179,648 RTC, Cap 13.110%, Margin 1.850% + COF, Resets Annually, 6.695%, 05/25/21 ............. 181,445
366,619 RTC, Cap 13.628%, Margin 1.942% + CMT, Resets Annually, 6.207%, 01/25/26 ............. 373,035
2,103,492 RTC, Cap 13.842%, Margin 1.690% + 6 Month DR, Resets Semi-Annually,
5.152%, 01/25/25 ................................................................... 2,150,821
5,372,201 RTC, Cap 13.850%, Margin .900% + CMT, Resets Annually, 7.23%, 04/25/22 ............... 5,526,652
355,510 RTC, Cap 13.950%, Margin 2.150% + CMT, Resets Annually, 5.813%, 01/25/25 ............. 361,732
3,619,385 RTC, Cap 14.690%, Margin 1.550% + CMT, Resets Annually, 7.997%, 06/25/22 ............. 3,764,161
592,122 RTC, Cap 14.970%, Margin 2.510% + 6 Month DR, Resets Semi-Annually,
6.049%, 08/25/29 ................................................................... 606,925
2,336,019 RTC, Cap 16.430%, Margin 1.300% + CMT, Resets Annually, 7.727%, 07/25/20 ............. 2,371,060
715,216 RYMS, Cap 13.450%, Margin 1.200%, + NACR, Resets Monthly, 6.971%, 11/25/21 ........... 740,248
5,003,216 Sears Mortgage Securities, Cap 12.370%, Margin 2.220% + CMT, Resets Annually,
5.726%, 10/25/21 ................................................................... 5,215,853
5,437,619 Shearson Lehman, Cap 10.750%, Margin 1.250% + CMT, Resets Annually, 5.253%, 06/25/18.. 5,559,965
2,972,231 Shearson Lehman, Cap 13.000%, Margin 2.000% + CMT, Resets Annually, 5.516%, 10/01/18.. 3,046,536
5,787,172 Shearson Lehman, Cap 13.600%, Margin 1.800% + NCI, Resets Annually, 5.925%, 08/25/18.. 5,873,978
6,365,288 Western Capital, Cap 12.850%, Margin 1.750% + 1 Month LIBOR, Resets Monthly, 5.65%,
10/25/20 ........................................................................... 6,556,245
------------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST $120,465,340) ................... 120,435,441
------------
U.S. GOVERNMENT SECURITIES 9.1%
278,000 U.S. Treasury Notes, 3.875%, 03/31/95 ................................................ 278,520
9,688,000 U.S. Treasury Notes, 3.875%, 04/30/95 ................................................ 9,700,012
378,000 U.S. Treasury Notes, 4.625%, 08/15/95 ................................................ 382,604
1,000,000 U.S. Treasury Notes, 3.875%, 08/31/95 ................................................ 999,370
------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $11,377,655) ............................. 11,360,506
------------
TOTAL INVESTMENTS (COST 131,842,995) 106.0% ................................. 131,795,947
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (6.0)% ........................... (7,486,708)
------------
NET ASSETS 100.0% ........................................................... $124,309,239
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1993 (CONT.)
<TABLE>
<CAPTION>
VALUE
ADJUSTABLE RATE SECURITIES PORTFOLIO (NOTE 1)
- ----------------------------------------------------------------------------------------------
<S> <C>
At October 31, 1993, the net unrealized depreciation based on the cost of
investments for income tax purposes of $131,843,997 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost.............................. $ 186,090
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value.............................. (234,140)
---------
Net unrealized depreciation............................................... $ (48,050)
=========
</TABLE>
PORTFOLIO ABBREVIATIONS:
CMT - 1 Year Constant Maturity Treasury Index
COF - 11th District Cost of Funds Index
DR - Discount Rate
GNMA - Government National Mortgage Association
LIBOR - London Interbank Offered Rate
NACR - National Average Contract Rate
NCI - National District Cost of Funds Index
PHMS - Prudential Home Mortgage Securities
PSSF - Prudential Securities Secured Finance
RFMC - Residential Funding Mortgage Corp.
