As filed with the Securities and Exchange Commission on December 29, 1995.
File Nos.
33-11444
811-4986
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 17 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19 (X)
FRANKLIN INVESTORS SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on December 12, 1995 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[x] on March 1, 1996 pursuant to paragraph (a) of rule 485
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
The Adjustable Rate Securities Portfolios (the Master Funds) has executed
this registration statement.
Declaration Pursuant to Rule 24f-2. The Registrant has registered an
indefinite number or amount of securities under the Securities Act of 1933
pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Rule
24f-2 Notice for the issuer's most recent fiscal year was filed on December
28, 1995.
Calculation of Registration Fee Under the Securities Act of 1933
Title of Proposed Amount
Securities Amount Maximum Proposed of
Being Being Offering Price Aggregate Offering
Registered Registered* Per Share Price* Fee*
Beneficial 22,268,534 $16.27 $289,996 $100
Interest shares
*Registrant elects to calculate the maximum aggregate offering price pursuant
to Rule 24e-2. 55,917,003 shares were redeemed during the fiscal year ended
October 31, 1995. 33,666,293 shares were used for reductions pursuant to
Paragraph (d) of Rule 24f-2 during the current year. 22,250,710 shares is the
amount of redeemed shares used for reduction in this amendment. Pursuant to
457(d) under the Securities Act of 1933, the maximum public offering price of
$16.27 per share on December 20, 1995, is the price used as the basis for
these calculations. The maximum public offering price per share varies and,
thus, may be higher or lower than $16.27 in the future. While no fee is
required for the 22,250,710 shares, the registrant has elected to register,
for $100, an additional $289,996 of shares (approximately 17,824 shares at
$16.27 per share).
As part of its initial registration statement, the registrant has elected to
register an indefinite number of shares pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended, and hereby continues such
election. The registrant filed the notice required by Rule 24f-2 for its most
recent fiscal year on December 28, 1995.
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Convertible Securities Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights - How Has
Information the Fund Performed?"; "How Does
the Fund Measure Performance?"
4. General Description "What is the Franklin Convertible
Securities Fund?"; "How Does the
Fund Invest Its Assets?"; "What
Are the Fund's Potential Risks?";
"General Information"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I
Securities Receive from the Fund?"; "How
Taxation Affects You and the
Fund"; "General Information"
7. Purchase of Securities "Who Manages the Fund?"; "How Do I
Buy Shares?"; "How Taxation
Affects You and the Fund?"; "What
Programs and Privileges Are
Available to Me as a
Shareholder?"; "What If My
Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?"
8. Redemption or Repurchase "How Do I Sell Shares?"; "What if
My Investment Outlook Changes? -
Exchange Privilege"; "Telephone
Transactions"; "How Do I Get More
Information About My Investment?"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information required in Prospectus
(Franklin Short-Intermediate U.S. Government Securities Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights - How Has
Information the Fund Performed?"; "How Does
the Fund Measure Performance?"
4. General Description "What is the Franklin
Short-Intermediate U.S. Government
Securities Fund?"; "How Does the
Fund Invest Its Assets?"; "What
Are the Fund's Potential Risks?";
"General Information"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I
Securities Receive from the Fund?"; "How
Taxation Affects You and the
Fund?"; "General Information"
7. Purchase of Securities "Who Manages the Fund?"; "How Do I
Buy Shares?"; "How Taxation
Affects You and the Fund"; "What
Programs and Privileges Are
Available to Me as a
Shareholder?"; "What If My
Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?"
8. Redemption or Repurchase "How Do I Sell Shares?"; "What if
My Investment Outlook Changes -
Exchange Privilege"; "Telephone
Transactions"; "How Do I Get More
Information About My Investment?"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Adjustable U.S. Government Securities Fund)
N-1A Location in the
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights - How Has
Information the Fund Performed?"; "How Does
the Fund Measure Performance?"
4. General Description "What is the Franklin Adjustable
U.S. Government Securities Fund?";
"How Does the Fund Invest Its
Assets?"; "What Are The Fund's
Potential Risks?"; "General
Information"
5. Management of the Fund "Who Administers The Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I
Securities Receive from the Fund?"; "How
Taxation Affects You and the
Fund"; "General Information"
7. Purchase of Securities "Who Administers the Fund?"; "How
Do I Buy Shares?"; "How Taxation
Affects You and the Fund?"; "What
Programs and Privileges Are
Available to Me as a
Shareholder?"; "What If My
Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?"
8. Redemption or Repurchase "How Do I Sell Shares?"; "What if
My Investment Outlook Changes? -
Exchange Privilege"; "Telephone
Transactions"; "How Do I Get More
Information About My Investment?"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Equity Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights - How Has
Information the Fund Performed?"; "How Does
the Fund Measure Performance?"
4. General Description "What is the Franklin Equity
Income Fund?"; "How Does the Fund
Invest Its Assets?"; "What Are the
Fund's Potential Risks?"; "General
information"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I
Securities Receive From the Fund?"; "How
Taxation Affects You and the
Fund"; "General Information"
7. Purchase of Securities "Who Manages the Fund?"; "How Do I
Buy Shares?"; "How Taxation
Affects You and the Fund"; "What
Programs and Privileges Are
Available to Me as a
Shareholder?"; "What If My
Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?"
8. Redemption or Repurchase "How Do I Sell Shares?"; "What If
My Investment Outlook Changes? -
Exchange Privilege"; "Telephone
Transactions"; "How Do I Get More
Information About My Investment?"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Global Government Income Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights - How Has
Information the Fund Performed?"; "How Does
the Fund Measure Performance?"
4. General Description "What is the Franklin Global
Government Income Fund?"; "How
Does the Fund Invest Its Assets?";
"What Are The Fund's Potential
Risks?"; "General Information"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I
Securities Receive From the Fund?"; "How
Taxation Affects You and the
Fund"; "General Information"
7. Purchase of Securities "Who Manages the Fund?"; "How Do I
Buy Shares?"; "How Taxation
Affects You and the
Fund?"; "What Programs and
Privileges are Available to Me as
a Shareholder?"; "What If My
Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?"
8. Redemption or Repurchase "How Do I Sell Shares?"; "What if
My Investment Outlook Changes? -
Exchange Privilege"; "Telephone
Transactions"; "How Do I Get More
Information About My Investment?"
9. Pending Legal Proceedings Not Applicable
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in Prospectus
(Franklin Adjustable Rate Securities Fund)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights - How Has
Information the Fund Performed?"; "How Does
the Fund Measure Performance?"
4. General Description "What is the Franklin Adjustable
Rate Securities Fund?"; "How Does
the Fund Invest Its Assets?";
"What Are the Fund's Potential
Risks?"; "General Information"
5. Management of the Fund "Who Administers the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I
Securities Receive From the Fund?"; "How
Taxation Affects You and the
Fund"; "General Information"
7. Purchase of Securities "Who Administers the Fund?"; "How
Do I Buy Shares?"; "How Taxation
Affects You and the Fund?"; "What
Programs and Privileges Are
Available to Me as a
Shareholder?"; "What If My
Investment Outlook Changes? -
Exchange Privilege"; "How Are Fund
Shares Valued?"
8. Redemption or Repurchase "How Do I Sell Shares?"; "What If
My Investment Outlook Changes? -
Exchange Privilege"; "Telephone
Transactions"; "How Do I Get More
Information About My Investment?"
9. Pending Legal Proceedings Not Applicable
Part B: Information Required in
Statement of Additional Information
(Franklin Short-Intermediate U.S. Government Securities Fund, Franklin
Convertible Securities Fund, and Franklin Equity Income Fund)
Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and "General Information"
History
13. Investment Objectives and "How Does each Fund Invest Its
Policies Assets?"; "What Are the Funds'
Potential Risks?"
14. Management of the Fund "Trustees and Officers"
15. Control Persons and "Trustees and Officers"; "General
Principal Holders of Information"
Securities
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Fund's Underwriter"
17. Brokerage Allocation "How Do the Funds Purchase
Securities For Their Portfolios?"
18. Capital Stock and Securities See Prospectuses "General
Information"
19. Purchase, Redemption and "How Do I Buy and Sell Shares?";
Pricing of Securities Being "How Are Fund Shares Valued?"
Offered
20. Tax Status "Additional Information Regarding
Taxation"
21. Underwriters "The Funds' Underwriter"
22. Calculation of Performance "General Information"
Data
23. Financial Statements "Financial Statements"
Part B: Information Required in
Statement of Additional Information
(Franklin Adjustable U.S. Government Securities Fund and Franklin Adjustable
Rate Securities Fund)
Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History "General Information"
13. Investment Objectives and "How Do the Funds Invest Their
Policies Assets?"; "Investment
Restrictions"
14. Management of the Fund "Trustees and Officers"
15. Control Persons and Principal "Trustees and Officers";
Holders of Securities "General Information"
16. Investment Advisory and Other "Administration and Other
Services Services"; "The Funds'
Underwriter"
17. Brokerage Allocation "How Do the Portfolios Purchase
Securities For Their Portfolio?"
18. Capital Stock and Securities See Prospectuses "General
Information"
19. Purchase, Redemption and "How Do I Buy and Sell Shares?";
Pricing of Securities Being "How Are Fund Shares Valued?"
Offered
20. Tax Status "Additional Information
Regarding Taxation"
21. Underwriters "The Funds' Underwriter"
22. Calculation of Performance Data "General Information"
23. Financial Statements "Financial Statements"
Part B: Information Required in
Statement of Additional Information
(Franklin Global Government Income Fund)
Location in
Item No. Item Registration Statement
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and "General Information"
History
13. Investment Objectives and "How Does the Fund Invest It's
Policies Assets?"; "What Are the Fund's
Potential Risks?"
14. Management of the Fund "Trustees and Officers"
15. Control Persons and "Trustees and Officers"; "General
Principal Holders of Information"
Securities
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"; "The Funds' Underwriter"
17. Brokerage Allocation "How Does the Fund Purchase
Securities For It's Portfolio?"
18. Capital Stock and Securities See Prospectus "General
Information"
19. Purchase, Redemption and "How Do I Buy and Sell Shares?";
Pricing of Securities Being "How Are Fund Shares Valued?"
Offered
20. Tax Status "Additional Information Regarding
Taxation"
21. Underwriters The Funds' Underwriter"
22. Calculation of Performance "General Information"
Data
23. Financial Statements "Financial Statements"
FRANKLIN
CONVERTIBLE
SECURITIES FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1996
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 series.
Each series of the Trust in effect represents a separate fund with its own
investment objective 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 objective will be achieved.
The Fund offers two classes of shares: Franklin Convertible Securities Fund -
Class I ("Class I") and Franklin Convertible Securities Fund - Class II ("Class
II"). You can choose between Class I shares, which generally bear a higher
front-end sales charge and lower ongoing Rule 12b-1 distribution fees ("Rule
12b-1 fees"), and Class II shares, which generally have a lower front-end sales
charge and higher ongoing Rule 12b-1 fees. You should consider the differences
between the two classes, including the impact of sales charges and Rule 12b-1
fees, in choosing the more suitable class given your anticipated investment
amount and time horizon. See "How Do I Buy Shares? - Differences Between Class I
and Class II."
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
A Statement of Additional Information (the "SAI") concerning the Fund and two
other series of the Trust, dated March 1, 1996 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 you. 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 shown above.
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.
THE FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-INVESTMENT GRADE BONDS,
COMMONLY KNOWN AS "JUNK BONDS", ISSUED BY BOTH U.S. AND FOREIGN ISSUERS, WHICH
ENTAIL DEFAULT AND OTHER RISKS GREATER THAN THOSE ASSOCIATED WITH HIGHER RATED
SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THE FUND IN LIGHT OF THE SECURITIES IN WHICH THE FUND INVESTS. SEE
"WHAT ARE THE FUND'S POTENTIAL RISKS?"
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.
CONTENTS PAGE
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Franklin Convertible Securities Fund?
How Does the Fund Invest Its Assets?
What Are the Fund's Potential Risks?
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Informations
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
Appendix
EXPENSE TABLE
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of Class I shares for the fiscal year ended October 31, 1995.
<TABLE>
<CAPTION>
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a
<S> <C> <C>
percentage of offering price) 4.50% 1.00%+
Deferred Sales Charge None++ 1.00%+++
Exchange Fee (per transaction)
$5.00* $5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.63% 0.63%
Rule 12b-1 Fees 0.21%** 1.00%**
Other Expenses:
Shareholder servicing fees 0.07% 0.07%
Registration and filing fees 0.04% 0.04%
Other 0.07% 0.07%
----- -----
Total Other Expenses 0.18% 0.18%***
----- --------
Total Fund Operating Expenses 1.02% 1.81%
===== =====
</TABLE>
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more, you will reach the crossover point more quickly.
See "How Do I Buy Shares? - Purchase Price of Fund Shares" for the definition of
Franklin Templeton Funds and similar references.
++Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred sales
charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.25% and pursuant to the Class II distribution plan is 1%.
See "Who Manages the Fund? - Plans of Distribution." 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.
***"Other Expenses" for Class II shares are estimates based on the actual
expenses incurred by Class I shares for the fiscal year ended October 31, 1995.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
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.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
CLASS I $55* $76 $99 $165
CLASS II $38 $66 $107 $221
*Assumes that a contingent deferred sales charge will not apply to Class I shares.
You would pay the following expenses on the same investment, assuming no
redemption.
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
CLASS II $28 $66 $107 $221
</TABLE>
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL 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 you as a result of your investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED?
Set forth below is a table containing the financial highlights for a share of
Class I of the Fund from the effective date of the registration statement
through each of the fiscal years ended January 31, 1993, the nine months ended
October 31, 1993 and each of the two fiscal year ended October 31, 1995; and for
a share of Class II of the Fund from its inception (October 1, 1995) through
fiscal year ended October 31, 1995. The information for each of the periods
ended in 1991 to October 31, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Fund's Annual Report to Shareholders dated October 31, 1995. The remaining
figures, which are also audited, are not covered by the auditors' current
report. See "Reports to Shareholders" under "General Information" in this
Prospectus."
<TABLE>
<CAPTION>
Per Share Operating Performance+ Ratios/Supplemental Data
------------------------------------------------------------ -------------------------
Distri- Distri- Ratio of Net
Net Asset Net Realized butions butions Net Asset Net Assets Ratio of Investment
Values at Net & Unrealized Total From From Net From Total Values at End Expenses Income Portfolio
PeriodBeginningInvestmentGains(Losses)Investment Investment Capital Distri- at End Total of Year to Average to AverageTurnover
Ended of Year Income on Securities Operations Income Gains butions of Year Return++(in 000's)Net Assets**Net Assets Rate
Class I
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19881 $10.00 $.58 $(1.168) $ (.588) $(.312) $ -- $(.312) $ 9.10 (4.80)%$14,734 .15%* 6.82%* 148.67%
1989 9.10 .78 .404 1.184 (.684) -- (.684) 9.60 13.08 17,290 .25 8.27 70.75
1990 9.60 .80 (.395) .405 (.695) -- (.695) 9.31 3.85 14,774 .24 8.25 30.87
1991 9.31 .78 (.729) .051 (.831) -- (.831) 8.53 .37 15,843 .25 8.90 45.42
1992 8.53 .44 2.194 2.634 (.684) -- (.684) 10.48 31.50 20,282 .26 6.84 64.90
1993 10.48 .61 1.034 1.644 (.684) -- (.684) 11.44 16.12 28,307 .25 6.01 60.00
19932 11.44 .45 1.413 1.863 (.513) -- (.513) 12.79 16.50 47,440 .25* 5.25* 31.05
19943 12.79 .59 (.327) .263 (.594) (0.119) (.713) 12.34 2.07 66,869 .84 4.84 68.39
1995 12.34 .58 1.099 1.679 (.592) (0.697)1(1.289) 12.73 15.18 83,523 1.03 4.82 108.64
Class II+++
1995/4 13.06 .07 (.373) (.303) (.047) - (.047) 12.71 (2.33) 209 1.60* 3.64* 108.64
</TABLE>
1For the period April 15, 1987 (effective date) to January 31, 1988.
2For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
3For the year ended October 31, 1994.
4For the period October 1, 1995 (effective date)to October 31, 1995
*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 front-end sales charge or the
contingent deferred sales charge, and assumes reinvestment of dividends and
capital gains, if any, at net asset value. Prior to May 1, 1994, dividends were
reinvested at the maximum offering price.
+++ Ratios have been calculated using daily average net assets during the
period.
**During the periods indicated, Franklin Advisers, Inc., the investment manager,
agreed in advance to waive all or a portion of its management fees and to make
certain payments to reduce expenses by the Fund. Had such action not been taken,
the ratios of operating expenses to average net assets would have been as
follows:
Class I
19881 .94%*
1989 .90
1990 .89
1991 .84
1992 .94
1993 .81
19932 .86*
19943 .92
WHAT IS FRANKLIN CONVERTIBLE SECURITIES FUND?
The Fund is a diversified series of 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
Investment Company Act of 1940 (the "1940 Act"). The Fund has two classes of
shares of beneficial interest ("multiclass" structure) with a par value of
$0.01: Franklin Convertible Securities Fund - Class I and Franklin Convertible
Securities Fund - Class II. All Fund shares outstanding before October 1, 1995
have been redesignated as Class I shares and will retain their previous rights
and privileges, except for legally required modifications to shareholder voting
procedures, as discussed in "General Information - Organization and Voting
Rights."
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see "How
Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable sales
charge not exceeding 4.50% of the offering price depending upon the amount
invested. The current public offering price of the Class II shares is equal to
the net asset value, plus a sales charge of 1% of the amount invested. Please
see "How Do I Buy Shares?"
HOW DOES THE FUND INVEST ITS ASSETS?
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 Fund may invest up to 35% of its net assets 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 investment 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 nationally recognized statistical rating
organizations ("NRSROs") that is, securities rated Baa or lower by Moody's
Investors Service ("Moody's") or BBB or lower by Standard & Poor's Corporation
("S&P"). The Fund may only 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 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. As of October 31, 1995, approximately
[]% of the Fund's net assets were invested in lower rated securities (those
having a rating below the four highest grades assigned by the rating services)
or in unrated securities with comparable credit characteristics. (A breakdown of
the securities' ratings is included under " What Are the Fund's Potential Risks?
- - Asset Composition Table.") 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
investment manager 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. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or a preferred stock which
may be converted within a specified period of time into a certain quantity of
the common stock of the same or a different issuer. A convertible security may
also be subject to redemption by the issuer but only after a specified date and
under circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Holders of a convertible security will have recourse only to the issuer of the
security which will be either an operating company or an investment bank.
As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. The price of a convertible security is also influenced by
the market value of the security's underlying common stock and tends to increase
as the market value of the underlying stock rises, whereas it tends to decrease
as the market value of the underlying stock declines. When issued by a company
other than an investment bank a convertible security tends to be senior to
common stock, but at the same time is often subordinate to other types of fixed
income securities issued by its respective company. Operating company issued
convertible securities are typically convertible into common stock through the
company issuing new common stock to the holder of the security. However in the
instance that the security is called by the issuer and the parity price of the
convertible security is less than the call price, the operating company will
often pay cash out instead of common stock. If the security is issued by an
investment bank, the security is an obligation of and is also convertible
through such investment bank. Because it has features of both common stock and a
straight fixed income security, a convertible security's value can be
influenced, as mentioned, by both interest rate and market movements.
Consequently, convertible securities often are not influenced by a change in
interest rates as much as a similar straight fixed income security or a change
in share price as drastically as the respective common stock. This is because
rather than a convertible security's value largely being determined by just
interest rates or share price, it is often determined by a combination of the
two.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria as that Fund's investments in debt obligations. However
unlike convertible debt obligations, convertible preferred stocks are equity
securities. Like common stocks, preferred stocks are subordinated to all debt
obligations in the event of insolvency, and an issuer's failure to make a
dividend payment is generally not an event of default entitling the preferred
shareholder to take action. Like common stocks, preferred stocks generally have
no maturity date, so that their market value is dependent on the issuer's
business prospects for an indefinite period of time. Finally, preferred stock
dividends are dividends, rather than interest payments, and are treated as such
for corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock which generally features a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer (PERCS are generally not
convertible into cash at maturity).Under a typical arrangement, if after three
years the issuer's common stock is trading at a price below that set by the
capital appreciation limit, each PERCS would convert to one share of common
stock. If, however, the issuer's common stock is trading at a price above that
set by the capital appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that fractional share of
common stock received by the PERCS holder is determined by dividing the price
set by the capital appreciation limit of the PERCS by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. However if called early the issuer must
pay a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date of the PERCS.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features: they are
issued by the company, the common stock of which will be received in the event
the convertible preferred stock is converted, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a Fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
SYNTHETIC CONVERTIBLES. The Fund may invest a portion of its assets in
"synthetic convertible" securities. A synthetic convertible is created by
combining distinct securities which together possess the two principal
characteristics of a true convertible security, i.e., fixed income and the right
to acquire the underlying equity security. This combination is achieved by
investing in nonconvertible fixed-income securities and in warrants or stock or
stock index call options which grant the holder the right to purchase a
specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "Equity Securities"
for purposes of each Fund's investment policy regarding those securities.
Synthetic convertible securities differ from the true convertible security in
several respects. The value of a synthetic convertible is the sum of the values
of its fixed-income component and its convertibility component. Thus, the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations. Further, although the Managers expect
normally to create synthetic convertibles whose two components represent one
issuer, the character of a synthetic convertible allows the Fund to combine
components representing distinct issuers, or to combine a fixed income security
with a call option on a stock index, when the Managers determine that such a
combination would better promote a Fund's investment objectives. In addition,
the component parts of a synthetic convertible security may be purchased
simultaneously or separately; and the holder of a synthetic convertible faces
the risk that the price of the stock, or the level of the market index
underlying the convertibility component will decline.
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 risk
associated with covered option writing is 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 canceling 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. The aggregate premiums paid on all such options
held at any time will not exceed 20% of the Fund's total net assets. As of 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 SAI.
WHAT OTHER POLICIES DOES THE FUND HAVE?
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 GNMA, which
guarantee is backed by the full faith and credit of 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. 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 on behalf of the Fund by a custodian approved by the
Trust's Board of Trustees and will be held pursuant to a written agreement.
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 Fund's portfolio securities would be reduced by a
gain in the short sale transaction. Conversely, any increase in the value of the
Fund's 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 its
assets 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. Consistent with procedures 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 collateral with an initial market value of at least 102% of
the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 102%. Such
collateral shall consist of cash. 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.
FOREIGN SECURITIES. The Fund will ordinarily purchase foreign securities which
are traded in the United States or purchase American Depository Receipts
("ADRs"), which may be sponsored or unsponsored, 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. The Fund may, however,
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 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. 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.
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, 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 SAI.
WHAT ARE THE FUND'S POTENTIAL RISKS?
HIGH YIELDING, FIXED-INCOME SECURITIES
Because of the Fund's policy of investing in higher yielding, higher risk
securities, an investment in the Fund is accompanied by a higher degree of risk
than is present with an investment in higher rated, lower yielding securities.
Accordingly, an investment in the Fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and goals. If you are on a fixed income
or retired, you should also consider the increased risk of loss to principal
which is present with an investment in higher risk securities such as those in
which the Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. 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 the rating agencies, 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 bonds rated BBB by S&P or Baa by Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of 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 developments affecting
the issuer, 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. As of [], [] issues (from
[] separate issuers) out of [] issues (excluding short-term securities and cash
equivalents) in the Fund's portfolio were in default. In the fiscal year ended
[], [] issues defaulted, and a total of [] issues defaulted over the prior three
years, of which the Fund still holds the [] issues mentioned above. Defaulted
issues represented []% of the net assets of the Fund at [date]. Current prices
for defaulted bonds are generally significantly lower than their purchase price,
and the Fund may have unrealized losses on such defaulted securities which are
reflected in the price of the Fund's shares. In general, securities which
default lose much of their value in the time period prior to the actual default
so that the Fund's net assets are impacted prior to the default. The Fund may
retain an issue which has defaulted because such issue may present an
opportunity for subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities 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 securities with lower yielding securities, 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. The Fund may be required under the Code and U.S.
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.
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 the secondary trading market for
a particular high yielding, fixed-income security 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 a
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 "How Are Fund Shares Valued?" in this
Prospectus and in the SAI.)
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 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 under 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 securities 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.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession disrupted the
market for high yielding securities and adversely affected the value of
outstanding securities and the ability of issuers of such securities to meet
their obligations. Those adverse effects may continue even as the economy
recovers. 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
prices for many these securities. In addition, the Fund may 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.
[The credit risk factors pertaining to lower rated securities also apply to
lower rated zero coupon, deferred interest and pay-in-kind bonds. Such bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Fund will realize no cash until the cash payment date
and, if the issuer defaults, the Fund may obtain no return at all on its
investment. Zero coupon, deferred interest and pay-in-kind bonds involve
additional special considerations.
Zero coupon or deferred interest securities are debt obligations which do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon security
report as income each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives no cash
payments of interest during the year.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
such bonds and be taxed as if interest were paid on a current basis, although no
cash interest payments are received by the Fund until the cash payment date or
until the bonds mature. Current federal income tax law requires that companies
such as the Fund, which seek to qualify for pass-through federal income tax
treatment as regulated investment companies, distribute at least 90% of their
investment company taxable income each year, including tax-exempt and non-cash
income. The Fund is not limited in the amount of its assets that may be invested
in such securities. Accordingly, during periods when the Fund receives no cash
interest payments on its zero coupon securities or deferred interest or
pay-in-kind bonds, it will be required, in order to maintain its desired tax
treatment, to distribute cash approximating the income attributable to such
securities. Such distribution may require the sale of portfolio securities to
meet the distribution requirements and such sales may be subject to the risk
factors discussed above. Further information is included under "How Taxation
Affects You and the Fund."]
ASSET COMPOSITION TABLE. A credit rating by a rating agency evaluates only the
safety of principal and interest of a bond, and does not consider the market
value risk associated with an investment in such a bond. The table below shows
the percentage of the Fund's assets invested in securities rated in each of the
specific rating categories shown and those that are not rated by the rating
agency but deemed by the investment manager to be of comparable credit quality.
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, 1995. The Appendix to this Prospectus includes a
description of each rating category.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
N/R*
*[]% of these securities, which are unrated by the rating agency, have been
included in the [] rating category.
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.
HOW YOU 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
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you 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, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets.
To the extent the Fund's investments consist of debt securities, 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 higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. To the extent the Fund's investments consist of common stocks, a
decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in the Fund's share price. History
reflects both increases and decreases in the prevailing rate of interest and in
the valuation of the market and these may reoccur unpredictably in the future.
WHO MANAGES THE FUND?
The Board of Trustees of the Trust (the "Board") 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.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares of the Fund. Although
the Board does not expect to encounter material conflicts in the future, the
Board will continue to monitor the Fund and will take appropriate action to
resolve such conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
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 and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(117 separate series) with aggregate assets of over $77 billion.
The team responsible for the day-to-day management of the Fund's portfolio is:
Edward Jamieson since inception, and Mitchell Cone since 1994.
Edward B. Jamieson
Senior Vice President
and Portfolio Manager
Mr. Jamieson holds a Bachelor of Arts degree 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. Mr. Jamieson
is a member of several securities industry-related committees and associations.
Mitchell Cone
Portfolio Manager
Franklin Advisers, Inc.
Mr. Cone is a Chartered Financial Analyst. He holds a Bachelor of Arts degree in
economics and sociology from the University of California at Berkeley. He has
been with Franklin since 1988. He has been in the securities industry since 1985
and is a member of several securities industry-related committees and
associations.
Pursuant to a 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. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Trust are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
During the fiscal year ended October 31, 1995, management fees, total 0.625% of
the average monthly net assets of the Fund. Total operating expenses, including
management fees before any advance waiver, totaled 1.03% and 1.60% of the
average monthly net assets of Class I and Class II, respectively.
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 "How Do
the Funds Purchase Securities For Their Portfolio?" in the SAI.
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.
PLANS OF DISTRIBUTION
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. 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.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.25% per annum of Class I's
average daily net assets payable on a quarterly basis. All expenses of
distribution in excess of 0.25% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.50% per annum of Class
II's average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans cover 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 Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Funds' Underwriter" in the
SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
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.
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) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the first business day preceding the 15th 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 Board. Fund shares are quoted
ex-dividend on the first business day following the record date (generally the
15th day of the month or prior business day depending on 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, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you 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 your investment, it may be taxable as
dividend income or capital gain.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Fund in any of these ways:
1. PURCHASE ADDITIONAL SHARES OF THE FUND - You may purchase additional shares
of the same class of the Fund (without a sales charge or imposition of a
contingent deferred sales charge) by reinvesting capital gain distributions, or
both dividend and capital gain distributions. If you are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Fund. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE SAME CLASS OF
THE FUND. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
DISTRIBUTIONS TO EACH CLASS OF SHARES
According to the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), dividends and capital gains will be calculated and distributed in
the same manner for Class I and Class II shares. The per share amount of any
income dividends will generally differ only to the extent that each class is
subject to different Rule 12b-1 fees.
HOW TAXATION AFFECTS YOU AND THE FUND
[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 SAI.
Each Fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will 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. The portion of
the dividends so qualified, however, depends on the aggregate qualifying
dividend income received by the Fund from domestic (U.S.) sources. For the
fiscal year ended October 31, 1995, 21.43% 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 the sale or
exchange of Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such 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 DO I BUY SHARES?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to 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 SHARES ARE PURCHASED THROUGH RETIREMENT
PLANS ESTABLISHED BY THE FRANKLIN TEMPLETON GROUP. THE FUND AND DISTRIBUTORS
RESERVE THE RIGHT TO REFUSE ANY ORDER FOR THE PURCHASE OF SHARES. PURCHASE PRICE
OF FUND SHARES
DIFFERENCES BETWEEN CLASS I AND CLASS II
Class I and Class II shares differ in the amount of their front-end sales
charges and Rule 12b-1 fees, as well as the circumstances under which the
contingent deferred sales charge applies. Generally, Class I shares have higher
front-end sales charges than Class II shares and comparatively lower Rule 12b-1
fees. Voting rights of each class will be the same on matters affecting the Fund
as a whole, but each class will vote separately on matters affecting only
shareholders of that class. See "General Information - Organization and Voting
Rights."
CLASS I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charge or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares are subject to Rule 12b-1 fees of
up to a maximum of .25% per annum of the average daily net assets of the class.
See "Who Manages the Fund?" and "How Do I Sell Shares?" for more information.
CLASS II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 1% per annum of
the average daily net assets of Class II shares,.75% of which will be retained
by Distributors during the first year of investment.
DECIDING WHICH CLASS TO PURCHASE
You should carefully evaluate your anticipated investment amount and time
horizon prior to determining which class of shares to purchase. Generally, if
you expect to invest less than $100,000 in the Franklin Templeton Funds and to
make substantial redemptions within approximately six years or less of
investment, you should consider purchasing Class II shares. However, the higher
annual Rule 12b-1 fees on Class II shares will result in higher operating
expenses (which will accumulate over time to outweigh the difference in
front-end sales charges) and lower income dividends for Class II shares. For
this reason, Class I shares may be more attractive to you if you plan to invest
in the Fund over the long-term, even if no sales charge reductions are available
to you.
If you qualify to purchase Class I shares at reduced sales charges, you should
seriously consider purchasing Class I shares, especially if you intend to hold
your shares approximately six years or more. If you qualify to purchase Class I
shares at reduced sales charges but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. IF YOU ARE
INVESTING $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO PURCHASE
CLASS I SHARES AT NET ASSET VALUE YOU MAY NOT PURCHASE CLASS II SHARES. See
"Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when you may purchase shares at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different front-end sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to you. Such purchases, however, may be
subject to a contingent deferred sales charge. You may exceed $1 million in
Class II shares by cumulative purchases over a period of time. If you intend to
make investments exceeding $1 million, however, you should consider purchasing
Class I shares through a Letter of Intent instead of purchasing Class II shares.
Each class has a separate schedule for compensating securities dealers for
selling Fund shares. You should take all of the factors regarding an investment
in each class into account before deciding which class of shares to purchase.
There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
WHEN PLACING PURCHASE ORDERS, YOU SHOULD CLEARLY INDICATE WHICH CLASS OF SHARES
YOU INTEND TO PURCHASE. A PURCHASE ORDER THAT FAILS TO SPECIFY A CLASS WILL
AUTOMATICALLY BE INVESTED IN CLASS I SHARES.
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after your securities dealer
receives the order which is promptly transmitted to the Fund or (2) after
receipt of an order by mail from you directly in proper form (which generally
means a completed Shareholder Application accompanied by a negotiable check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. 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 "How
Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER CONCESSION AS A
SIZE OF TRANSACTION AT AS A PERCENTAGE OF OFFERING AS A PERCENTAGE OF NET PERCENTAGE OF OFFERING
OFFERING PRICE PRICE AMOUNT INVESTED PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than 3.75% 3.90% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.25% 2.30% 2.00%
$1,000,000
$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 indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. A securities
dealer who receives 90% or more of the sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**Distributors will pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $1 million
or more: 1% 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.
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 all
or a portion of investments of $1 million or more within the contingency period.
See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments 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") and (b) the U.S.
registered mutual funds in the Templeton Group of Funds except 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 Fund(s)". Sales charge
reductions based upon aggregate holdings of Franklin Templeton Funds may be
effective only after notification to Distributors that the investment qualifies
for a discount.
OTHER PAYMENTS TO SECURITIES DEALERS. Either 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
companies 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" below and "How Do I Buy and
Sell Shares?" in the SAI.
CLASS II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase,
as indicated in the table below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER CONCESSION AS A
SIZE OF TRANSACTION AT AS A PERCENTAGE OF AS A PERCENTAGE OF NET PERCENTAGE OF OFFERING
OFFERING PRICE OFFERING PRICE AMOUNT INVESTED PRICE*
<S> <C> <C> <C>
any amount (less than $1 1.00% 1.01% 1.00%
million)
</TABLE>
*Either Distributors or one of its affiliates may make additional payments to
securities dealers, out of its own resources, of up to 1% of the amount
invested. During the first year following a purchase of Class II shares,
Distributors will keep a portion of the Rule 12b-1 fees assessed to those shares
to partially recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made 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 Templeton Funds and other dealer-sponsored
programs or events. In some instances this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
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. Securities 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.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?".
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included under "Officers and Trustees"
in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES - CLASS I SHARES ONLY
Class I 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,
you or your securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of your spouse, children under
the age of 21 and grandchildren under the age of 21. The value of Class II
shares you own may also be included for this purpose.
In addition, an investment in Class I shares 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 Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. LETTER OF INTENT. You may immediately qualify for a reduced sales charge on a
purchase of Class I shares by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
express 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, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint 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. You or your securities dealer must
inform Investor Services or Distributors that this Letter is in effect each time
a purchase is made.
YOU ACKNOWLEDGE AND AGREE 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 Class I shares
registered in your 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 you have
directed. You will not be able to liquidate the reserved shares until the Letter
has been completed or the higher sales charge paid. This policy of reserving
shares does not apply to certain benefit plans described under "Description of
Special Net Asset Value Purchases." For more information, see "How Do I Buy and
Sell Shares?" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares you own may be included in determining a
reduced sales charge to be paid on Class I shares pursuant to the Letter of
Intent and Rights of Accumulation programs.
GROUP PURCHASES OF CLASS I SHARES
If you are a member of a qualified group you may purchase Class I 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 members of 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, 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 you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your 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
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, 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, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; 7) insurance
company separate accounts for pension plan contracts; and (8) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the Code, in
shares of the Fund.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 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. IF A DIFFERENT CLASS OF SHARES IS
PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE PAID AT THE TIME OF PURCHASE
OF THE NEW SHARES. Under this privilege, you 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 and subsequently repurchased,
a new contingency period will begin. Shares that were no longer subject to a
contingent deferred sales charge will be reinvested at net asset value and will
not be subject to a new contingent deferred sales charge. Shares of the Fund
redeemed in connection with an exchange into another fund (see "What If My
Investment Outlook Changes? - 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 365 days after the redemption. The 365 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
you 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 under "Additional Information Regarding Taxation" in the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gain distributions from investments in that class of
shares of the Fund within 365 days of the payment date of such distribution.
Class II shareholders may also direct such distributions for investment at net
asset value in a Class I Franklin Templeton Fund. 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 "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
Class I shares 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 a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has an investment objective similar
to that of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker-dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares 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 365 days after the plan distribution.
Class I shares 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 the 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. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Class I shares may 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 of Class I Shares," which enable Distributors to realize economies of
scale in its sales efforts and sales related expenses.
Class I shares 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 the
amount to be purchased, 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 the 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.
Class I shares 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.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases of Class I shares.
HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS?
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or, because Trust Company can serve as
custodian or trustee for retirement plans, you may ask Trust Company to provide
the plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that an application other than the one contained in this Prospectus
must be used to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, call 1-800/DIAL BEN
(1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
WHAT PROGRAMS AND PRIVILEGES
ARE AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND IF YOUR 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 "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name 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 you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or your
securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. If you would like to establish a Systematic
Withdrawal Plan, please complete the Systematic Withdrawal Plan section of the
Shareholder Application included with this Prospectus and indicate how you would
like to receive your payments. You may choose to receive your payments in any of
the following ways:
1. PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. RECEIVE PAYMENTS IN CASH - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. 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. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
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.
BY TELEPHONE
YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
THE FUND BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "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, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your 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 of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into 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.
If you request the exchange of the total value of your 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, you 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 under "Additional Information Regarding Taxation" in the SAI.
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 objective 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.
EXCHANGES OF CLASS I SHARES
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
EXCHANGES OF CLASS II SHARES
When an account is composed of Class II shares subject to the contingent
deferred sales charge and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares and you exchange $3,000 into a new fund, $500 will be exchanged from free
shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may Class II shareholders purchase shares of Money Fund II
directly. Class II shares exchanged for shares of Money Fund II will continue to
age, for purposes of calculating the contingent deferred sales charge, because
they continue to be subject to Rule 12b-1 fees. The contingent deferred sales
charge will be assessed if CDSC liable shares are redeemed. Class I shares may
be exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another method
such as first-in first-out or free shares followed by CDSC liable shares, the
exchanged shares may, in some instances, be CDSC liable even though a redemption
of such shares, as discussed elsewhere herein, may no longer be subject to a
contingent deferred sales charge. The proportional method is believed by
management to more closely meet and reflect the expectations of Class II
shareholders in the event shares are redeemed during the contingency period. For
federal income tax purposes, the cost basis of shares redeemed or exchanged is
determined under the Code without regard to the method of transferring shares
chosen by the Fund.
RETIREMENT PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
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
exchange 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) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges 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 also reserves the right to refuse the purchase side of an exchange
request 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
objective and policies, or would otherwise potentially be adversely affected.
Your 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, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
TRANSFERS
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
CONVERSION RIGHTS
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
HOW DO I SELL SHARES?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
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. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) 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 will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the New York
Stock Exchange (the "Exchange") (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. You are requested to provide a telephone
number where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURES 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 owners of the account;
(3 the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts". You may obtain
additional information about telephone redemptions 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. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
If your account has 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 the scheduled close of the Exchange
(generally 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, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, 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 your 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 your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions from an individual
retirement plan account due to death or disability or upon periodic
distributions based on life expectancy; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions initiated by
the Fund due to an account falling below the minimum specified account size;
redemptions following the death of the shareholder or beneficial owner; and
redemptions through a Systematic Withdrawal Plan set up for shares 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). For example, if a Class I account maintained
an annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge. Likewise, if a
Class II account maintained an annual balance of $10,000, only $1,200 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of 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.