RTC - Resolution Trust Corp.
RYMS - Ryland Mortgage Securites Corp.
TB - Treasury Bills
(j)See Note 1 regarding securities purchased on a to-be-announced basis.
The accompanying notes are an integral part of these financial statements.
56
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1993
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------ --------------------
<S> <C> <C>
Assets:
Investments in securities:
At identified cost ................................................... $2,149,367,557 $131,842,995
============== ============
At value ............................................................. 2,143,156,479 131.,795,947
Cash .................................................................. - 3,115,956
Receivables:
Interest ............................................................. 15,263,775 860,633
Investment securities sold ........................................... 15,190,614 471,248
Unamortized organization costs (Note 2)................................ - 7,137
-------------- ------------
Total assets ...................................................... 2,173,610,868 136,250,921
-------------- ------------
Liabilities:
Payables:
Investment securities purchased on a to-be-announced basis (Note 1) .. 13,071,849 11,933,926
Capital shares repurchased ........................................... 29,954,045 -
Management fees ...................................................... 93,559 -
Payable to manager for organization costs ............................ - 7,137
Accrued expenses and other payables ................................... 204,777 619
Bank overdraft ........................................................ 57,626 -
-------------- ------------
Total liabilities ................................................. 43,381,856 11,941,682
-------------- ------------
Net assets, at value .................................................. $2,130,229,012 $124,309,239
============== ============
Net assets consist of:
Unrealized depreciation on investments ............................... (6,211,078) (47,048)
Accumulated net realized loss ........................................ (62,671,103) (109,611)
Capital shares ....................................................... 2,170,344 123,967
Additional paid-in capital ........................................... 2,196,940,849 124,341,931
-------------- ------------
Net assets, at value .................................................. $2,130,229,012 $124,309,239
============== ============
Shares outstanding .................................................... 217,034,422 12,396,739
============== ============
Net asset value per share ............................................. $9.82 $10.03
============== ============
Representative computation (U.S. Government Adjustable
Rate Mortgage Portfolio) of net asset value, offering price and
redemption price per share: (2,130,229,012 divided by 217,034,422) $9.82
==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
57
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------ --------------------
<S> <C> <C>
Investment income:
Interest (Note 1).................................... $113,503,147 $2,718,221
Expenses: ------------ ----------
Management fees (Note 6)............................. 6,534,699 20,602
Reports to shareholders.............................. 24,620 718
Professional fees.................................... 79,365 20,080
Trustees' fees and expenses.......................... 14,157 -
Custodian fees....................................... 261,708 12,293
Amortization of organization costs (Note 2) ......... - 1,647
Other................................................ 85,683 5,733
Payments from manager (Note 6)....................... - (1,647)
------------ ----------
Total expenses .................................... 7,000,232 59,426
------------ ----------
Net investment income............................. 106,502,915 2,658,795
Realized and unrealized gain (loss) on investments: ------------ ----------
Net realized gain (loss)............................. 7,294,889 (51,910)
Net unrealized depreciation during the period........ (31,684,300) (61,448)
------------ ----------
Net realized and unrealized loss on investments....... (24,389,411) (113,358)
------------ ----------
Net increase in net assets resulting from operations.. $ 82,113,504 $2,545,437
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
58
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
AND THE YEAR ENDED JANUARY 31, 1993
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE RATE
ADJUSTABLE RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
---------------------------------- ---------------------------
FOR THE NINE FOR THE FOR THE NINE FOR THE
MONTHS ENDED YEAR ENDED MONTHS ENDED YEAR ENDED
10/31/93 01/31/93 10/31/93 01/31/93
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income................................... $ 106,502,915 $ 252,633,962 $ 2,658,795 $ 1,352,157
Net realized gain (loss) from security transactions..... 7,294,889 (67,642,070) (51,910) (57,701)
Net unrealized appreciation (depreciation) on
investments during the period........................... (31,684,300) 18,117,443 (61,448) 14,400
--------------- -------------- ------------ -----------