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.
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 you invested, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"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.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you 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 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 you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You 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 redemption, distribution or
dividend payment changes. 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.
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.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or 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 your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 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 front-end sales charge of each class of shares of the
Fund).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features. By calling the Franklin TeleFACTS(R) system at
1-800/247-1753, you may obtain Class I and Class II account information, current
price and, if available, yield or other performance information specific to the
Fund or any Franklin Templeton Fund. In addition, Class I shareholders may
process an exchange, within the same class, into an identically registered
Franklin account and request duplicate confirmation or year-end statements and
deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 137 and 237, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. 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 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 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.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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 each class 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 for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), 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 of a class are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. 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 a class' income and will assume the payment of the
maximum sales charge on the purchase of that class 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 each class,
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 a class' total return, current yield or distribution rate may be
in any future period.
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund 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 under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $0.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
Additional series or classes may be added in the future by the Board.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state business trust law, or (3) required to
be voted on separately by class by the 1940 Act, or the rules adopted
thereunder. For instance, if a change to the Rule 12b-1 plan relating to Class I
shares requires shareholder approval, only shareholders of Class I may vote on
the change to the Rule 12b-1 plan affecting that class. Similarly, if a change
to the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all 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.
The Trust does not intend to hold annual shareholders meetings. The Trust may,
however, hold a special shareholders meeting of a series 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 the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will 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.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares? in the SAI.
REGISTERING YOUR ACCOUNT
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you 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 Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available 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. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are 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 you 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.
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 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.
FRANKLIN
SHORT-INTERMEDIATE
U.S. GOVERNMENT
SECURITIES FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS
MARCH 1, 1996
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 3 1/2 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 (the "SAI") concerning the Fund and other
series of the Trust, dated March 1, 1996, 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 you. 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 shown 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 you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you 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.
CONTENTS PAGE
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Franklin Short-Intermediate U.S. Government Securities Fund?
How Does the Fund Invest Its Assets?
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
EXPENSE TABLE
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on aggregate operating expenses
of the Fund for the fiscal year ended October 31, 1995.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 2.25%
Deferred Sales Charge NONE+
Exchange Fee (per transaction) $5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.56%
Maximum 12b-1 Fees 0.08%**
Other Expenses:
Shareholder Servicing Costs 0.03%
Reports to Shareholders 0.02%
Other 0.04%
-----
Total Other Expenses 0.09%
Total Fund Operating Expenses 0.73%
+Investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingency period" of 12 months of
the calendar month of such investments. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Fund's
distribution plan is 0.10%. See "Who Manages the Fund? - Plan of Distribution."
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 front-end 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.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end 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.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$30 $45 $62 $111
*Assumes that a contingent deferred sales charge will not apply.
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE 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 you as a result of your investment in the Fund. In addition,
federal securities regulations require the example to assume an annual return of
5%, but the Fund's actual return may be more or less than 5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund throughout the fiscal periods from the effective date of registration
(April 15, 1987) to October 31, 1995. The information for each of the periods
ended in 1991 or later has been audited by Coopers & Lybrand L.L.P., independent
auditors, whose audit report appears in the Fund's Annual Report to Shareholders
dated October 31, 1995. The remaining figures, which are also audited, are not
covered by the auditor's current report. See "Reports to Shareholders" under
"General Information" in this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance+ Ratios/Supplemental Data
Distri-
Distri- butions Ratio of Ratio of Net
Net Asset Net Net Realized butions From Net Asset Net Assets Expenses Investment
Values at Invest- & Unrealized Total From From Net Capital Total Values at End to Average Income Portfolio
Period Beginning ment Gains (Losses)Investment Investment Gains Distri- at End Total of Year to Net to Average Turnover
Ended of Year Income on SecuritiesOperations Income butions of YearReturn++(in 000's) Assets** Net Assets Rate
- -----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19881 $10.00 $.64 $ .045 $ .685 $(.305) - $(.305) $10.38 6.33% $ 20,636 .14%* 6.5%* 13.14%
1989 10.38 .78 (.300) .480 (.740) - (.740) 10.12 4.63 29,150 .25 7.72 111.75
1990 10.12 .78 .097 .877 (.837) - (.837) 10.16 8.78 30,996 .27 7.60 151.36
1991 10.16 .76 .248 1.008 (.864) (.004) (.868) 10.30 10.19 48,981 .48 7.56 71.44
1992 10.30 .58 .374 .954 (.786) (.078) (.864) 10.39 9.44 163,690 .71 5.90 102.05
1993 10.39 .57 .432 1.002 (.565) (.257) (.822) 10.57 10.01 235,382 .56 5.40 78.96
19932 10.57 .38 .245 .625 (.390) (.005) (.395) 10.80 5.90 273,678 .55* 4.75* 31.71
1994 10.80 .49 (.696) (.206) (0.472) (.092) (.564) 10.03 (1.99) 225,352 .65 4.75 99.09
1995 10.03 .56 .309 .869 (0.549) - (.549) 10.35 8.90 208,057 .73 5.42 56.34
</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.
+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 and is not annualized. It does not include the maximum front-end sales
charge or the contingent deferred sales charge, and assumes reinvestment of
dividends and capital gain, if any, at net asset value. Prior to May 1, 1994,
with the implementation of the Rule 12b-1 distribution plan, dividends were
reinvested at the maximum offering price.
* Annualized.
**During the periods indicated, Franklin Advisers, Inc., the investment manager,
agreed in advance to waive a portion of its management fees and made payments of
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:
19881 .81%*
1989 .79
1990 .77
1991 .74
1993 .65
19932 .63*
1994 .68
WHAT IS THE FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND?
The Fund is a diversified series of the Trust, which is an open-end management
investment company commonly called a "mutual fund." The Trust was organized as a
Massachusetts business trust on December 16, 1986, and registered with the SEC
under the Investment Company Act of 1940, as amended (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.
The Board of Trustees of the Trust (the "Board") may determine, at a future
date, to offer shares of the Fund in one or more "classes" to permit the Fund to
take advantage of alternative methods of selling Fund shares. "Classes" of
shares represent proportionate interests in the same portfolio of investment
securities but with different rights, privileges and attributes, as determined
by the trustees. Certain funds in the Franklin Templeton Funds, as that term is
defined under "How Do I Buy Shares?," currently offer their shares in two
classes, designated "Class I" and "Class II." Because the Fund's sales charge
structure and plan of distribution are similar to those of Class I shares,
shares of the Fund may be considered Class I shares for redemption, exchange and
other purposes.
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Fund's shares is equal to the net asset value (see "How
Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable sales
charge not exceeding 2.25% of the offering price depending upon the amount
invested. Please see "How Do I Buy Shares?"
HOW DOES THE FUND INVEST ITS ASSETS?
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 average weighted maturity of 3 1/2 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 collateralized by
U.S. Treasury obligations. 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 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 on behalf of the Fund by a custodian approved by the
Fund's Board and will be held pursuant to a written agreement.
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.
ZERO COUPON BONDS. The Fund may also, consistent with its other policies, invest
in zero coupon bonds issued or guaranteed by the U.S. Government or its agencies
or instrumentalities. Zero coupon bonds are debt obligations which are issued at
a significant discount from face value. The original discount approximates the
total amount of interest the bonds will accrue and compound over the period
until maturity or the first interest accrual date at a rate of interest
reflecting the market rate of the security at the time of issuance. A zero
coupon security pays no interest to its holder during its life and its value
(above its cost to a Fund) consists of the difference between its face value at
maturity and its cost. Such investments experience greater volatility in market
value due to changes in interest rates than debt obligations which provide for
regular payments of interest. The Fund will accrue income on such investments
for tax and accounting purposes, as required, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Fund's
distribution 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. Consistent with procedures approved by the Board
and subject to the following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other institutional investors,
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 collateral with an initial market value of at least 102% of the
initial market value of the securities loaned, including any accrued interest,
with the value of the collateral and loaned securities marked-to-market daily to
maintain collateral coverage of at least 102%. Such collateral shall consist of
cash, securities issued by the U.S. Government, its agencies or
instrumentalities, or irrevocable letters of credit. The lending of securities
is a common practice in the securities industry. The Fund 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.
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 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. Please see the
Statement of Additional Information for more details regarding the Fund's
policies regarding eligible federal credit union investments.
HOW YOU 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
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you 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, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets. 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 higher 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.
WHO MANAGES THE FUND?
The Board 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 and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(116 separate series) with aggregate assets of over $77 billion.
The team responsible for the day-to-day management of the Fund's portfolios and
have been since the Fund's inception are:
Jack Lemein
Senior Vice President
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisers or
an affiliate since 1984. He is a member of several securities industry-related
associations.
David Capurro
Portfolio Manager
Franklin Advisers, Inc.
Mr. Capurro holds a Master of Business Administration degree and a Bachelor
of Science degree in business administration from California State University
at Hayward. Mr. Capurro has been with Advisors since 1985.
Tom Runkel
Portfolio Manager
Franklin Advisers, Inc.
Mr. Runkel is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of Santa Clara. He earned his
Bachelor of Arts degree in political science from the University of
California at Davis. Mr. Runkel has been with Advisors since 1985. He is a
member of several securities industry-related committees and associations.
Pursuant to a 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. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
The Fund is responsible for its own operating expenses including, but not
limited to, the Manager's fee; taxes, if any; custodian, legal and auditing
fees; fees and expenses of Trustees who are not members of, affiliated with, or
interested persons of the Manager; salaries of any personnel not affiliated with
the Manager; insurance premiums; trade association dues; expenses of obtaining
quotations for calculating the value of the Fund's net assets; and printing and
other expenses which are not expressly assumed by the Manager.
During the fiscal year ended October 31, 1995, management fees totaling 0.56% 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 "How
Does the Fund Purchase Securities For Its Portfolio?" in the SAI.
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.
During the fiscal year ended October 31, 1995, expenses borne by the Fund,
including fees paid to Advisers and to Investor Services, totaled 0.73% of the
average daily net assets of the Fund.
PLAN OF DISTRIBUTION
A plan of distribution has been approved and adopted for the Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. 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 reimburse to Distributors or others for
such distribution expenses is 0.10% per annum of its average daily net assets,
payable on a quarterly basis. All expenses of distribution 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. For more information, including a
discussion of the Board's policies with regard to the amount of Plan fees,
please see "The Fund's Underwriter" in the SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
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) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board 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 that month. Daily
allocation of net investment income will begin on the day after the Fund
receives your money or settlement of a wire order trade and will continue to
accrue through the day of receipt of your redemption request or the settlement
of a wire order trade.
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 Board. 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, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you 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 your investment, it may be taxable as
dividend income or capital gain.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Fund in any of these ways:
1.....Purchase additional shares of the Fund - You may purchase additional
shares of the Fund (without a sales charge or imposition of a contingent
deferred sales charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2.....Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3.....Receive distributions in cash - You may choose to receive dividends, or
both dividend and capital gain distributions in cash. You may have the money
sent directly to you, to another person, or to a checking account. If you choose
to send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE FUND. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the record date
for the Fund to process the new option.
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 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, 1994 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. The Fund may also generate and distribute realized capital gains from
the sale of portfolio securities, which are generally subject to state income
taxes (as well as federal income taxes, as noted above). 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 DO I BUY SHARES?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to 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 shares are purchased through retirement
plans established by the Franklin Templeton Group. 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 determined
by adding the net asset value per share plus a front-end sales charge, next
computed (1) after your securities dealer receives the order which is promptly
transmitted to the Fund or (2) after receipt of an order by mail from you
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. 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 "How Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions.
TOTAL SALES CHARGE
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE
----------------- ----- -------- -----
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**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. A securities
dealer who receives 90% or more of the sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**Distributors will pay the following commissions, 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.
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
all or a portion of investments of $1 million or more within the contingency
period. See "How Do I Sell Shares? - 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 your current
purchase plus the cost or current value (whichever is higher) of your existing
investments 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, and (c) the
U.S. registered mutual funds in the Templeton Group of Funds except 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
Fund(s)". 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.
Other Payments to Securities Dealers. Either 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 trust companies and trust
departments of banks, certain designated retirement plans (excluding IRA and IRA
rollovers), and certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, and 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]. See "Description of
Special Net Asset Value Purchases" below and "How Do I Buy and Sell Shares?" in
the SAI.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made 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 Templeton Funds and other dealer-sponsored
programs or events. In some instances this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
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. Securities 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.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?".
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included under "Officers and Trustees" in the SAI.
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, you or
your securities dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for a discount, an investment in any of the Franklin Templeton
Investments may be combined with those of your spouse, children under the age of
21 and grandchildren under the age of 21. The value of Class II shares you own
may also be included for this purpose.
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 Investments may be combined
with the amount of the current purchase in determining the sales charge to be
paid.
2. Letter of Intent. You 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"). By completing the Letter, you (i)
express 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, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint 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. You or your securities dealer must
inform Investor Services or Distributors that this Letter is in effect each time
a purchase is made.
YOU ACKNOWLEDGE AND AGREE 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 your 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 you have
directed. You will not be able to liquidate the reserved shares until the Letter
has been completed or the higher sales charge paid. This policy of reserving
shares does not apply to certain benefit plans described under "Description of
Special Net Asset Value Purchases." For more information, see "How Do I Buy and
Sell Shares?" in the SAI.
The value of Class II shares you own may be included in determining a reduced
sales charge to be paid on shares of the Fund pursuant to the Letter of Intent
and Rights of Accumulation programs.
GROUP PURCHASES
If you are a member of a qualified group you may 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 members of 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 you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your 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 without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, 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, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; (7) insurance
company separate accounts for pension plan contracts; and (8) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the Code, in
shares of the Fund.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 365 days, their shares of the Fund or another of
the Class I Franklin Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on redemption. IF A
DIFFERENT CLASS OF SHARES IS PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE
PAID AT THE TIME OF PURCHASE OF THE NEW SHARES. Under this privilege, you 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 and
subsequently repurchased, a new contingency period will begin. Shares that were
no longer subject to a contingent deferred sales charge will be reinvested at
net asset value and will not be subject to a new contingent deferred sales
charge. Shares of the Fund redeemed in connection with an exchange into another
fund (see "What If My Investment Outlook Changes? - 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 365 days after the
redemption. The 365 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 you 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 under "Additional Information Regarding Taxation" in the SAI.
Shares of the Fund may be purchased at net asset value and without a contingent
deferred sales charge by persons who have received dividends and capital gain
distributions from investments in the Fund or another Franklin Templeton Fund
within 365 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 "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
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 a mutual fund which is not part of
the Franklin Templeton Funds and which was subject to a front-end sales charge
or a contingent deferred sales charge 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 broker-dealers who have
entered into a supplemental agreement with Distributors, or by registered
investment advisors affiliated with such broker-dealers, 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 365 days after the plan distribution.
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 the 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. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may 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 the amount to be purchased, 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 the 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.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases.
HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS?
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or, because Trust Company can serve as
custodian or trustee for retirement plans, you may ask Trust Company to provide
the plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that an application other than the one contained in this Prospectus
must be used to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, call 1-800/DIAL BEN
(1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
WHAT PROGRAMS AND PRIVILEGES
ARE AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND IF YOUR 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 "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name 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 you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or by
your securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums.
No exchanges between different classes of shares will be allowed. Shareholders
may choose to redeem shares of the Fund and purchase Class II shares of another
Franklin Templeton Fund but such purchase will be subject to that fund's Class
II front-end and contingent deferred sales charges. Although there are no
exchanges between different classes of shares, Class II shareholders of a
Franklin Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
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.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
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.
BY TELEPHONE
YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
THE FUND BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "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, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your 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 value 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 original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into 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.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your 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, you 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 under "Additional Information
Regarding Taxation" in the SAI.
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 PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange
shares 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
exchange 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) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges 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 also reserves the right to refuse the purchase side of an exchange
request 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.
Your 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, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
HOW DO I SELL SHARES?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
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. You will then receive from the Fund the
value of the shares redeemed based upon the net asset value per share (less a
contingent deferred sales charge, if applicable) 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 will receive
the price calculated on the following business day. The net asset value per
share is determined as of the scheduled close of the New York Stock Exchange
(the "Exchange") (generally 1:00 p.m. Pacific time) each day that the Exchange
is open for trading. You are requested to provide a telephone number where you
may be reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURES 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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts". You may obtain
additional information about telephone redemptions 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. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
If your account has 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 the scheduled close of the Exchange
(generally 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, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
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 your 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 your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for: exchanges;
any account fees; distributions from an individual retirement plan account due
to death or disability or upon periodic distributions based on life expectancy;
tax-free returns of excess contributions from employee benefit plans;
distributions from employee benefit plans, including those due to termination or
plan transfer; redemptions initiated by the Fund due to an account falling below
the minimum specified account size; redemptions following the death of the
shareholder or beneficial owner; and redemptions through a Systematic Withdrawal
Plan set up for shares 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). For example, if an
account maintained an annual balance of $1,000,000, only $120,000 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge. Any
amount over that $120,000 would be assessed a 1% contingent deferred sales
charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of 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.
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.
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 you invested, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"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.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you 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 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 you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You 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 redemption, distribution or
dividend payment changes. 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.
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.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or 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 your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 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 front-end sales charge of the Fund).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares outstanding.
Assets in the Fund's portfolio are valued as described under "How Are Fund
Shares Valued?" in the SAI.
HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
account information, current price and, if available, yield or other performance
information specific to the Fund or any Franklin Templeton Fund. In addition,
you may process an exchange, within the same class, into an identically
registered Franklin account and request duplicate confirmation or year-end
statements and deposit slips.
The Fund code, which will be needed to access system information, is 136. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
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.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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.
Current yield for the Fund, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), 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 of the Fund are
reflected in the current distribution rate, which may be quoted to you. 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. 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 total return, current yield, or distribution rate 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 Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund 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 under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Additional series or
classes may be added in the future by the Board.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all 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.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special shareholders' meeting of a series 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 the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will 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.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
REGISTERING YOUR ACCOUNT
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you 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 Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available 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. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are 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 you 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.
Franklin Adjustable
U.S. Government
Securities Fund
Franklin Investors Securities Trust
PROSPECTUS March 1, 1996
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 you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
A Statement of Additional Information (the "SAI") concerning the Trust, the Fund
and another series of the Trust, dated March 1, 1996, 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 you. 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 from
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown 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.
Contents Page
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Franklin Adjustable U.S. Government Securities Fund?
How Do the Fund and Portfolio Invest Their Assets?
What Are the Fund's Potential Risks?
Who Administers the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
Useful Terms and Definitions in this Prospectus
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of the Fund, before fee waivers and expense reductions, for the fiscal
year ended October 31, 1995, and include the expenses of the Portfolio.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 2.25%
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00**
*Investments of $1 million or more are not subject to a front-end sales charge,
however, a contingent deferred sales charge of 1% is generally imposed on
certain redemptions within a "contingency period" of 12 months of the calendar
month of such investments. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge."
**$5.00 fee only imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management and Administration Fees 0.50%***
12b-1 Fees 0.24%****
Other Expenses of the Fund and the Portfolio 0.12%
-----
Total Fund Operating Expenses 0.86%***
***For fiscal year ended October 31, 1995, Franklin Advisers, Inc. ("Advisers"),
the Fund's administrator and the Portfolio's investment manager, agreed in
advance to waive a portion of the management of the Portfolio and to make
certain other payments to reduce the expenses of the Fund,and the Portfolio, if
necessary, to ensure total aggregate operating expenses of the Fund are not
higher than if the Fund was not investing its assets in the Portfolio. With this
reduction, the Fund's total operating expenses, including the Fund's
proportionate share of Portfolio expenses, were 0.61% 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.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end 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.
One Year Three Years Five Years Ten Years
$31* $49 $69 $126
*Assumes that a contingent deferred sales charge will not apply.
This example is based on the aggregate annual operating expenses of the Fund,
before fee waivers or expense reductions, 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 you as a result of your investment in the Fund. In addition,
federal securities 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 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 "Who Administers the Fund?"
Financial Highlights - How Has the Fund Performed?
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 (October 6,
1987) to January 31, 1993, for the nine-month period from February 1, 1993 to
October 31, 1993, and for each of the two fiscal years in the period ended
October 31, 1995. The information for the period ended January 31, 1991 and for
each of the indicated periods ended October 31, 1995, has been audited by
Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Annual Report to Shareholders dated October 31,
1995. The remaining figures, which are also audited, are not covered by the
auditors' current report. See "Reports to Shareholders" under "General
Information" in this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data
- ---------------------------------------------------------- --------------------------
Net Distri- Distri- Ratio Ratio
Net Realized Total butions butions of Ex- of Net
Asset & Un- From - From From Net Net penses Investment
Values Net realized Invest- Net Real- Asset Assets to Income
Year at Be- Invest- Gain (Loss) ment Invest- ized Total Value at End Average To Aver- Portfolio
Ended ginning ment on Secur- Opera- ment Capital Distri- at End Total of Year Net age Net Turnover
Oct. 31 of Year Income ities tions Income Gains butions of Year Return** (in 000's) Assets Assets+ Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $0.08 $0.09 $0.17 $ - $ - $ - $10.17 1.7 % $ 1,803 - % 8.88%* 0.39%
1989(2) 10.17 0.82 (0.229) 0.591 (0.691) - (0.691) 10.07 5.99 45,250 0.44 7.92 48.39
1990(2) 10.00 0.94 0.034 0.974 (0.994) - (0.994) 10.05 10.16 82,257 0.39 9.03 76.32
1991(2) 10.05 0.88 0.066 0.946 (1.006) - (1.006) 9.99 9.91 1,173,486 0.30 8.23 96.50
1992(2) 9.99 0.74 0.027 0.767 (0.777) - (0.777) 9.98 7.96 3,513,415 0.68(4) 7.10 30.89
1993(2) 9.98 0.51 (0.105) 0.405 (0.522) (0.003) (0.525) 9.86 4.16 2,971,424 0.66(4) 5.10 30.36
1993(3) 9.86 0.28 (0.086) 0.194 (0.284) - (0.284) 9.77 1.99 1,813,504 0.65(4)* 3.92* 6.97
1994 9.77 0.35 (0.606) 0.256) (0.314) - (0.314) 9.20 (2.65) 700,617 0.424 3.67 5.99
1995 9.20 0.54 0.136 0.676 (0.536) - (0.536) 9.34 7.57 509,371 0.614 5.76 17.81
1For the period October 6, 1987 (effective date of registration) to January 31,
1988.
2For the year ended January 31.
3For the nine months ended October 31, 1993.
4Includes the Fund's share of the Portfolio's allocated expenses.
*Annualized.
**Total return measures the change in value of an investment over the periods
indicated, and it is not annualized. It does not include the maximum front-end
sales charge, and assumes reinvestment of dividends and capital gains at net
asset value. Prior to May 1, 1994, dividends were reinvested at the maximum
offering price.
+During the periods indicated, Franklin Advisers, Inc. agreed in advance to
waive a portion of its administration fees and made payments of other expenses
incurred by the Fund and the Portfolio. Had such action not been taken, the
ratios of operating expenses to average net assets would have been as follows:
Franklin Adjustable U.S. Government Securities Fund
19881 0.87%*
1989 0.96
1990 0.87
1991 0.82
19922 0.894
19932 0.804
19933 0.79
1994 0.82
1995 0.86
</TABLE>
What Is the Franklin Adjustable U.S. Government Securities 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.
The Board of Trustees of the Trust (the "Board") may determine, at a future
date, to offer shares of the Fund in one or more "classes" to permit the Fund to
take advantage of alternative methods of selling Fund shares. "Classes" of
shares represent proportionate interests in the same portfolio of investment
securities but with different rights, privileges and attributes, as determined
by the trustees. Certain funds in the Franklin Templeton Funds currently offer
their shares in two classes, designated "Class I" and "Class II." Because the
Fund's sales charge structure and plan of distribution are similar to those of
Class I shares, shares of the Fund may be considered Class I shares for
redemption, exchange and other purposes.
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Fund's shares is equal to the net asset value, plus a
sales charge not exceeding 2.25% of the offering price depending upon the amount
invested. Please see "How Do I Buy Shares?"
How Do the Fund and Portfolio Invest Their Assets?
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 Franklin Advisers, Inc. ("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 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 SAI 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 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 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. For further information,
please refer to "Organization" under "General Information." Any such fund may be
offered with the same or different sales charge structure and Rule 12b-1 fees;
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."
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 traditional mortgage securities,
are interests in pools 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, 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 is 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.
Many 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 which guarantee is 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 issued or guaranteed
by 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 or instrumentalities. 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 the London Interbank Offered Rate (LIBOR);
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.
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.
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 financial institutions such as
broker-dealers and banks which are deemed creditworthy by the Portfolio's
investment manager. A repurchase agreement is deemed to be a loan by the
Portfolio under the 1940 Act. The U.S. government security subject to resale
(the collateral) will be held on behalf of the Portfolio by a custodian approved
by the Portfolio's Board and will be held pursuant to a written agreement.
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 in 30 to 60
days. 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 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.
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.
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, 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 SAI.
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 Portfolio.
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 Portfolio 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 Portfolio's holdings and thus its share price. Increased rates of
interest which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of Portfolio shares. History
reflects both increases and decreases in the prevailing rate of interest and
these may reoccur unpredictably in the future.
What Are the Fund's Potential
Risks?
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 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.
Who Administers the Fund?
The Board of Trustees has the primary responsibility for the overall management
of the Trust and the Fund and for electing the officers of the Trust who are
responsible for administering the day-to-day operations of all series of the
Trust. The officers and trustees of the Trust are also officers and trustees of
the Adjustable Rate Securities Portfolios. For information concerning the
officers and trustees of the Trust and the Adjustable Rate Securities
Portfolios, see "Trustees and Officers" in the SAI. 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. Further
information is included in the SAI.
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 and Rupert H. Johnson, Jr., who own approximately
20% and 16%, respectively, of Resources' outstanding shares. Resources is
engaged in various aspects of the financial services industry through its
subsidiaries. Advisers acts as investment manager or administrator to 34 U.S.
registered investment companies (117 separate series) with aggregate assets of
over $78 billion.
The team responsible for the day-to-day management of the Portfolio's portfolio
in which the Fund invests is: Roger Bayston since 1991, Tony Coffey since 1989
and Jack Lemein since inception.
Roger Bayston
Portfolio Manager
Advisers
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. He has
been with Advisers or an affiliate since earning his MBA degree in 1991.
Tony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned his
Bachelor of Arts degree in applied mathematics and economics from Harvard
University. Mr. Coffey has been with Advisers or an affiliate since 1989. He is
a member of several securities industry-related associations.
Jack Lemein
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisers or
an affiliate since 1984. He is a member of several securities industry-related
associations.
Pursuant to the administration agreement, Advisers provides the Fund with
various administrative, statistical and other services which are necessary to
conduct the Fund's business.
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.
Advisers performs similar services for other funds and there may be times when
the actions taken with respect to the Fund's and the Portfolio's portfolios will
differ from those taken by Advisers on behalf of other funds. Neither Advisers
(including its affiliates) nor its officers, directors or employees nor the
officers and trustees of the Trust are prohibited from investing in securities
held by the Fund or other funds which are managed or administered by Advisers to
the extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
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, agree in advance to waive all or any
portion of the management fee due from the Portfolio or the administration fee
due from the Fund. During the fiscal year ended October 31, 1995, 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 0.40%.
Advisers, however, waived a portion of the Portfolio's management fee. Total
operating expenses including the Fund's proportionate share of the Portfolio's
expenses, would have totaled 0.86%. After fee waivers, total operating expenses
of the Fund, including its proportionate share of the Portfolio's operating
expenses, totaled 0.61%.This action may be terminated by Advisers upon notice to
the Board of Trustees.
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 in principal transactions that involve the receipt by the broker of a
spread between the bid and ask prices for the securities and not the receipt of
commissions.
In the event that the Portfolio does participate in transactions involving
brokerage commissions, it is Advisers' responsibility to select brokers through
whom 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.
Plan of Distribution
A plan of distribution has been approved and adopted for rhe Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for expenses actually 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, and 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, 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. For more information please see the
"The Funds' Underwriter" in the SAI.
What Distributions Might I Receive from the Fund?
You may receive two types of distributions from the Fund:
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) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
Distribution Date
Although subject to change by the Board, 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, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you 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 your investment, it may be taxable as
dividend income or capital gain.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1........Purchase additional shares of the Fund - You may purchase additional
shares of the Fund (without a sales charge or imposition of a contingent
deferred sales charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2........Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3........Receive distributions in cash - You may choose to receive dividends, or
both dividend and capital gain distributions in cash. You may have the money
sent directly to you, to another person, or to a checking account. If you choose
to send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the Fund. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the record
date for the Fund to process the new option.
How Taxation Affects You and the Fund
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to continue to qualify for as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). By
distributing all of its income and meeting certain other requirements relating
to the sources of its income and diversification of its assets, the Fund will
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,
1995, 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. 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, 1994 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 Do I Buy Shares?
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. If you are purchasing
shares through a retirement plan established by the Franklin Templeton Group,
these minimums may be waived. To open your account, contact your investment
representative or complete and sign the enclosed Shareholder Application and
return it to the Fund with your check.
Purchase Price of Fund Shares
You may buy shares at the public offering price. The public offering price is
equal to the net asset value plus the 2.25% sales charge, unless you qualify to
purchase shares at a discount or without a sales charge as discussed below. The
offering price will be calculated to two decimal places using standard rounding
criteria.
Quantity Discounts in Sales Charges
The sales charge you pay when you buy shares may be reduced based upon the size
of your purchase, as shown in the table below.
<TABLE>
<CAPTION>
Total Sales Charge
Dealer
As a Concession
As a Percentage As a
Percentage of Net Percentage
Size of Transaction of Offering Amount of Offering
at Offering Price Price Invested 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)***
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times allow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed to be an underwriter
under the Securities Act of 1933, as amended.
**A contingent deferred sales charge of 1% may be imposed on certain redemptions
of all or a part of an investment of $1 million or more. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge."
***Please see "General - Other Payments to Securities Dealers" below for a
discussion of commissions Distributors may pay to securities dealers out of its
own resources.
</TABLE>
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current purchase. To receive the reduction, you or your
investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase shares at a reduced sales charge by
completing the Letter of Intent section of the Shareholder Application. A Letter
of Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. You or your investment representative must inform us that the Letter is in
effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
You authorize Distributors to reserve five percent (5%) of the amount of
the total intended purchase in Fund shares registered in your name.
You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem
any or all of these reserved shares to pay any unpaid sales charge if you
do not fulfill the terms of the Letter.
We will include the reserved shares in the total shares you own as reflected on
your periodic statements.
You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
Although you may exchange your shares, you may not liquidate reserved
shares until you complete the Letter or pay the higher sales charge.
Our policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase Fund
shares at the reduced sales charge applicable to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will be 1.75%.
We define a qualified group as 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.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in shares of the Fund without
paying front-end or contingent deferred sales charges:
(i) a distribution that you have received from a Franklin Templeton Fund if it
is returned within 365 days of its payment date. When you return the
distribution, please include a written request to reinvest the money at net
asset value. You may reinvest Class II distributions in either Class I or Class
II shares, but Class I distributions may only be invested in Class I shares
under this privilege. For more information, see "Distribution Options" under
"What Distributions Might I Receive From the Fund?" or call Shareholder Services
at 1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. When you return the
distribution, please include a written request to reinvest the money at net
asset value. The distribution must be returned to the Fund within 365 days of
the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if you then reinvest
the redemption proceeds under an employee benefit plan qualified under Section
401 of the Code, in shares of the Fund.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds at net asset value. To do so, you must (a) have paid a sales
charge on the purchase or sale of the original shares, (b) reinvest the
redemption money in the same class of shares, and (c) request the reinvestment
of the money in writing to the Fund within 365 days of the redemption date. You
may reinvest up to the total amount of the redemption proceeds under this
privilege. If a different class of shares is purchased, the full front-end sales
charge must be paid at the time of purchase of the new shares. While you will
receive credit for any contingent deferred sales charge paid on the shares
redeemed, a new contingency period will begin. Shares that were no longer
subject to a contingent deferred sales charge will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
exchanged into other Franklin Templeton Funds are not considered "redeemed" for
this privilege (see "What If My Investment Outlook Changes? - Exchange
Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase shares of the Fund at
net asset value regardless of the source of the investment proceeds. If you are
or your account is included in one of the categories below, none of the shares
of the Fund you purchase will be subject to front-end or contingent deferred
sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of such trusts reinvesting
distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their investment
accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or registered investment advisors affiliated with such
broker-dealers, on behalf of their clients who are participating in a
comprehensive fee program (sometimes known as a wrap fee program);
(vii) 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").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
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 you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges; or
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13-month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(x) insurance company separate accounts investing for pension plan contracts;
(xi) 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; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund if they meet the requirements described
under "Group Purchases," above.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
How Do I Buy Shares in Connection with Tax-Deferred Retirement Plans?
Your individual or employer-sponsored tax-deferred retirement plans may invest
in the Fund. You may use the Fund for an existing retirement plan, or, because
Trust Company can serve as custodian or trustee for retirement plans, you may
ask Trust Company to provide the plan documents and serve as custodian or
trustee. A plan document must be adopted in order for a retirement plan to be in
existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that you must use an application other than the one contained in
this Prospectus to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, please call 1-800/DIAL BEN
(1-800/342-5236). Trust Company is an affiliate of Distributors.
Please see "How Do I Sell Shares?" for information regarding redemptions from
retirement plan accounts. You must complete specific forms in order to receive
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition, if you
are a retirement plan investor, you should consider consulting your investment
representatives or advisors about investment decisions within your plans.
General
The Fund continuously offers it shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, 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. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the amount
purchased to securities dealers who initiate and are responsible for purchases
made at net asset value by any of the entities described in paragraphs (ix) ,
(xi) or (xii) under "Purchases at Net Asset Value" above and 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. Please
see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints applicable to
these purchases.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the United States. Securities dealers may not use sales of the
Fund's shares to qualify for this compensation if prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and trustees of the Trust who are affiliated with Distributors. See "Officers
and Trustees."
What Programs and Privileges Are Available to Me as a Shareholders?
Certain of the programs and privileges described in this section may not be
available directly from the Fund if your 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 "Registering Your
Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name 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 you, can be
2% or more of the value of the lost, stolen or destroyed certificate. A
certificate will be issued if requested by you or by your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums.
No exchanges between different classes of shares will be allowed. Shareholders
may choose to redeem shares of the Fund and purchase Class II shares of another
Franklin Templeton Fund but such purchase will be subject to that fund's Class
II front-end and contingent deferred sales charges. Although there are no
exchanges between different classes of shares, Class II shareholders of a
Franklin Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
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.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
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.
By Telephone
You or your 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 (day or night) at 1-800/247-1753. If you
do not wish this privilege extended to a particular account, you should notify
the Fund or Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "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(R)
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also " By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your 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 value 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 original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into 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.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your 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, you 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 under "Additional Information
Regarding Taxation" in the SAI.
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 objectiveexist immediately. Subsequently,
this money will be withdrawn from such short-term money market instrumentsand
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 Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
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
exchange 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) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges 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 also reserves the right to refuse the purchase side of an exchange
request 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.
Your 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, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
How Do I Sell Shares?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
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. You will then receive from the Fund the
value of the shares redeemed based upon the net asset value per share (less a
contingent deferred sales charge, if applicable) 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 will receive
the price calculated on the following business day. The net asset value per
share is determined as of the scheduled close of the New York Stock Exchange
(the "Exchange") (generally 1:00 p.m. Pacific time) each day that the Exchange
is open for trading. You are requested to provide a telephone number where you
may be reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures 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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustee(s) or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts. You may obtain
additional information about telephone redemptions 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. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has 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 the scheduled close of the Exchange
(generally 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, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
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 your 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 your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for; exchanges;
any account fees; distributions from an individual retirement plan account due
to death or disability or upon periodic distributions based on life expectancy;
tax-free returns of excess contributions from employee benefit plans;
distributions from employee benefit plans, including those due to termination or
plan transfer; redemptions initiated by the Fund due to an account falling below
the minimum specified account size; redemptions following the death of the
shareholder or beneficial owner; and redemptions through a Systematic Withdrawal
Plan set up for shares 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). For example, if an
account maintained an annual balance of $1,000,000, only $120,000 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge. Any
amount over that $120,000 would be assessed a 1% contingent deferred sales
charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of 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.
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.
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 you invested, depending on
fluctuations in the market value of securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
Other Information
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"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.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you 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 you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You 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 redemption, distribution or
dividend payment changes. 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.
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.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your 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 your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 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 front-end sales charge of the Fund).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares of the Fund
outstanding at the time. Assets in the Fund's and the Portfolio's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS system at 1-800/247-1753, you may obtain
account information, current price, and, if available, yield or other
performance information specific to the Fund or any Franklin Templeton Fund. In
addition, you may process an exchange, within the same class, into an
identically registered Franklin account and request duplicate confirmation or
year-end statements and deposit slips.
The Fund code, which will be needed to access system information is 151. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
Hours of Operation
(Monday through
Department Name Telephone No. Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-0637 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
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.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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.
Current yield for the Fund, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to shareholders of
the Fund. Dividends or distributions paid to shareholders are reflected in the
current distribution rate, which may be quoted to you. 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. 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 total return, current yield, or distribution rate may be in any
future period.
General Information
Reports to Shareholders
The Trust'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. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained by investors or shareholders, 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 Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
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.
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 shareholders meetings. The Trust may,
however, hold a special shareholders 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 will 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.
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."
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by your prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, the you
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 Investor Services, and to have authorized
them to execute the instructions without further inquiry. At the present time,
such services which are available 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. You
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Fund that the number furnished by you is incorrect or that
you are 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 you 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.
Useful Terms and Definitions in this Prospectus
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13-month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Letter - Letter of Intent.
Net asset value (NAV) - the value of a mutual fund share determined by deducting
the fund's liabilities from the total assets of the portfolio and dividing this
by the number of shares outstanding. When you buy, sell or exchange shares, we
will use the NAV next calculated after we receive your request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company.
FRANKLIN
EQUITY
INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1996
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 series.
Each series of the Trust in effect represents a separate fund with its own
investment objective 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 Equity Income Fund (the "Fund"),
formerly known as the Franklin Special Equity Income Fund, a separate
diversified series of the Trust. The Fund 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 objective
will be achieved.
The Fund offers two classes of shares: Franklin Equity Income Fund - Class I
("Class I") and Franklin Equity Income Fund - Class II ("Class II"). You can
choose between Class I shares, which generally bear a higher front-end sales
charge and lower ongoing Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and
Class II shares, which generally have a lower front-end sales charge and higher
ongoing Rule 12b-1 fees. You should consider the differences between the two
classes, including the impact of sales charges and Rule 12b-1 fees, in choosing
the more suitable class given your anticipated investment amount and time
horizon. See "How Do I Buy Shares? - Differences Between Class I and Class II."
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
A Statement of Additional Information (the "SAI") concerning the Fund and two
other series of the Trust, dated March 1, 1996 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 you. 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 shown above.
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.
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.
CONTENTS PAGE
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Franklin Convertible Securities Fund?
How Does the Fund Invest Its Assets?
What Are the Fund's Potential Risks?
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
EXPENSE TABLE
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of Class I shares for the fiscal year ended October 31, 1995.