Net increase in net assets resulting from
operations........................................ 82,113,504 203,109,335 2,545,437 1,308,856
Distributions to shareholders from undistributed net
investment income....................................... (106,502,915) (252,633,962) (2,658,795) (1,352,157)
Increase (decrease) in net assets from capital share
transactions (Note 4)................................... (2,046,792,768) (64,722,144) 79,767,042 44,698,756
--------------- -------------- ------------ -----------
Net increase (decrease) in net assets.............. (2,071,182,179) (114,246,771) 79,653,684 44,655,455
Net assets (there is no undistributed net investment
income at beginning or end of period):
Beginning of period.................................... 4,201,411,191 4,315,657,962 44,655,555 100
--------------- -------------- ------------ -----------
End of period.......................................... $ 2,130,229,012 $4,201,411,191 $124,309,239 $44,655,555
=============== ============== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Adjustable Rate Securities Portfolios (the Trust) is a no load, open-end,
diversified management investment company (mutual fund) registered under the
Investment Company Act of 1940 as amended. The Trust currently has two separate
portfolios (the Portfolios) consisting of the U.S. Government Adjustable Rate
Mortgage Portfolio (Mortgage Portfolio) and Adjustable Rate Securities Portfolio
(Securities Portfolio). The shares of the Trust are issued in private placements
and are thus exempt from registration under the Securities Act of 1933.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
a. SECURITIES VALUATIONS:
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, at
the mean between the most recent quoted bid and asked prices. Other securities
for which market quotations are readily available are valued at current market
values, obtained from a pricing service, which are 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 securities. Portfolio securities which are traded both in the
over-the-counter market and on a securities exchange are valued according to the
broadest and most representative market as determined by the Manager. Securities
for which market quotations are not readily available, if any, are valued at
their fair value as determined following procedures approved by the Board of
Trustees. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.
b. INCOME TAXES:
It is the Trust's policy to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to its shareholders. Therefore, no income tax provision is
required. Each Portfolio is treated as a separate entity in the determination of
compliance with the Internal Revenue Code.
c. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are purchased
or sold (trade date). Realized gains and losses on security transactions are
determined on the basis of specific identification for both financial statement
and income tax purposes.
d. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Distributions to shareholders are recorded on the ex-dividend date. Interest
income and estimated expenses are accrued daily. Bond premium, if any, is
amortized as required by the Internal Revenue Code. The Fund normally declares
dividends from its net investment income daily and distributes monthly. Daily
allocations of net investment income will commence on the date of receipt of an
investor's funds. Dividends are normally declared each day the New York Stock
Exchange is open for business equal to the Fund's total net investment income
and are payable to shareholders of record at the beginning of business on the
ex-date. Once a month, dividends are reinvested in additional shares of the Fund
or paid in cash as requested by the shareholders.
Distributions from undistributed net investment income, and net realized capital
gains from security transactions to the extent they exceed available capital
loss carryovers, are made during each year to avoid the 4% excise tax imposed on
regulated investment companies by the Internal Revenue Code.
e. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the Portfolios based
on the ratio of net assets of each Portfolio to the combined net assets. In all
other respects, expenses are charged to each Portfolio as incurred on a specific
identification basis.
60
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
f. SECURITIES PURCHASED ON A TO-BE-ANNOUNCED (TBA) BASIS:
The Trust may trade securities on a WI or delayed delivery basis, with payment
and delivery scheduled for a future time, generally beyond 45 days.
In a TBA transaction, the Trust has committed to purchasing or selling
securities for which all specific information is not yet known at the time of
trade, particularly the face amount and maturity date in GNMA Certificates.
These transactions are subject to market fluctuations and are subject to the
risk that the value at delivery may be more or less than the purchase price when
the transactions were entered into. Although the Trust will generally purchase
these securities with the intention of acquiring such securities, they may sell
such securities before the settlement date. The Trust ha s set aside sufficient
investment securities as collateral for securities purchased on a TBA basis.