<TABLE>
<CAPTION>
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50% 1.00%+
Deferred Sales Charge NONE++ 1.00%+++
Exchange Fee (per transaction) $5.00* $5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.62% 0.62%
Rule 12b-1 Fees 0.23%** 1.00%**
Other Expenses***:
Shareholder Servicing Costs 0.07% 0.07%
Reports to Shareholders 0.04% 0.04%
Other 0.06% 0.06%
----- -----
Total Other Expenses 0.17% 0.17%***
----- --------
Total Fund Operating Expenses 1.02% 1.79%
===== =====
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. (See "How to Buy Shares of the Fund - Purchase Price of Fund Shares"
for the definition of Franklin Templeton Funds and similar references.)
++Class I investments of $1 million or more are not subject to a front-end sales
charge; however, a contingent deferred sales charge of 1% is generally imposed
on certain redemptions within a "contingency period" of 12 months of the
calendar month of such investments. See "How to Sell Shares of the Fund -
Contingent Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the calendar month of such investments
are subject to a 1% contingent deferred sales charge. See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege" in the Prospectus. All other exchanges are processed without a fee.
</TABLE>
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.25% and pursuant to the Class II distribution plan is 1%.
See "Who Manages the Fund? - Plans of Distribution." 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.
***"Other Expenses" for Class II shares are estimates based on the actual
expenses incurred by Class I shares for the fiscal year ended October 31, 1995.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the front-end sales charge, that apply to a $1,000 investment over
various time periods assuming (1) a 5% annual rate of return and (2) redemptions
at the end of each time period.
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class I $55 $76 $99 $164
Class II $38 $66 $106 $218
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
</TABLE>
A shareholder of Class II would pay the following expenses on the same
investment, assuming no redemption:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
$28 $66 $106 $218
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL 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 you as a result of your investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED?
Set forth below is a table containing the financial highlights for a share of
Class I of the Fund from the effective date of the registration statement
through each of the fiscal years ended January 31, 1993, the nine months ended
October 31, 1993 and each of the two fiscal year ended October 31, 1995; and for
a share of Class II of the Fund from its inception (October 1, 1995) through
fiscal year ended October 31, 1995. The information for each of the periods
ended in 1991 to October 31, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Fund's Annual Report to Shareholders dated October 31, 1995. The remaining
figures, which are also audited, are not covered by the auditors' current
report. See "Reports to Shareholders" under "General Information" in this
Prospectus."
<TABLE>
<CAPTION>
Per Share Operating Performance+ Ratios/Supplemental Data
------------------------------------------------------------ -------------------------
Distri- Distri- Ratio of Net
Net Asset Net Realized butions butions Net Asset Net Assets Ratio of Investment
Values at Net & Unrealized Total From From Net From Total Values at End Expenses Income Portfolio
PeriodBeginningInvestmentGains(Losses)Investment Investment Capital Distri- at End Total of Year to Average to AverageTurnover
Ended of Year Income on Securities Operations Income Gains butions of Year Return++(in 000's)Net Assets**Net Assets Rate
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19891 $10.00 $.56 $ .887 $1.447 $(.370) $(.077) $ (.447) $11.00 14.61% $ 2,527 --% 5.78%* 11.34%
1990 11.00 .75 .527 1.277 (.655) (.092) (.747) 11.53 11.43 7,221 -- 6.23 33.11
1991 11.53 .72 (.803) (.083) (.736) (.071) (.807) 10.64 (.92) 10,808 .18 6.60 26.99
1992 10.64 .42 1.967 2.387 (.660) (.057) (.717) 12.31 22.76 16,144 .25 5.77 40.59
1993 12.31 .66 1.307 1.967 (.682) (.135) (.817) 13.46 16.23 26,092 .25 5.18 31.05
19932 13.46 .60 1.435 2.035 (.495) (.090) (.585) 14.91 15.27 42,177 .25* 5.86* 19.33
19943 14.91 .62 (.358) .262 (.725) (.307) (1.032) 14.14 1.83 92,763 .77 4.53 39.51
1995 14.14 0.63 1.272 1.902 (.609) (.243) (.852) 15.19 14.10 168,897 1.00 4.44 27.86
Class II+++
1995/4 15.38 .05 (.193) (.143) (.047) - (.047) 15.19 (.93) 386 1.99* 3.57* 27.86
1For the period March 15, 1988 (effective date of registration) to January 31,
1989.
2For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
3For the year ended October 31, 1994.
</TABLE>
4For the period October 1, 1995 to October 31, 1995.
*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 front-end sales charge or the
deferred contingent sales charge, and assumes reinvestment of dividends and
capital gains, if any, at net asset value. Prior to May 1, 1994, dividends were
reinvested at the maximum offering price.
+++Ratios have been calculated using daily average net assets during the period.
**During the periods indicated, Franklin Advisers, Inc., the investment manager,
agreed in advance to waive a portion of its management fees and made payments of
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:
Class I
19891 .73%*
1990 .83
1991 .83
1992 .84
1993 .81
19932 .87*
19943 .95
1995 1.02
WHAT IS THE FRANKLIN CONVERTIBLE SECURITIES FUND?
The Fund is a diversified series of 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
Investment Company Act of 1940 (the "1940 Act"). The Fund has two classes of
shares of beneficial interest ("multiclass" structure) with a par value of
$0.01: Franklin Equity Income Fund - Class I and Franklin Equity Income Fund -
Class II. All Fund shares outstanding before October 1, 1995 have been
redesignated as Class I shares and will retain their previous rights and
privileges, except for legally required modifications to shareholder voting
procedures, as discussed in "General Information - Organization and Voting
Rights."
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see "How
Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable sales
charge not exceeding 4.50% of the offering price depending upon the amount
invested. The current public offering price of the Class II shares is equal to
the net asset value, plus a sales charge of 1% of the amount invested. Please
see "How Do I Buy Shares?"
HOW DOES THE FUND INVEST ITS ASSETS?
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, including convertibles,
offering current dividend yields above the average of the market defined by the
Standard & Poor's 500 Index. 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 fixed-income 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 objective 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 500 Index. 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.
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 objective: 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 Trust's trustees and without prior
shareholder approval.
WHAT OTHER POLICIES DOES THE FUND HAVE?
Convertible Securities. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or a preferred stock which
may be converted within a specified period of time into a certain quantity of
the common stock of the same or different issuer. A convertible security may
also be subject to redemption by the issuer but only after a particular date and
under circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in the capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Holders of a convertible security will have recourse only to the issuer of the
security which will be either an operating company or an investment bank.
As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. The price of a convertible security is also influenced by
the market value of the security's underlying common stock and tends to increase
as the market value of the underlying stock rises, whereas it tends to decrease
as the market value of the underlying stock declines. When issued by a company
other than an investment bank a convertible security tends to be senior to
common stock, but at the same time is often subordinate to other types of fixed
income securities issued by its respective company. Operating company issued
convertible securities are typically convertible into common stock through the
company issuing new common stock to the holder of the security. However in the
instance that the security is called by the issuer and the parity price of the
convertible security is less than the call price, the operating company will
often pay cash out instead of common stock. If the security is issued by an
investment bank, the security is an obligation of and is also convertible
through such investment bank. Because a convertible security has features of
both common stock and a straight fixed income security, a convertible security's
value can be influenced, as mentioned, by both interest rate and market
movements. Consequently, convertible securities often are not influenced by a
change in interest rates as much as a similar straight fixed income security or
a change in share price as drastically as the respective common stock. This is
because rather than a convertible security's value largely being determined by
just interest rates or share price, it is often determined by a combination of
the two.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria as that Fund's investments in debt obligations. However
unlike convertible debt obligations, convertible preferred stocks are equity
securities and intrinsically different than all debt obligations including
convertible debt obligations. Like common stocks, preferred stocks are
subordinated to all debt obligations in the event of insolvency, and an issuer's
failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. Like common stocks,
preferred stocks generally have no maturity date, so that their market value is
dependent on the issuer's business prospects for an indefinite period of time.
Finally, preferred stock dividends are dividends, rather than interest payments,
and are treated as such for corporate tax purposes. For these reasons,
convertible preferred stocks are treated as preferred stocks for the Fund's
financial reporting, credit rating, and investment limitation purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock which generally features a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer (PERCS are generally not
convertible into cash at maturity).Under a typical arrangement, if after three
years the issuer's common stock is trading at a price below that set by the
capital appreciation limit, each PERCS would convert to one share of common
stock. If, however, the issuer's common stock is trading at a price above that
set by the capital appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that fractional share of
common stock received by the PERCS holder is determined by dividing the price
set by the capital appreciation limit of the PERCS by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. However if called early the issuer must
pay a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date of the PERCS.
The Fund may also invest in other classes of enhanced convertible securities.
These include but are not limited to ACES (Automatically Convertible Equity
Securities), PEPS (Participating Equity Preferred Stock), PRIDES (Preferred
Redeemable Increased Dividend Equity Securities), SAILS (Stock Appreciation
Income Linked Securities), TECONS (Term Convertible Notes), QICS (Quarterly
Income Cumulative Securities), and DECS (Dividend Enhanced Convertible
Securities). ACES, PEPS, PRIDES, SAILS, TECONS, QICS, and DECS all have the
following features: they are issued by the company, the common stock of which
will be received in the event the convertible preferred stock is converted;
unlike PERCS they do not have a capital appreciation limit; they seek to provide
the investor with high current income with some prospect of future capital
appreciation; they are typically issued with three or four-year maturities; they
typically have some built-in call protection for the first two to three years;
investors have the right to convert them into shares of common stock at a preset
conversion ratio or hold them until maturity; and, upon maturity, they will
necessarily convert into either cash or a specified number of shares of common
stock.
Similarly, there may be enhanced convertible debt obligations issued by the
operating company whose common stock is to be acquired in the event the security
is converted or by a different issuer, such as an investment bank. These
securities may be identified by names such as ELKS (Equity Linked Securities) or
similar names. Typically they share most of the salient characteristics of an
enhanced convertible preferred stock but will be ranked as senior or
subordinated debt in the issuer's corporate structure according to the terms of
the debt indenture. There may be additional types of convertible securities not
specifically referred to herein which may be similar to those described above in
which a Fund may invest, consistent with its objectives and policies.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as the deterioration in the credit worthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
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 objective. In seeking securities which meet the Fund's
investment objective and current investment strategy, the Fund will acquire only
debt securities which are rated B or better by Standard & Poor's Corporation
("S&P") or Ba or better by Moody's Investors Service ("Moody's") or debt
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.
The Fund does not intend to invest more than 5% of its assets in fixed-income
debt securities rated below Baa by Moody's or BBB by S&P. Further details on
these ratings are included in the Appendix to the SAI. 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 may at any particular time 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 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.
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. For more information on options, please see "The Investment
Objective and Policies of Each Fund - Options" in the SAI.
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 SAI.
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. 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 on behalf of the Fund by a custodian approved by the
Trust's trustees and will be held pursuant to a written agreement.
BORROWING. The Fund may not borrow money or mortgage or pledge any of its assets
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. Consistent with procedures 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 collateral with an initial market value of at least 102% of
the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 102%. Such
collateral shall consist of cash. 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.
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.
The Fund, however, 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.
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, 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 SAI.
HOW YOU 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
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you 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, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets.
To the extent the Fund's investments consist of debt securities, 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 higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. To the extent the Fund's investments consist of common stocks, a
decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in the Fund's share price. To the
extent that the Fund is invested in foreign securities, a decline in the stock
market of any country in which the Fund is invested may also be reflected in
declines in the Fund's share price. Changes in currency valuations will also
affect the price of Fund shares. History reflects both increases and decreases
in the prevailing rate of interest and in the valuation of the market and these
may reoccur unpredictably in the future.
WHO MANAGES THE FUND?
The Board of Trustees of the Trust (the "Board") 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.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares of the Fund. Although
the Board does not expect to encounter material conflicts in the future, the
Board will continue to monitor the Fund and will take appropriate action to
resolve such conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
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 and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(117 separate series) with aggregate assets of over $78 billion.
The team responsible for the management of the Fund's portfolio is: Frank
Felicelli and Howard M. McEldowney since its inception and Doug Barton since
July 1991.
Frank Felicelli
Executive Vice President and
Portfolio Manager
Franklin Advisers
Mr. Felicelli is responsible for the day-to-day management of the Fund's
portfolio, including investment strategy and stock selection. He is a Chartered
Financial Analyst. Mr. Felicelli has a Bachelor of Arts degree in economics from
the University of Illinois and a Masters degree in Business Administration and
Finance from Golden Gate University. He has been with Franklin since 1986 and is
a member of industry-related associations.
Douglas Barton
Portfolio Manager
Franklin Advisers, Inc.
Mr. Barton is responsible for the day-to-day management of the Fund's portfolio,
including investment strategy and stock selection. He is a Chartered Financial
Analyst. He holds a Master of Business Administration degree from California
State University in Hayward and a Bachelor of Science degree from California
State University in Chico. Mr. Barton joined Franklin in July 1988.
Howard M. McEldowney
President
Franklin Management Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. McEldowney has been generally involved with investment strategy and stock
selection of the Fund's portfolio since its inception. He has a Master in
Business Administration degree 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.
Pursuant to a 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. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Trust are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
During the fiscal year ended October 31, 1995, management fees, before any
advance waiver, totaled 0.62% of the average monthly net assets of the Fund.
Total operating expenses, including management fees before any advance waiver,
totaled 1.02% of the average monthly net assets of Class I. Pursuant to an
agreement by Advisers to limit its fees, the Fund paid management fees totaling
0.60% of the average monthly net assets of the Fund and operating expenses
totaling 1.00%. Other expenses of the Class II of the Fund are based on
estimates on the expenses incurred by Class I.
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 "How Do
the Funds Purchase Securities For Their Portfolio?" in the SAI.
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.
PLANS OF DISTRIBUTION
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. 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.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.25% per annum of Class I's
average daily net assets payable on a quarterly basis. All expenses of
distribution in excess of 0.25% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.75% per annum of Class II's average daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.25% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.75% per annum of Class
II's average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans cover 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 Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Funds' Underwriter" in the
SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
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.
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) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the first business day preceding the 15th 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 Board. Fund shares are quoted
ex-dividend on the first business day following the record date (generally the
15th day of the month or prior business day depending on 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, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you 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 your investment, it may be taxable as
dividend income or capital gain.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Fund in any of these ways:
1. PURCHASE ADDITIONAL SHARES OF THE FUND - You may purchase additional shares
of the same class of the Fund (without a sales charge or imposition of a
contingent deferred sales charge) by reinvesting capital gain distributions, or
both dividend and capital gain distributions. If you are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Fund. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3. RECEIVE DISTRIBUTIONS IN CASH - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE SAME CLASS OF
THE FUND. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
DISTRIBUTIONS TO EACH CLASS OF SHARES
According to the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), dividends and capital gains will be calculated and distributed in
the same manner for Class I and Class II shares. The per share amount of any
income dividends will generally differ only to the extent that each class is
subject to different Rule 12b-1 fees.
HOW TAXATION AFFECTS YOU AND THE FUND
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 SAI.
Each fund of the Trust is treated as a separate entity for federal income tax
purposes. The Fund intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to the sources of its
income and diversification of its assets, the Fund will 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. The portion of
the dividends so qualified, however, depends on the aggregate qualifying
dividend income received by the Fund from domestic (U.S.) sources. For the
fiscal year ended October 31, 1994, 96.56% 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
SAI.
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 the sale or
exchange of Fund shares, held for six months or less, will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such 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 DO I BUY SHARES?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to 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 SHARES ARE PURCHASED THROUGH RETIREMENT
PLANS ESTABLISHED BY THE FRANKLIN TEMPLETON GROUP. THE FUND AND DISTRIBUTORS
RESERVE THE RIGHT TO REFUSE ANY ORDER FOR THE PURCHASE OF SHARES. PURCHASE PRICE
OF FUND SHARES
DIFFERENCES BETWEEN CLASS I AND CLASS II
Class I and Class II shares differ in the amount of their front-end sales
charges and Rule 12b-1 fees, as well as the circumstances under which the
contingent deferred sales charge applies. Generally, Class I shares have higher
front-end sales charges than Class II shares and comparatively lower Rule 12b-1
fees. Voting rights of each class will be the same on matters affecting the Fund
as a whole, but each class will vote separately on matters affecting only
shareholders of that class. See "General Information - Organization and Voting
Rights."
CLASS I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charge or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares are subject to Rule 12b-1 fees of
up to a maximum of .25% per annum of the average daily net assets of the class.
See "Who Manages the Fund?" and "How Do I Sell Shares?" for more information.
CLASS II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 1% per annum of
the average daily net assets of Class II shares, 0.75% of which will be retained
by Distributors during the first year of investment.
DECIDING WHICH CLASS TO PURCHASE
You should carefully evaluate your anticipated investment amount and time
horizon prior to determining which class of shares to purchase. Generally, if
you expect to invest less than $100,000 in the Franklin Templeton Funds and to
make substantial redemptions within approximately six years or less of
investment, you should consider purchasing Class II shares. However, the higher
annual Rule 12b-1 fees on Class II shares will result in higher operating
expenses (which will accumulate over time to outweigh the difference in
front-end sales charges) and lower income dividends for Class II shares. For
this reason, Class I shares may be more attractive to you if you plan to invest
in the Fund over the long-term, even if no sales charge reductions are available
to you.
If you qualify to purchase Class I shares at reduced sales charges, you should
seriously consider purchasing Class I shares, especially if you intend to hold
your shares approximately six years or more. If you qualify to purchase Class I
shares at reduced sales charges but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. IF YOU ARE
INVESTING $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO PURCHASE
CLASS I SHARES AT NET ASSET VALUE YOU MAY NOT PURCHASE CLASS II SHARES. See
"Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when you may purchase shares at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different front-end sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to you. Such purchases, however, may be
subject to a contingent deferred sales charge. You may exceed $1 million in
Class II shares by cumulative purchases over a period of time. If you intend to
make investments exceeding $1 million, however, you should consider purchasing
Class I shares through a Letter of Intent instead of purchasing Class II shares.
Each class has a separate schedule for compensating securities dealers for
selling Fund shares. You should take all of the factors regarding an investment
in each class into account before deciding which class of shares to purchase.
There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
WHEN PLACING PURCHASE ORDERS, YOU SHOULD CLEARLY INDICATE WHICH CLASS OF SHARES
YOU INTEND TO PURCHASE. A PURCHASE ORDER THAT FAILS TO SPECIFY A CLASS WILL
AUTOMATICALLY BE INVESTED IN CLASS I SHARES.
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after your securities dealer
receives the order which is promptly transmitted to the Fund or (2) after
receipt of an order by mail from you directly in proper form (which generally
means a completed Shareholder Application accompanied by a negotiable check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. 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 "How
Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER CONCESSION AS A
SIZE OF TRANSACTION AT AS A PERCENTAGE OF OFFERING AS A PERCENTAGE OF NET PERCENTAGE OF OFFERING
OFFERING PRICE PRICE AMOUNT INVESTED PRICE*
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than 3.75% 3.90% 3.25%
$250,000
$250,000 but less than 2.75% 2.83% 2.50%
$500,000
$500,000 but less than 2.25% 2.30% 2.00%
$1,000,000
$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 indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. A securities
dealer who receives 90% or more of the sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**Distributors will pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of $1 million
or more: 1% 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.
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 all
or a portion of investments of $1 million or more within the contingency period.
See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments 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") and (b) the U.S.
registered mutual funds in the Templeton Group of Funds except 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 Fund(s)". Sales charge
reductions based upon aggregate holdings of Franklin Templeton Funds may be
effective only after notification to Distributors that the investment qualifies
for a discount.
OTHER PAYMENTS TO SECURITIES DEALERS. Either 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
companies 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" below and "How Do I Buy and
Sell Shares?" in the SAI.
CLASS II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase,
as indicated in the table below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER CONCESSION AS A
SIZE OF TRANSACTION AT AS A PERCENTAGE OF AS A PERCENTAGE OF NET PERCENTAGE OF OFFERING
OFFERING PRICE OFFERING PRICE AMOUNT INVESTED PRICE*
----- ----- -------- ------
<S> <C> <C> <C>
any amount (less than $1 1.00% 1.01% 1.00%
million)
*Either Distributors or one of its affiliates may make additional payments to
securities dealers, out of its own resources, of up to 1% of the amount
invested. During the first year following a purchase of Class II shares,
Distributors will keep a portion of the Rule 12b-1 fees assessed to those shares
to partially recoup fees Distributors pays to securities dealers.
</TABLE>
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made 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 Templeton Funds and other dealer-sponsored
programs or events. In some instances this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
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. Securities 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.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?".
Certain officers and trustees of the Trust are also affiliated with
Distributors. A detailed description is included under "Officers and Trustees"
in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES - CLASS I SHARES ONLY
Class I 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,
you or your securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of your spouse, children under
the age of 21 and grandchildren under the age of 21. The value of Class II
shares you own may also be included for this purpose.
In addition, an investment in Class I shares 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 Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. LETTER OF INTENT. You may immediately qualify for a reduced sales charge on a
purchase of Class I shares by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
express 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, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint 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. You or your securities dealer must
inform Investor Services or Distributors that this Letter is in effect each time
a purchase is made.
YOU ACKNOWLEDGE AND AGREE 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 Class I shares
registered in your 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 you have
directed. You will not be able to liquidate the reserved shares until the Letter
has been completed or the higher sales charge paid. This policy of reserving
shares does not apply to certain benefit plans described under "Description of
Special Net Asset Value Purchases." For more information, see "How Do I Buy and
Sell Shares?" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares you own may be included in determining a
reduced sales charge to be paid on Class I shares pursuant to the Letter of
Intent and Rights of Accumulation programs.
GROUP PURCHASES OF CLASS I SHARES
If you are a member of a qualified group you may purchase Class I 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 members of 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, 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 you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your 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
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, 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, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; 7) insurance
company separate accounts for pension plan contracts; and (8) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the Code, in
shares of the Fund.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 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. IF A DIFFERENT CLASS OF SHARES IS
PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE PAID AT THE TIME OF PURCHASE
OF THE NEW SHARES. Under this privilege, you 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 and subsequently repurchased,
a new contingency period will begin. Shares that were no longer subject to a
contingent deferred sales charge will be reinvested at net asset value and will
not be subject to a new contingent deferred sales charge. Shares of the Fund
redeemed in connection with an exchange into another fund (see "What If My
Investment Outlook Changes? - 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 365 days after the redemption. The 365 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
you 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 under "Additional Information Regarding Taxation" in the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gain distributions from investments in that class of
shares of the Fund within 365 days of the payment date of such distribution.
Class II shareholders may also direct such distributions for investment at net
asset value in a Class I Franklin Templeton Fund. 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 "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
Class I shares 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 a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has an investment objective similar
to that of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker-dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares 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 365 days after the plan distribution.
Class I shares 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 the 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. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Class I shares may 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 of Class I Shares," which enable Distributors to realize economies of
scale in its sales efforts and sales related expenses.
Class I shares 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 the
amount to be purchased, 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 the 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.
Class I shares 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.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases of Class I shares.
HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS?
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or, because Trust Company can serve as
custodian or trustee for retirement plans, you may ask Trust Company to provide
the plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that an application other than the one contained in this Prospectus
must be used to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, call 1-800/DIAL BEN
(1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
WHAT PROGRAMS AND PRIVILEGES
ARE AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND IF YOUR 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 "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name 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 you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or your
securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply. If you would like to establish a Systematic
Withdrawal Plan, please complete the Systematic Withdrawal Plan section of the
Shareholder Application included with this Prospectus and indicate how you would
like to receive your payments. You may choose to receive your payments in any of
the following ways:
1. PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. RECEIVE PAYMENTS IN CASH - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
the Franklin Templeton Institutional Services Department at 1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. 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. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
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.
BY TELEPHONE
YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
THE FUND BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "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, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your 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 of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into 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.
If you request the exchange of the total value of your 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, you 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 under "Additional Information Regarding Taxation" in the SAI.
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 objective 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.
EXCHANGES OF CLASS I SHARES
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
EXCHANGES OF CLASS II SHARES
When an account is composed of Class II shares subject to the contingent
deferred sales charge and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares and you exchange $3,000 into a new fund, $500 will be exchanged from free
shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may Class II shareholders purchase shares of Money Fund II
directly. Class II shares exchanged for shares of Money Fund II will continue to
age, for purposes of calculating the contingent deferred sales charge, because
they continue to be subject to Rule 12b-1 fees. The contingent deferred sales
charge will be assessed if CDSC liable shares are redeemed. Class I shares may
be exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another method
such as first-in first-out or free shares followed by CDSC liable shares, the
exchanged shares may, in some instances, be CDSC liable even though a redemption
of such shares, as discussed elsewhere herein, may no longer be subject to a
contingent deferred sales charge. The proportional method is believed by
management to more closely meet and reflect the expectations of Class II
shareholders in the event shares are redeemed during the contingency period. For
federal income tax purposes, the cost basis of shares redeemed or exchanged is
determined under the Code without regard to the method of transferring shares
chosen by the Fund.
RETIREMENT PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange shares
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
exchange 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) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges 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 also reserves the right to refuse the purchase side of an exchange
request 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
objective and policies, or would otherwise potentially be adversely affected.
Your 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, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
TRANSFERS
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
CONVERSION RIGHTS
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
HOW DO I SELL SHARES?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
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. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) 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 will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the New York
Stock Exchange (the "Exchange") (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. You are requested to provide a telephone
number where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURES 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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts". You may obtain
additional information about telephone redemptions 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. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
If your account has 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 the scheduled close of the Exchange
(generally 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, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, 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 your 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 your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions from an individual
retirement plan account due to death or disability or upon periodic
distributions based on life expectancy; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions initiated by
the Fund due to an account falling below the minimum specified account size;
redemptions following the death of the shareholder or beneficial owner; and
redemptions through a Systematic Withdrawal Plan set up for shares 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). For example, if a Class I account maintained
an annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge. Likewise, if a
Class II account maintained an annual balance of $10,000, only $1,200 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of 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.
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.
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 you invested, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"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.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you 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 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 you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You 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 redemption, distribution or
dividend payment changes. 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.
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.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or 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 your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 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 front-end sales charge of each class of shares of the
Fund).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features. By calling the Franklin TeleFACTS(R) system at
1-800/247-1753, you may obtain Class I and Class II account information, current
price and, if available, yield or other performance information specific to the
Fund or any Franklin Templeton Fund. In addition, Class I shareholders may
process an exchange, within the same class, into an identically registered
Franklin account and request duplicate confirmation or year-end statements and
deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 139 and 239, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. 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 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 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.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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 each class 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 for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), 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 of a class are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. 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 a class' income and will assume the payment of the
maximum sales charge on the purchase of that class 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 each class,
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 a class' total return, current yield or distribution rate may be
in any future period.
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund 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 under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $0.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
Additional series or classes may be added in the future by the Board.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state business trust law, or (3) required to
be voted on separately by class by the 1940 Act, or the rules adopted
thereunder. For instance, if a change to the Rule 12b-1 plan relating to Class I
shares requires shareholder approval, only shareholders of Class I may vote on
the change to the Rule 12b-1 plan affecting that class. Similarly, if a change
to the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Voting rights are noncumulative, so that in any election of trustees, the
holders of more than 50% of the shares voting can elect all 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.
The Trust does not intend to hold annual shareholders meetings. The Trust may,
however, hold a special shareholders meeting of a series 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 the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will 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.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares? in the SAI.
REGISTERING YOUR ACCOUNT
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you 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 Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available 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. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are 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 you 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.
FRANKLIN
GLOBAL GOVERNMENT
INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS
MARCH 1, 1996
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. There can, of course, be no assurance that the Fund's objective
will be achieved.
The Fund offers two classes of shares: Franklin Global Government Income Fund -
Class I ("Class I") and Franklin Global Government Income Fund - Class II
("Class II"). You can choose between Class I shares, which generally bear a
higher front-end sales charge and lower ongoing Rule 12b-1 distribution fees
("Rule 12b-1 fees"), and Class II shares, which generally have a lower front-end
sales charge and higher ongoing Rule 12b-1 fees. You should consider the
differences between the two classes, including the impact of sales charges and
Rule 12b-1 fees, in choosing the more suitable class given your anticipated
investment amount and time horizon. See "How Do I Buy Shares? - Differences
Between Class I and Class II."
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, you should retain it for future reference; it contains
information about the purchase and sale of shares and other items which you 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 (the "SAI") concerning the Fund, dated
March 1, 1996, 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 you. 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 shown
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.
CONTENTS PAGE
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Franklin Global Government Income Fund?
How Does the Fund Invest Its Assets?
What Are the Fund's Potential Risks?
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
Appendix
EXPENSE TABLE
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of each class for the fiscal year ended October 31, 1995.
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price) 4.25% 1.00%+
Deferred Sales Charge None++ 1.00%+++
Exchange Fee (per transaction)
$5.00* $5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.58% 0.58%
Rule 12b-1 Fees 0.08%** 0.65%**
Other Expenses:
Custodian Fees 0.13% 0.13%
Reports to Shareholders 0.06% 0.06%
Other 0.11% 0.11%
----- -----
Total Other Expenses 0.30% 0.30%
------ -----
Total Fund Operating Expenses 0.96% 1.53%
===== =====
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more, you will reach the crossover point more quickly.
See "How Do I Buy Shares? - Purchase Price of Fund Shares" for the definition of
Franklin Templeton Funds and similar references.
++Class I investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingency period" of 12 months of
the calendar month of such investments. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred
sales charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The maximum amounts of Rule 12b-1 fees allowed pursuant to the Class I and
Class II distribution plans are 0.15% and 0.65%, respectively. See "Who Manages
the Fund? - Plans of Distribution." 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.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
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.
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
CLASS I $52* $72 $93 $155
CLASS II $35 $58 $93 $191
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would pay the following expenses on the same investment, assuming no
redemption.
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
CLASS II $25 $58 $93 $191
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL 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 you as a result of your investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED?
Set forth below is a table containing the financial highlights for a share of
Class I of the Fund throughout the fiscal periods from the effective date of
registration (March 15, 1988) to October 31, 1995; and for a share of Class II
of the Fund from its inception (May 1, 1995) through fiscal year ended October
31, 1995. The information for each of the periods ended in 1991 or later has
been audited by Coopers & Lybrand L.L.P., independent auditors, whose audit
report appears in the Fund's Annual Report to Shareholders dated October 31,
1995. The remaining figures, which are also audited, are not covered by the
auditors' current report. See "Reports to Shareholders" under "General
Information" in this Prospectus.
<TABLE>
<CAPTION>
Per Share Operating Performance+ Ratios/Supplemental Data
________________________________________________ ___________________________
Total
From Distri- Distri-
Net Asset Net Net Realized Invest butions butions Net Asset Net Assets Ratio of Ratio of Net
Values Invest & Unrealized ment From Net From Distributions Total Value at End Expenses Income
PeriodBeginning ment Gains(Losses)Opera- Investment Capital From Return+++ Distri- at End Total of Year to Average to Average
Ended of Year Income on Securitiestions Income Gains of Capital bution of Year Return++(in 000's)Net Assets**Net Assets
Class I Shares:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19891 $10.00 $ .66 $ .296 $ .956 $ (.558) $(.008) $ - $ (.566) $10.39 9.52% $ 5,604 -% 9.92%*
1990 10.39 1.11 (.804) .306 (1.116) - - (1.116) 9.58 2.69 12,421 .03 11.97
1991 9.58 1.05 (.174) .876 (1.107) (.009) - (1.116) 9.34 9.27 29,660 .25 11.80
1992 9.34 .86 .246 1.106 (.900) (.156) - (1.056) 9.39 12.15 78,911 .50 7.87
1993 9.39 .83 (.698) .132 (.713) (.075) (.124) (.912) 8.61 1.08 153,899 .72 7.08
19932 8.61 .58 .716 1.296 (.576) - - (.576) 9.33 15.14 195,627 .77* 6.74*
1994 9.33 1.30 (1.806) (.506) (.078) (.083) (.603) (.764) 8.06 (5.72) 187,204 .89 8.54
1995 8.06 .67 .290 .960 (.645) -- (.065) (.710) 8.31 12.65 164,970 .96 8.29
Class II Shares: +++
19953 8.03 0.31 0.301 0.611 (0.301) -- (0.030) (0.331) 8.31 7.09 1,193 1.54* 7.41*
Period Portfolio
Ended Turnover
Class Rate
19891 2.05%
1990 41.34
1991 72.21
1992 155.40
1993 49.20
19932 67.36
1994 80.69
1995 103.49
Class II Shares: +++
19953 103.49
</TABLE>
1For the period March 15, 1988 (effective date of registration) to January 31,
1989.
2For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
3For the period May 1, 1995 to October 31, 1995
+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 and is not annualized. It does not include the maximum front-end sales
charge or the contingent deferred sales charge, and assumes reinvestment of
dividends and capital gain, if any, at net asset value. Prior to May 1, 1994,
with the implementation of the Rule 12b-1 distribution plan, dividends were
reinvested at the maximum offering price.
+++Ratios have been calculated using daily average net assets during the period.
*Annualized
**During the periods indicated, Franklin Advisers, Inc., the investment manager,
agreed in advance to waive a portion of its management fees and made payments of
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:
19891 1.71%*
1990 .96
1991 .87
1992 .80
19932 .73
WHAT IS THE FRANKLIN GLOBAL GOVERNMENT INCOME FUND?
The Fund is a non-diversified series of the Trust, which is an open-end
management investment company commonly called a "mutual fund." The Trust was
organized as a Massachusetts business trust on December 16, 1986, and registered
with the SEC under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund has two classes of shares of beneficial interest ("multiclass"
structure) with a par value of $.01 per share: Franklin Global Government Income
Fund - Class I and Franklin Global Government Income Fund - Class II. All Fund
shares outstanding before May 1, 1995 have been redesignated as Class I shares
and will retain their previous rights and privileges, except for legally
required modifications to shareholder voting procedures, as discussed in
"General Information - Organization and Voting Rights." 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.
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see "How
Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable sales
charge not exceeding 4.25% of the offering price depending upon the amount
invested. The current public offering price of the Class II shares is equal to
the net asset value, plus a sales charge of 1% of the amount invested. Please
see "How Do I Buy Shares?"
HOW DOES THE FUND INVEST ITS ASSETS?
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. 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, all of which may be considered to be "derivatives". A detailed
description of these financial transactions is included under "Special
Strategies." The risk considerations involved in global investing generally 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, which investments may involve
greater exposure to the risks ordinarily associated with foreign investing. See
"Special Considerations with Respect to Global Investing," below. The Fund's
manager does not currently expect the Fund's investments in less developed and
developing countries to exceed 20% of the Fund's total net assets.
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 "semi-governmental
securities," 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, in the opinion of the Fund's investment
manager, 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 financially 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. Nevertheless, the Fund's
nondiversified status may expose it to greater risk or volatility than
diversified funds with otherwise similar investment policies, since the Fund may
have a larger portion of its assets invested in securities of a small number of
issuers.
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 the Fund's investment manager believes 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 involving the
"derivative" securities and transactions described in this section. 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. While there are no specific limits on the Fund's use of
these practices other than those limits stated below, the Fund only engages in
these practices for hedging purposes, or in other words for the purpose of
protecting against declines in the value of the Fund's portfolio securities and
the income on these securities. The production of additional income may at times
be a secondary purpose of these practices.
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 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. 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.
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.
The Fund's investment in options, futures contracts and forward contracts,
options on futures contracts, including transactions involving actual or deemed
short sales, 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.
Lower Rated Debt Obligations. The Fund may invest in high yield, high risk,
lower rated debt obligations that are rated at least B by Moody's Investors
Service, Inc. ("Moody's"), or Standard & Poor's Corporation ("S&P"), or if
unrated, are at least of comparable quality as determined by the Manager. The
Fund currently holds approximately 11.38% in lower rated investments and may in
the future increase this percentage, but such investments will not exceed 35% of
the Fund's net assets. Many debt obligations of foreign issuers, and especially
developing markets issuers, are not rated by U.S. rating agencies and their
selection depends on the Manager's internal analysis. Securities rated BB or
lower (sometimes referred to as "junk bonds") are regarded as predominately
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation and therefore involve
special risks. See "Risk Considerations - High Yielding, Fixed-Income
Securities," the "Appendix" for a discussion of the rating categories, and the
"Asset Composition Table" for the ratings of the debt obligations in the Fund as
of October 31, 1995.
RISK CONSIDERATIONS - HIGH YIELDING, FIXED-INCOME SECURITIES
Because of the Fund's ability to invest in higher yielding, higher risk
securities, an investment in the Fund is accompanied by a higher degree of risk
than is present with an investment in higher rated, lower yielding securities.
Accordingly, an investment in the Fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and goals. If you are on a fixed income
or retired, you should also consider the increased risk of loss to principal
which is present with an investment in higher risk securities such as those in
which the Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tends to reflect individual
developments affecting the issuer to a greater extent than the market value of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. 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 the rating agencies, 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 bonds rated BBB by S&P or Baa by Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of 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 developments affecting
the issuer, 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 Fund's portfolio has
never contained issues in default. Current prices for defaulted bonds are
generally significantly lower than their purchase price, and the Fund may have
unrealized losses on such defaulted securities which are reflected in the price
of the Fund's shares. In general, securities which default lose much of their
value in the time period prior to the actual default so that the Fund's net
assets are impacted prior to the default. The Fund may retain an issue which has
defaulted because such issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities 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 manager may find it necessary to
replace such securities with lower yielding securities which could result in
less net investment income to the Fund. 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. The Fund may be required under the Code and U.S. 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.
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 the secondary trading market for
a particular high yielding, fixed-income security 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 a
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 "How Are Fund Shares Valued?" in this
Prospectus and in the SAI.)
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 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 under 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 securities 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.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession disrupted the
market for high yielding securities and adversely affected the value of
outstanding securities and the ability of issuers of such securities to meet
their obligations. Those adverse effects may continue even as the economy
recovers. Factors adversely impacting the market value of high yielding
securities will adversely impact the Fund's net asset value. For example, the
highly publicized defaults of some high yield issuers in 1989 and 1990 and
concerns regarding a sluggish economy which continued in 1993, depressed the
prices for many these securities. However, while market prices may be
temporarily depressed due to these facts, the ultimate securitiy price will
generally reflect the true operating results of the corporation. 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.
ASSET COMPOSITION TABLE
A credit rating by a rating agency evaluates only the safety of principal and
interest of the bond, and does not consider the market value risk associated
with an investment in such a bond. The table below shows the percentage invested
in each of the specific S&P rating categories and those that are not rated by a
rating agency but deemed by the investment manager to be of the same credit
quality. The information was prepared based on a dollar weighted average of the
Funds portfolio composition based on month-end assets for each of the 12 months
in the fiscal year ended October 31, 1995. The Appendix includes a description
of each rating category.
AVERAGE WEIGHTED
S&P RATING PERCENTAGE OF ASSETS
AAA 37.28%
AA+ 22.75%
AA- 24.15%
AA 2.15%
A 0.87%
BBB* 1.43%
BB+ 1.69%
B** 9.69%
*All of these securities are unrated by a rating agency.
**.58% of these securities, which are unrated by a rating agency, have been
included in the B rating category.
OTHER INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES. Consistent with procedures 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 with
the Fund's custodian collateral with an initial market value of at least 102% of
the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. Such
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund 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 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 on behalf of the Fund by a custodian approved by the
Fund's Board and will be held pursuant to a written agreement.
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.
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
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.
HOW YOU 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
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you 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, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets.