Securities purchased on a TBA basis are identified on the accompanying statement
of investments in securities and net assets.
g. PREPAYMENT OF REMIC SECURITIES:
In connection with amortizing premium on collateralized mortgage obligations
issued in the form of Real Estate Mortgage Investment Conduit (REMIC)
securities, it is necessary to estimate the rate at which principal of such
REMIC securities is prepaid. The Trust uses prepayment estimates for each REMIC
issue based on a speed factor obtained through outside brokers.
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Securities Portfolio are amortized on a
straight-line basis over a period of five years, from December 26, 1991, the
effective date of registration. In the event Franklin Resources, Inc. (which was
the sole shareholder prior to December 26, 1991) redeems its shares within the
five-year period, the pro rata share of the then-unamortized, deferred
organization cost will be deducted from the redemption price paid to Franklin
Resources, Inc. New investors purchasing shares of the portfolio subsequent to
that date bear such costs during the amortization period only as such charges
are accrued daily against investment income.
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1993, for tax purposes, the Portfolios had accumulated capital
loss carryovers as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------- --------------------
<S> <C> <C>
Capital loss carryovers
Expiring in: October 31, 2000..... $62,621,618 $ 57,701
October 31, 2001..... - 50,908
----------- --------
$62,621,618 $108,609
=========== ========
</TABLE>
For income tax purposes, the aggregate cost of securities is higher (and
unrealized depreciation is higher) than for financial reporting purposes at
October 31, 1993 by $49,485 in the Mortgage Portfolio and $1,002 in the
Securities Portfolio.
4. CAPITAL STOCK
At October 31, 1993, there was an unlimited number of $.01 par value shares of
beneficial interest authorized. Transactions in each of the Portfolio's shares
were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Nine months ended October 31, 1993
Shares sold ....................................... 35,150,104 $ 347,867,956 12,949,265 $130,092,823
Shares issued in reinvestment of distributions..... 10,857,572 107,414,657 263,368 2,646,062
Shares redeemed.................................... (253,133,809) (2,502,075,381) (5,271,267) (52,971,843)
------------ --------------- ---------- ------------
Net increase (decrease)............................ (207,126,133) $(2,046,792,768) 7,941,366 $ 79,767,042
============ =============== ========== ============
</TABLE>
61
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONT.)
4. CAPITAL STOCK (CONT.)
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ---------- ------------
<S> <C> <C> <C> <C>
Year ended January 31, 1993
Shares sold ...................................... 235,156,419 $ 2,350,192,033 5,842,878 $ 58,602,313
Shares issued in reinvestment of distributions.... 25,240,437 251,793,145 136,199 1,365,334
Shares redeemed .................................. (267,513,926) (2,666,707,322) (1,423,214) (14,261,881)
Changes from exercise of exchange privilege:
Shares redeemed .................................. - - (100,500) (1,007,010)
------------ --------------- ---------- ------------
Net increase (decrease)........................... (7,117,070) $ (64,722,144) 4,455,363 $ 44,698,756
============ =============== ========== ============
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the nine months ended October 31, 1993 were as
follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------- --------------------
<S> <C> <C>
Purchases........................... $2,499,100,754 $212,535,677
============== ============
Sales............................... $4,276,737,054 $121,265,451
============== ============
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Trust, and receives fees computed monthly based on the average daily net assets
of the Trust during the month. The Trust pays a fee equal to an annualized rate
of 40/100 of 1% for the first $5 billion of net assets, plus 35/100 of 1% of net
assets in excess of $5 billion up to and including $10 billion, 33/100 of 1% of
net assets in excess of $10 billion up to and including $15 billion, and 30/100
of 1% of net assets in excess of $15 bil lion. Under the agreement, fees
incurred by the Mortgage Portfolio and the Securities Portfolio would have been
$9,965,963 and $222,753, respectively, for the nine months ended October 31,
1993. The terms of the management agreement provide that aggregate annual
expenses of the Trust be limited to the extent necessary to comply with the
limitations set forth in the laws, regulations and administrative
interpretations of the states in which the Trust's shares are registered. The
Trust's expenses did not exceed these limitations; however, for the nine months
ended October 31, 1993, Franklin Advisers, Inc. reduced its management fees for
the Mortgage Portfolio and Securities Portfolio by $3,431, 264 and $202,151,
respectively, and made payments of other expenses of $1,647 for the Securities
Portfolio.