Changes in the prevailing rates of interest in any of the countries in which the
Fund is invested will likely affect the value of the Fund's holdings and thus
the value of Fund shares. Increased rates of interest which frequently accompany
higher inflation and/or a growing economy are likely to have a negative effect
on the value of Fund shares. In addition, changes in currency valuations will
impact the price of Fund shares. History reflects both increases and decreases
in interest rates in individual countries and throughout the world, and in
currency valuations, and these may reoccur unpredictably in the future.
To the extent the Fund's investments consist of common stocks, a decline in the
stock market of any country in which the Fund is invested, expressed for example
by a drop in a domestic or foreign equity based index, may also be reflected in
declines in the Fund's share price. History reflects both increases and
decreases in interest rates, currency valuations and stock market indexes in
individual countries and throughout the world, and these may reoccur
unpredictably in the future.
WHAT ARE THE FUND'S POTENTIAL RISKS?
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
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. Each of the risks described below may be heightened to the
extent that the fund invests in securities of developing or emerging markets.
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.
WHO MANAGES THE FUND?
The Board of Trustees of the Trust (the "Board") 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.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
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 and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(116 separate series) with aggregate assets of over $77 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. The Manager
performs similar services for other funds and there may be times when the
actions taken with respect to the Fund's portfolio will differ from those taken
by the Manager on behalf of other funds. Neither the Manager (including its
affiliates) nor its officers, directors or employees nor the officers and
trustees of the Fund are prohibited from investing in securities held by the
Fund or other funds which are managed or administered by the Manager to the
extent such transactions comply with the Fund's Code of Ethics. Please see
"Investment Advisory and Other Services" and "General Information" in the SAI
for further information on securities transactions and a summary of the Fund's
Code of Ethics.
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. The subadvisory fees
are not in addition to those the Fund is currently obligated to pay the Manager.
The team responsible for the day-to-day management of the Fund's portfolio
is: Mr. Dickson since 1993, Mr. Devlin since 1994 and Mr. Latta since 1995.
Thomas J. Dickson
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Dickson received his Bachelor of Science degree in managerial economics
from the University of California at Davis. Mr. Dickson joined Franklin in
1992 and Templeton in 1994.
Neil S. Devlin
Executive Vice President and Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Devlin is a Chartered Financial Analyst and holds a Bachelor of Arts
degree in economics and philosophy from Brandeis University. Mr. Devlin
joined Templeton in 1987.
Thomas Latta
Vice President, Templeton
Global Bond Managers and
Portfolio Manager of TICI
Mr. Latta attended the University of Missouri and New York University. Mr.
Latta has been in the securities industry since 1981 and with Templeton since
1991. Prior to joining Templeton, Mr. Latta worked as a portfolio manager
with Forester and Hairston, a global fixed-income investment management firm,
and prior thereto, he worked as an investment adviser with Merrill Lynch.
During the fiscal year ended October 31, 1995, management 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 "How Does
the Fund Purchase Securities For Its Portfolio?" in the SAI.
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.
During the fiscal year ended October 31, 1995, expenses borne by Class I and
Class II shares of the Fund, including fees paid to Advisers and to Investor
Services, totaled 0.96% and 1.53%, respectively, of the average daily net assets
of such class.
PLAN OF DISTRIBUTION
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. 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.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.15% per annum of Class I's
average daily net assets payable on a quarterly basis. All expenses of
distribution in excess of 0.15% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50%. per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.50% per annum of Class
II's average daily net assets to partially recoup fees Distributors pays to
securities dealers in connection with initial purchases of Class II shares.
Both Plans cover 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 Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Fund's Underwriter" in the
SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
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) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. The Fund may
make more than one distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these distributions for
operational or other reasons.
DISTRIBUTIONS TO EACH CLASS OF SHARES
According to the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), dividends and capital gains will be calculated and distributed in
the same manner for Class I and Class II shares. The per share amount of any
income dividends will generally differ only to the extent that each class is
subject to different Rule 12b-1 fees.
DISTRIBUTION DATE
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the first business day preceding the 15th 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 (generally the 15th day of the
month or prior business day depending on the record date.) 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, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you 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 your investment, it may be taxable as
dividend income or capital gain.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Fund in any of these ways:
1. Purchase additional shares of the Fund - You may purchase additional shares
of the same class of the Fund (without a sales charge or imposition of a
contingent deferred sales charge) by reinvesting capital gain distributions, or
both dividend and capital gain distributions. If you are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Fund. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2. Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3. Receive distributions in cash - You may choose to receive dividends, or both
dividend and capital gain distributions in cash. You may have the money sent
directly to you, to another person, or to a checking account. If you choose to
send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE SAME CLASS OF
THE FUND. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
HOW TAXATION AFFECTS YOU AND THE FUND
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.
Regular income dividends (which are generally distributed monthly) will be
determined from each Fund's net investment income, excluding any realized net
foreign currency gains and losses. Under the Code, net realized foreign currency
gains and losses are required to be reported as ordinary income or loss to each
Fund. Therefore, if in the course of a fiscal year, a Fund realizes net foreign
currency losses, that Fund may be required to reclassify all or a portion of its
income dividend distributions made during such fiscal year as a
return-of-capital for federal income tax purposes. Net foreign currency gains,
if any, will generally be distributed as a supplemental income dividend once
each year in December to reflect any net foreign currency gain realized by a
Fund as of October 31 of the current fiscal year. Shareholders will be informed
of the tax status of all distributions shortly after the close of each calendar
year.
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.
For corporate shareholders, it is anticipated that no portion of the Fund's
dividends will qualify for the corporate dividends-received deduction.
The Fund may be subject to foreign withholding taxes on income from certain of
its foreign securities. If more than 50% of the total assets of the Fund at the
end of its fiscal year are invested in securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of foreign
taxes paid by the Fund. If this election is made, shareholders will be (i)
required to include in their gross income their pro rata share of foreign source
income (including any foreign taxes paid by the fund), and (ii) entitled to
either deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code. Shareholders will be informed by
the Fund at the end of each calendar year regarding the availability of any
credits and the amount of foreign source income (including any foreign taxes
paid by the Fund) to be included on their income tax returns.
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 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 DO I BUY SHARES?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to 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 shares are purchased through retirement
plans established by the Franklin Templeton Group. The Fund and Distributors
reserve the right to refuse any order for the purchase of shares.
DIFFERENCES BETWEEN CLASS I AND CLASS II
Class I and Class II shares differ in the amount of their front-end sales
charges and Rule 12b-1 fees, as well as the circumstances under which the
contingent deferred sales charge applies. Generally, Class I shares have higher
front-end sales charges than Class II shares and comparatively lower Rule 12b-1
fees. Voting rights of each class will be the same on matters affecting the Fund
as a whole, but each class will vote separately on matters affecting only
shareholders of that class. See "General Information - Organization and Voting
Rights."
Class I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charge or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares are subject to Rule 12b-1 fees of
up to a maximum of 0.15% per annum of the average daily net assets of the class.
See "Who Manages the Fund?" and "How Do I Sell Shares?" for more information.
Class II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 0.65% per annum
of the average daily net assets of Class II shares, 0.50% of which will be
retained by Distributors during the first year of investment.
DECIDING WHICH CLASS TO PURCHASE
You should carefully evaluate your anticipated investment amount and time
horizon prior to determining which class of shares to purchase. Generally, if
you expect to invest less than $100,000 in the Franklin Templeton Funds and to
make substantial redemptions within approximately six years or less of
investment, you should consider purchasing Class II shares. However, the higher
annual Rule 12b-1 fees on Class II shares will result in higher operating
expenses (which will accumulate over time to outweigh the difference in
front-end sales charges) and lower income dividends for Class II shares. For
this reason, Class I shares may be more attractive to you if you plan to invest
in the Fund over the long-term, even if no sales charge reductions are available
to you.
If you qualify to purchase Class I shares at reduced sales charges, you should
seriously consider purchasing Class I shares, especially if you intend to hold
your shares approximately six years or more. If you qualify to purchase Class I
shares at reduced sales charges but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. IF YOU ARE
INVESTING $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO PURCHASE
CLASS I SHARES AT NET ASSET VALUE YOU MAY NOT PURCHASE CLASS II SHARES. See
"Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when you may purchase shares at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different front-end sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to you. Such purchases, however, may be
subject to a contingent deferred sales charge. You may exceed $1 million in
Class II shares by cumulative purchases over a period of time. If you intend to
make investments exceeding $1 million, however, you should consider purchasing
Class I shares through a Letter of Intent instead of purchasing Class II shares.
Each class has a separate schedule for compensating securities dealers for
selling Fund shares. You should take all of the factors regarding an investment
in each class into account before deciding which class of shares to purchase.
There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
WHEN PLACING PURCHASE ORDERS, YOU SHOULD CLEARLY INDICATE WHICH CLASS OF SHARES
YOU INTEND TO PURCHASE. A PURCHASE ORDER THAT FAILS TO SPECIFY A CLASS WILL
AUTOMATICALLY BE INVESTED IN CLASS I SHARES.
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after your securities dealer
receives the order which is promptly transmitted to the Fund or (2) after
receipt of an order by mail from you directly in proper form (which generally
means a completed Shareholder Application accompanied by a negotiable check).
Class I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. 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 "How
Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
TOTAL SALES CHARGE
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE
----------------- ----- -------- -----
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**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. A securities
dealer who receives 90% or more of the sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**Distributors will pay the following commissions, 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.
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
all or a portion of investments of $1 million or more within the contingency
period. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments 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, and (c) the
U.S. registered mutual funds in the Templeton Group of Funds except 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
Fund(s)". 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.
Other Payments to Securities Dealers. Either 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 trust companies and trust
departments of banks, certain designated retirement plans (excluding IRA and IRA
rollovers), and certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, and 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. See "Description of
Special Net Asset Value Purchases" below and "How Do I Buy and Sell Shares?" in
the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase,
as indicated in the table below:
TOTAL SALES CHARGE
DEALER
SIZE OF AS A PERCENTAGE AS A PERCENTAGE CONCESSION AS A
TRANSACTION AT OF OFFERING PRICE OF NET AMOUNT PERCENTAGE OF
OFFERING PRICE INVESTED OFFERING PRICE*
----- -------- ------
any amount (less 1.00% 1.01% 1.00%
than $1 million)
*Either Distributors or one of its affiliates may make additional payments to
securities dealers, out of its own resources, of up to 1% of the purchase price.
During the first year following a purchase of Class II shares, Distributors will
keep a portion of the Rule 12b-1 fees assessed to those shares to partially
recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made 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 Templeton Funds and other dealer-sponsored
programs or events. In some instances this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
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. Securities 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.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?".
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included under "Officers and Trustees" in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES - CLASS I SHARES ONLY
Class I 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,
you or your securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of your spouse, children under
the age of 21 and grandchildren under the age of 21. The value of Class II
shares you own may also be included for this purpose.
In addition, an investment in Class I shares 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 Investments may be combined
with the amount of the current purchase in determining the sales charge to be
paid.
2. Letter of Intent. You may immediately qualify for a reduced sales charge on a
purchase of Class I shares by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
express 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, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint 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. You or your securities dealer must
inform Investor Services or Distributors that this Letter is in effect each time
a purchase is made.
YOU ACKNOWLEDGE AND AGREE 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 Class I shares
registered in your 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 you have
directed. You will not be able to liquidate the reserved shares until the Letter
has been completed or the higher sales charge paid. This policy of reserving
shares does not apply to certain benefit plans described under "Description of
Special Net Asset Value Purchases." For more information, see "How Do I Buy and
Sell Shares?" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares you own may be included in determining a
reduced sales charge to be paid on Class I shares pursuant to the Letter of
Intent and Rights of Accumulation programs.
GROUP PURCHASES OF CLASS I SHARES
If you are a member of a qualified group you may purchase Class I 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 members of 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 3.50%. 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 you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your 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
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, 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, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; (7) insurance
company separate accounts for pension plan contracts; and (8) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the Code, in
shares of the Fund.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 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. IF A DIFFERENT CLASS OF SHARES IS
PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE PAID AT THE TIME OF PURCHASE
OF THE NEW SHARES. Under this privilege, you 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 and subsequently repurchased,
a new contingency period will begin. Shares that were no longer subject to a
contingent deferred sales charge will be reinvested at net asset value and will
not be subject to a new contingent deferred sales charge. Shares of the Fund
redeemed in connection with an exchange into another fund (see "What If My
Investment Outlook Changes? - 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 365 days after the redemption. The 365 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
you 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 under "Additional Information Regarding Taxation" in the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gain distributions from investments in that class of
shares of the Fund within 365 days of the payment date of such distribution.
Class II shareholders may also direct such distributions for investment at net
asset value in a Class I Franklin Templeton Fund. 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 "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
Class I shares 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 a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has an investment objective similar
to that of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker-dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares 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 365 days after the plan distribution.
Class I shares 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 the 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. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Class I shares may 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 of Class I Shares," which enable Distributors to realize economies of
scale in its sales efforts and sales related expenses.
Class I shares 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 the
amount to be purchased, 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 the 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.
Class I shares 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.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases of Class I shares.
HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS?
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or, because Trust Company can serve as
custodian or trustee for retirement plans, you may ask Trust Company to provide
the plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that an application other than the one contained in this Prospectus
must be used to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, call 1-800/DIAL BEN
(1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
WHAT PROGRAMS AND PRIVILEGES
ARE AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND IF YOUR 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 "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name 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 you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or your
securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. 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. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
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.
BY TELEPHONE
YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
THE FUND BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "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, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your 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 of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into 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.
If you request the exchange of the total value of your 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, you 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 under "Additional Information
Regarding Taxation" in the SAI.
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, unless it is felt that attractive investment opportunities consistent
with the Fund's investment objective exist immediately. Subsequently, this money
will be withdrawn from such short-term money market instruments 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.
EXCHANGES OF CLASS I SHARES
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
EXCHANGES OF CLASS II SHARES
When an account is composed of Class II shares subject to the contingent
deferred sales charge and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares and you exchange $3,000 into a new fund, $500 will be exchanged from free
shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may Class II shareholders purchase shares of Money Fund II
directly. Class II shares exchanged for shares of Money Fund II will continue to
age, for purposes of calculating the contingent deferred sales charge, because
they continue to be subject to Rule 12b-1 fees. The contingent deferred sales
charge will be assessed if CDSC liable shares are redeemed. Class I shares may
be exchanged for shares of any of the money market funds in the Franklin
Templeton Funds except Money Fund II. Draft writing privileges and direct
purchases are allowed on these other money market funds as described in their
respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another method
such as first-in first-out or free shares followed by CDSC liable shares, the
exchanged shares may, in some instances, be CDSC liable even though a redemption
of such shares, as discussed elsewhere herein, may no longer be subject to a
contingent deferred sales charge. The proportional method is believed by
management to more closely meet and reflect the expectations of Class II
shareholders in the event shares are redeemed during the contingency period. For
federal income tax purposes, the cost basis of shares redeemed or exchanged is
determined under the Code without regard to the method of transferring shares
chosen by the Fund.
RETIREMENT PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange
shares 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
exchange 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) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges 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 also reserves the right to refuse the purchase side of an exchange
request 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
objective and policies, or would otherwise potentially be adversely affected.
Your 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, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
TRANSFERS
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
CONVERSION RIGHTS
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
HOW DO I SELL SHARES?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
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. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) 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 will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the New York
Stock Exchange (the "Exchange") (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. You are requested to provide a telephone
number where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURES 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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts". You may obtain
additional information about telephone redemptions 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. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
If your account has 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 the scheduled close of the Exchange
(generally 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, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, 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 your 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 your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions from an individual
retirement plan account due to death or disability or upon periodic
distributions based on life expectancy; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions initiated by
the Fund due to an account falling below the minimum specified account size;
redemptions following the death of the shareholder or beneficial owner; and
redemptions through a Systematic Withdrawal Plan set up for shares 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). For example, if a Class I account maintained
an annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge. Likewise, if a
Class II account maintained an annual balance of $10,000, only $1,200 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of 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.
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.
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 you invested, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"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.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you 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 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 you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You 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 redemption, distribution or
dividend payment changes. 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.
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.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or 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 your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 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 front-end sales charge of each class of shares of the
Fund).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features. By calling the Franklin TeleFACTS(R) system at
1-800/247-1753, you may obtain Class I and Class II account information, current
price and, if available, yield or other performance information specific to the
Fund or any Franklin Templeton Fund. In addition, Class I shareholders may
process an exchange, within the same class, into an identically registered
Franklin account and request duplicate confirmation or year-end statements and
deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 135 and 235, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
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.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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 each class 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 for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), 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 of a class are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. 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 a class' income and will assume the payment of the
maximum sales charge on the purchase of that class 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 each class,
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 a class' total return, current yield, or distribution rate 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 auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to each household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund 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 under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The Agreement and Declaration of Trust permits the trustees to issue an
unlimited number of full and fractional shares of beneficial interest of $.01
par value, which may be issued in any number of series and classes. Shares
issued will be fully paid and non-assessable and will have no preemptive,
conversion, or sinking rights. Shares of each series have equal and exclusive
rights as to dividends and distributions as declared by such series and the net
assets of such series upon liquidation or dissolution. Shares of each class of a
series have the same voting and other rights and preferences as the other
classes and series of the Trust for matters that affect the Trust as a whole.
Additional series or classes may be added in the future by the Board.
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state business trust law, or (3) required to
be voted on separately by class by the 1940 Act, or the rules adopted
thereunder. For instance, if a change to the Rule 12b-1 plan relating to Class I
shares requires shareholder approval, only shareholders of Class I may vote on
the change to the Rule 12b-1 plan affecting that class. Similarly, if a change
to the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
Voting rights are cumulative, which means that in all elections of trustees,
each shareholder has the right to cast a number of votes equal to the number of
shares owned multiplied by the number of trustees to be elected at such election
and each shareholder may cast the whole number of votes for one candidate or
distribute such votes among two or more candidates.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special shareholders' meeting of a series 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 the trustees in their
discretion or by shareholders holding at least ten percent of the outstanding
shares of the Trust. Shareholders will 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.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares? in the SAI.
REGISTERING YOUR ACCOUNT
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you 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 Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available 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. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are 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 you 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.
APPENDIX
DESCRIPTION OF BOND RATINGS
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D - Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
Note: The S&P ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within the major rating categories.
Franklin
Adjustable Rate
Securities Fund
Franklin Investors Securities Trust
PROSPECTUS March 1, 1996
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 various 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 you 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 you 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 (the "SAI") concerning the Trust, the Fund
and another series of the Trust, dated March 1, 1996, 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 from
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown 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.
Contents Page
Expense Table
Financial Highlights - How Has the Fund Performed?
What is the Franklin Adjustable Rate Securities Fund?
How Does the Fund and the Portfolio Invest Their Assets?
What Are the Fund's Potential Risks?
Who Administers the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
Useful Terms and Definitions in this Prospectus
Expense Table
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on the aggregate operating
expenses of the Fund, before fee waivers and expense reductions, for the fiscal
year ended October 31, 1995, and include the expenses of the Portfolio.
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 2.25%
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00*
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management and Administration Fees 0.50%***
12b-1 Fees 0.20%****
Other Expenses of the Fund and the Portfolio 0.29%
Total Fund Operating Expenses 0.99%**
=======
*Investments of $1 million or more are not subject to a front-end sales
charge, but a contingent deferred sales charge of 1% is imposed on certain
redemptions within a "contingency period" of 12 months of the calendar month
of such investments. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge."
**$5.00 fee only imposed on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
***The Fund's administrator and the Portfolio's investment manager agreed in
advance to waive a portion of the 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 0.21% 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 0.70% 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.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
Example
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end 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.
One Year Three Years Five Years Ten Years
$32* $53 $76 $141
*Assumes that a contingent deferred sales charge will not apply.
This example is based on the aggregate annual operating expenses of the Fund
before fee waivers or expense reductions, 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 you as a result of your investment in the Fund. In addition,
federal securities 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 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 - How Has the Fund Performed?