As of October 31, 1993, 184,156,840 shares of the Mortgage Portfolio were owned
by the Franklin Adjustable U.S. Government Securities Fund and 32,877,582 shares
were owned by the Franklin Institutional Adjustable U.S. Government Securities
Fund. This represents 85% and 15%, respectively, of the outstanding shares of
the Mortgage Portfolio.
As of October 31, 1993, 3,795,340 shares of the Securities Portfolio were owned
by the Franklin Adjustable Rate Securities Fund and 8,470,882 shares were owned
by the Franklin Institutional Adjustable Rate Securities Fund. This represents
31% and 68%, respectively, of the outstanding shares of the Securities
Portfolio. The remaining 130,517 shares of the Securities Portfolio were owned
by Franklin Resources, Inc.
Certain officers and Trustees of the Trust are also officers and/or directors of
Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc.,
Franklin/Templeton Investors Services, Inc., and Templeton Worldwide, Inc., all
wholly-owned subsidiaries of Franklin Resources, Inc.
62
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONT.)
7. OTHER CONSIDERATIONS
On June 15, 1993, the Board of Trustees authorized a change in the fiscal year
end of the Trust from January 31 to October 31.
8. FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DIVIDENDS NET ASSET
YEAR VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
ENDED BEGINNING INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT FROM TOTAL AT END
JANUARY 31, OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
1992(1) $10.00 $.493 $ .013 $.506 $(.493) $(.003) $(.496) $10.01
1993 10.01 .544 (.100) .444 (.544) - (.544) 9.91
1993** 9.91 .313 (.090) .223 (.313) - (.313) 9.82
ADJUSTABLE RATE SECURITIES PORTFOLIO
1992(2) 10.00 - - - - - - 10.00
1993 10.00 .599 .020 .619 (.599) - (.599) 10.02
1993** 10.02 .368 .010 .378 (.368) - (.368) 10.03
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
------------------------------------------------------
NET ASSETS RATIO OF RATIO OF
YEAR AT END EXPENSES NET INCOME PORTFOLIO
ENDED TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER
JANUARY 31, RETURN++ (IN 000'S) NET ASSETS*** NET ASSETS RATE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
1992(1) 5.13% $4,315,658 .31%* 7.25%* 48.96%
1993 4.53 4,201,411 .30 5.49 66.44
1993** 2.28** 2,130,229 .27* 4.15* 76.55
ADJUSTABLE RATE SECURITIES PORTFOLIO
1992(2) 10.00 - - - -
1993 6.36 44,656 - 5.80 88.92
1993** 3.83** 124,309 .11* 4.76* 158.70
</TABLE>
*Annualized.
** For the nine months ended October 31, 1993.
(1)For the period May 20, 1991 (effective date of registration) to January 31,
1992.
(2)For the period December 26, 1991 (effective date of registration) to January
31, 1992.
+ Selected data for a share of capital stock outstanding throughout the period.
++ Total return measures the change in value of an investment over the periods
indicated. It assumes reinvestment of dividends and capital gains
distributions at net asset value.
***During the period indicated below, the Manager reduced its management fees
and reimbursed other expenses incurred by the Portfolios.
Had such action not been taken, the ratio of operating expenses to average
net assets would have been as follows:
<TABLE>
<CAPTION>
RATIO OF
OPERATING
EXPENSES
TO AVERAGE
NET ASSETS
----------
<S> <C>
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
1992(1)............................................. .41%*
1993................................................ .42
1993**.............................................. .41*
ADJUSTABLE RATE SECURITIES PORTFOLIO
1993................................................ .64
1993**.............................................. .47*
</TABLE>