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
(December 26, 1991) to January 31, 1993, for the nine-month period from February
1, 1993 to October 31, 1993, and for each of the two fiscal years in the period
ended October 31, 1995. The information for each of the periods indicated has
been audited by Coopers & Lybrand L.L.P., independent auditors, whose audit
report appears in the financial statements in the Trust's Annual Report to
Shareholders dated October 31, 1995. See "Reports to Shareholders" under
"General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance+ Ratios/Supplemental Data
Net Real- Total
ized & Un- From Distri- Distri- Ratio of Net
Net Asset Net realized Invest- butions butions Net Asset Net Assets Ratio of Investment Port-
Values at Invest- Gains ment From Net From Total Values at End Expenses Income folio
Year Beginning ment In- (Losses)on Opera- Investment Capital Distri- at End Total of Yearto Average to Average Turnover
Ended of Year come Securities tions Income Gains butions of Year Return** (in 000's) Net Assets+Net Assets Rate
Franklin Adjustable Rate Securities Fund
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1992(1) $10.00 $ - $ - $ - $ - $ - $ - $10.00 - % $ - - % - % - %
1993(2) 10.00 .60 .031 .631 (.601) - (.601) 10.03 6.48 12,521 - 5.84 48.95
1993(3) 10.03 .37 .009 .379 (.369) - (.369) 10.04 3.83 37,809 0.11(4) 4.69* 49.11
1994 10.04 .45 (.341) .109 (.449) - (.449) 9.70 1.11 24,564 0.45(4) 4.45 84.67
1995 9.70 0.58 0.120 0.700 (0.580) - (0.580) 9.82 7.57 17,014 0.70(4) 5.82 53.30
1For the period December 26, 1991 (effective date of registration) to January
31, 1992.
2For the year ended January 31.
3For the nine months ended October 31, 1993.
4Includes the Fund's share of the Portfolio's allocated expenses.
*Annualized.
**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, if any, at net asset value. Prior
to May 1, 1994, dividends were reinvested at the maximum offering price.
+During the periods indicated, Franklin Advisers, Inc. agreed in advance to
waive a portion of its administration fees and made payments of other expenses
incurred by the Fund and the Portfolio. Had such action not been taken, the
ratios of operating expenses to average net assets would have been as follows:
19921 -%
19932 1.914
19933 1.014*
1994 0.854
1995 0.994
</TABLE>
What is the Franklin Adjustable Rate 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.
The Board of Trustees of the Trust (the "Board")may determine, at a future date,
to offer shares of the Fund in one or more "classes" to permit the Fund to take
advantage of alternative methods of selling Fund shares. "Classes" of shares
represent proportionate interests in the same portfolio of investment securities
but with different rights, privileges and attributes, as determined by the
trustees. Certain funds in the Franklin Templeton Funds currently offer their
shares in two classes, designated "Class I" and "Class II." Because the Fund's
sales charge structure and plan of distribution are similar to those of Class I
shares, shares of the Fund may be considered Class I shares for redemption,
exchange and other purposes.
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Fund's shares is equal to the net asset value, plus a
sales charge not exceeding 2.25% of the offering price depending upon the amount
invested. Please see "How Do I Buy Shares?"
How Do the Fund and Portfolio Invest Their Assets?
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. ("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 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 Association ("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) privately-issued fixed-rate mortgage securities; (d)
privately-issued asset-backed securities; and (e) 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 (and the Fund's) 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 SAI 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 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 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. For
further information please refer to "Organization" under "General Information."
Any such fund may be offered with the same or different sales charge structure
and Rule 12b-1 fees; 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."
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 sixty 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 maximum 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's ARS will generally 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's holdings may
fluctuate more substantially since the caps and floors of its ARS 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."
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 five 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 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.
Many 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 which guarantee is 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 issued or guaranteed
by 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 insurance 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 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
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.
The Portfolio's investment manager currently intends to limit investment in
fixed-rate CMOs and REMICS to planned amortization classes ("PACs") and
sequential pay classes. A PAC is retired according to a payment schedule in
order to have a stable average life and yield even if expected prepayment rates
change. Within a specified broad range of prepayment possibilities, the
retirement of all classes is adjusted so that the PAC bond amortization schedule
will be met. Thus PAC bonds offer more predictable amortization schedules at the
expense of less predictable cash flows for the other bonds in the structure.
Within a given structure, the Portfolio currently intends to buy the PAC bond
with the shortest remaining average life. A sequential pay CMO is structured so
that only one class of bonds will receive principal until it is paid off
completely. Then the next sequential pay CMO class will begin receiving
principal until it is paid off. The Portfolio currently intends to buy
sequential pay CMO securities in the class with the shortest remaining average
life.
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 and floating rate 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, although some may have
intervals as long as 5 years. There are three main categories of indices: those
based on the London Interbank Offered Rate (LIBOR); 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 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 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.
Stripped mortgage securities are purchased and sold by institutional investors,
such as the Fund, 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 which are
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.
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 that may be developed in the future. In general, the
collateral supporting asset-backed securities is of a shorter maturity than
mortgage loans and historically has been less likely to experience substantial
prepayment.
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 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
financial institutions such as broker-dealers and banks which are deemed
creditworthy by the Portfolio's investment manager. A repurchase agreement is
deemed to be a loan by the Portfolio under the 1940 Act. The U.S. government
security subject to resale (the collateral) will be held on behalf of the
Portfolio by a custodian approved by the Portfolio's Board and will be held
pursuant to a written agreement.
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 in
30 to 60 days. 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 extent necessary
to meet that test. This may require the Portfolio to sell a portion of its
investments at a disadvantageous time.
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.
Loans of Portfolio Securities. Consistent with procedures approved by the Boards
of Trustees of the Portfolio and subject to the following conditions, the
Portfolio 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 their respective total assets at the time of the most recent loan. The
borrower must deposit with the Portfolio's custodian collateral with an initial
market value of at least 102% of the inital 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%. Such collateral shall consist of cash. The lending of securities is
a common practice in the securities industry. The Portfolio engages in security
loan arrangements with the primary objective of increasing the Portfolio'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 Portfolio 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.
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 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 Portfolio 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 Portfolio 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, more than 10%
of the value of the total net assets of the Portfolio.
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 SAI.
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 Portfolio.
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 Portfolio 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 Portfolio's holdings and thus its share price. Increased rates of
interest which frequently accompany higher inflation and/or a growing economy
are likely to have a negative effect on the value of Portfolio shares. History
reflects both increases and decreases in the prevailing rate of interest and
these may reoccur unpredictably in the future.
What Are the Fund's Potential Risks?
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 five 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 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.
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 fixed-rate mortgage securities in which the Portfolio may invest are
generally more exposed to this "prepayment risk" than adjustable rate mortgage
securities.
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, 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 an
adjustable rate mortgage security or beyond the coupon rate of a fixed-rate
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
described under "Illiquid Securities."
Risks of Asset-backed Securities
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. In the case of a home equity
loan, there is a risk that the homeowner will default and there won't be enough
money left to pay off the home equity loan after paying off the first
mortgage."For further discussion concerning the risks of investing in
asset-backed securities, see the SAI.
Who Administers the Fund?
The Board of Trustees has the primary responsibility for the overall management
of the Trust and the Fund and for electing the officers of the Trust who are
responsible for administering the day-to-day operations of all series of the
Trust. The officers and trustees of the Trust are also officers and trustees of
the Adjustable Rate Securities Portfolios. For information concerning the
officers and trustees of the Trust and the Adjustable Rate Securities
Portfolios, see "Trustees and Officers" in the SAI. 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. Further
information is included in the SAI.
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 and Rupert H. Johnson, Jr., who own approximately
20% and 16%, respectively, of Resources' outstanding shares. Resources is
engaged in various aspects of the financial services industry through its
subsidiaries. Advisers acts as investment manager or administrator to 34 U.S.
registered investment companies (117 separate series) with aggregate assets of
over $78 billion.
The team responsible for the day-to-day management of the Portfolio's
portfolio in which the Fund invests is: Roger Bayston since 1991, Tony Coffey
since 1989 and Jack Lemein since inception.
Roger Bayston
Portfolio Manager
Advisers
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. He has
been with Advisers or an affiliate since earning his MBA degree in 1991.
Tony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration from the University of California at Los Angeles. He earned his
Bachelor of Arts degree in applied mathematics and economics from Harvard
University. Mr. Coffey has been with Advisers or an affiliate since 1989. He is
a member of several securities industry-related associations.
Jack Lemein
Senior Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisers or
an affiliate since 1984. He is a member of several securities industry-related
associations.
Pursuant to the administration agreement, Advisers provides the Fund with
various administrative, statistical and other services which are necessary in
order to conduct the Fund's business.
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.
Advisers performs similar services for other funds and
there may be times when the actions taken with respect to the Fund's and the
Portfolio's portfolios will differ from those taken by Advisers on behalf of
other funds. Neither Advisers (including its affiliates) nor its officers,
directors or employees nor the officers and trustees of the Trust are prohibited
from investing in securities held by the Fund or other funds which are managed
or administered by Advisers to the extent such transactions comply with the
Fund's Code of Ethics. Please see "Investment Advisory and Other Services" and
"General Information" in the SAI for further information on securities
transactions and a summary of the Fund's Code of Ethics.
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 has agreed in advance to waive a portion of its
management fee to the Portfolio as well as a portion of the administration fees
to the Fund and to make certain payments to reduce expenses of the Fund. This
arrangement may be terminated at any time upon notice to the Board. During the
fiscal year ended October 31, 1995, the Fund's proportionate share of the
Portfolio's management fees, before any advance.waivers, was 0.40% of the
average daily net assets of the Fund. Pursuant to an agreement by Advisers to
waive a portion of its fees, the Fund's proportionate share of the Portfolio's
management fees same time period was 0.21% of the Fund's average daily net
assets.
During the fiscal year ended October 31, 1995, administration fees, before any
advance waiver and expense reductions, totaled 0.50% and 0.99%, respectively of
the average daily net assets of the Fund. Administration fees and total
operating expenses paid by the Fund totaled 0.21% and 0.70%,respectively, of the
average daily net assets of the Fund.
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 in principal transactions that involve the receipt by the broker of a
spread between the bid and ask prices for the securities and not the receipt of
commissions.
In the event that the Portfolio does participate in transactions involving
brokerage commissions, it is Advisers' responsibility to select brokers through
whom 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.
Plan of Distribution
A plan of distribution has been approved and adopted for rhe Fund (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for expenses actually 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, and 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, 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. For more information please see the
"The Funds' Underwriter" in the SAI.
What Distributions Might I Receive From the Fund?
You may receive two types of distributions from the Fund:
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) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or 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 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.
Distribution Options
You may choose to receive your distributions from the Fund in any of these ways:
1.....Purchase additional shares of the Fund - You may purchase additional
shares of the Fund (without a sales charge or imposition of a contingent
deferred sales charge) by reinvesting capital gain distributions, or both
dividend and capital gain distributions. This is a convenient way to accumulate
additional shares and maintain or increase your earnings base.
2.....Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). Many shareholders find this a convenient way to diversify their
investments.
3.....Receive distributions in cash - You may choose to receive dividends, or
both dividend and capital gain distributions in cash. You may have the money
sent directly to you, to another person, or to a checking account. If you choose
to send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
To select one of these options, please complete sections 6 and 7 of the
Shareholder Application included with this Prospectus or tell your investment
representative which option you prefer. If no option is selected, dividend and
capital gain distributions will be automatically reinvested in the Fund. You may
change the distribution option selected at any time by notifying the Fund by
mail or by telephone. Please allow at least seven days prior to the reinvestment
date for the Fund to process the new option.
How Taxation Affects You and the Fund
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 SAI.
The Fund is treated as a separate entity for federal income tax purposes. The
Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By distributing all of its income and meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will 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,
1994, 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. 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, 1994, 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 Do I Buy Shares?
You may buy shares to open a Fund account with as little as $100 and make
additional investments at any time with as little as $25. If you are purchasing
shares through a retirement plan established by the Franklin Templeton Group,
these minimums may be waived. To open your account, contact your investment
representative or complete and sign the enclosed Shareholder Application and
return it to the Fund with your check.
Purchase Price of Fund Shares
You may buy shares at the public offering price. The public offering price is
equal to the net asset value plus the 2.25% sales charge, unless you qualify to
purchase shares at a discount or without a sales charge as discussed below. The
offering price will be calculated to two decimal places using standard rounding
criteria.
Quantity Discounts in Sales Charges
The sales charge you pay when you buy shares may be reduced based upon the size
of your purchase, as shown in the table below.
Total Sales Charge
Dealer
As a Concession
As a Percentage As a
Percentage of Net Percentage
Size of Transaction of Offering Amount of Offering
at Offering Price Price Invested Price*
----------------- ----- -------- ------
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)***
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. Distributors may at times allow
the entire sales charge to the securities dealer. A securities dealer who
receives 90% or more of the sales commission may be deemed to be an underwriter
under the Securities Act of 1933, as amended. **A contingent deferred sales
charge of 1% may be imposed on certain redemptions of all or a part of an
investment of $1 million or more. See "How Do I Sell Shares? - Contingent
Deferred Sales Charge." ***Please see "General - Other Payments to Securities
Dealers" below for a discussion of commissions Distributors may pay to
securities dealers out of its own resources.
Rights of Accumulation. To determine if you may pay a reduced sales charge, you
may add the cost or current value, whichever is higher, of your Class I and
Class II shares in other Franklin Templeton Funds, as well as those of your
spouse, children under the age of 21 and grandchildren under the age of 21, to
the amount of your current purchase. To receive the reduction, you or your
investment representative must notify Distributors that your investment
qualifies for a discount.
Letter of Intent. You may purchase shares at a reduced sales charge by
completing the Letter of Intent section of the Shareholder Application. A Letter
of Intent is a commitment by you to invest a specified dollar amount during a 13
month period. The amount you agree to invest determines the sales charge you
pay. You or your investment representative must inform us that the Letter is in
effect each time you purchase shares.
By completing the Letter of Intent section of the Shareholder Application, you
acknowledge and agree to the following:
You authorize Distributors to reserve five percent (5%) of the amount of the
total intended purchase in Fund shares registered in your name.
You grant Distributors a security interest in these shares and appoint
Distributors as attorney-in-fact with full power of substitution to redeem
any or all of these reserved shares to pay any unpaid sales charge if you do
not fulfill the terms of the Letter.
We will include the reserved shares in the total shares you own as reflected
on your periodic statements.
You will receive dividend and capital gain distributions on the reserved
shares; we will pay or reinvest these distributions as you direct.
Although you may exchange your shares, you may not liquidate reserved shares
until you complete the Letter or pay the higher sales charge.
Our policy of reserving shares does not apply to certain benefit plans
described under "Purchases at Net Asset Value."
If you would like more information about the Letter of Intent privilege, please
see "How Do I Buy and Sell Shares? - Letter of Intent" in the SAI or call our
Shareholder Services Department.
Group Purchases. If you are a member of a qualified group, you may purchase Fund
shares at the reduced sales charge applicable to the group as a whole. The sales
charge is based on the combined dollar value of the group members' existing
investments, plus the amount of the current purchase. For example, if group
members previously invested and still hold $80,000 of Fund shares and invest
$25,000, the sales charge will be 1.75%.
We define a qualified group as 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.
In addition, a qualified group must have more than 10 members, and be available
to arrange for meetings between our representatives and group members. It must
also agree to include sales and other materials related to the Franklin
Templeton Funds in publications and mailings to its members at reduced or no
cost to Distributors, and arrange for payroll deduction or other bulk
transmission of investments to the Fund.
If you select a payroll deduction plan, your investments will continue
automatically until you notify the Fund and your employer to discontinue further
investments. Due to the varying procedures used by employers to handle payroll
deductions, there may be a delay between the time of the payroll deduction and
the time the money reaches the Fund. We invest your purchase at the applicable
offering price per share determined on the day that the Fund receives both the
check and the payroll deduction data in required form.
Purchases at Net Asset Value
You may invest money from the following sources in shares of the Fund without
paying front-end or contingent deferred sales charges:
(i) a distribution that you have received from a Franklin Templeton Fund if it
is returned within 365 days of its payment date. When you return the
distribution, please include a written request to reinvest the money at net
asset value. You may reinvest Class II distributions in either Class I or Class
II shares, but Class I distributions may only be invested in Class I shares
under this privilege. For more information, see "Distribution Options" under
"What Distributions Might I Receive From the Fund?" or call Shareholder Services
at 1-800/632-2301;
(ii) a redemption from a mutual fund with investment objectives similar to those
of the Fund, if (a) your investment in that fund was subject to either a
front-end or contingent deferred sales charge at the time of purchase, (b) the
fund is not part of the Franklin Templeton Funds, and (c) your redemption
occurred within the past 60 days;
(iii) a distribution from an existing retirement plan already invested in the
Franklin Templeton Funds (including the Franklin Templeton Profit Sharing 401(k)
plan), up to the total amount of the distribution. When you return the
distribution, please include a written request to reinvest the money at net
asset value. The distribution must be returned to the Fund within 365 days of
the distribution date; or
(iv) a redemption from Templeton Institutional Funds, Inc., if you then reinvest
the redemption proceeds under an employee benefit plan qualified under Section
401 of the Code, in shares of the Fund.
You may also reinvest the proceeds from a redemption of any of the Franklin
Templeton Funds at net asset value. To do so, you must (a) have paid a sales
charge on the purchase or sale of the original shares, (b) reinvest the
redemption money in the same class of shares, and (c) request the reinvestment
of the money in writing to the Fund within 365 days of the redemption date. You
may reinvest up to the total amount of the redemption proceeds under this
privilege. If a different class of shares is purchased, the full front-end sales
charge must be paid at the time of purchase of the new shares. While you will
receive credit for any contingent deferred sales charge paid on the shares
redeemed, a new contingency period will begin. Shares that were no longer
subject to a contingent deferred sales charge will be reinvested at net asset
value and will not be subject to a new contingent deferred sales charge. Shares
exchanged into other Franklin Templeton Funds are not considered "redeemed" for
this privilege (see "What If My Investment Outlook Changes? - Exchange
Privilege").
If you immediately reinvested your redemption proceeds in a Franklin Bank
Certificate of Deposit ("CD") but you would like to reinvest them back into the
Franklin Templeton Funds as described above, you will have 365 days from the
date the CD (including any rollover) matures to do so.
If your securities dealer or another financial institution reinvests your money
in the Fund at net asset value for you, that person or institution may charge
you a fee for this service.
A redemption is a taxable transaction, but reinvestment without a sales charge
may affect the amount of gain or loss you recognize and the tax basis of the
shares reinvested. If you have a loss on the redemption, the loss may be
disallowed if you reinvest in the same fund within a 30-day period. If you would
like more information regarding the possible tax consequences of such a
reinvestment, please see the tax section of this Prospectus and the SAI.
Certain categories of investors also qualify to purchase shares of the Fund at
net asset value regardless of the source of the investment proceeds. If you are
or your account is included in one of the categories below, none of the shares
of the Fund you purchase will be subject to front-end or contingent deferred
sales charges:
(i) companies exchanging shares or selling assets pursuant to a merger,
acquisition or exchange offer;
(ii) accounts managed by the Franklin Templeton Group;
(iii) certain unit investment trusts and unit holders of such trusts reinvesting
distributions from the trusts in the Fund;
(iv) registered securities dealers and their affiliates, for their
investment accounts only;
(v) current employees of securities dealers and their affiliates and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer and affiliate;
(vi) broker-dealers who have entered into a supplemental agreement with
Distributors, or registered investment advisors affiliated with such
broker-dealers, on behalf of their clients who are participating in a
comprehensive fee program (sometimes known as a wrap fee program);
(vii) 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").
IF YOU ARE SUCH AN INVESTOR, PLEASE CONSULT YOUR OWN LEGAL ADVISORS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS.
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 you are a securities dealer who has executed a dealer agreement
with Distributors and, through your services, an eligible governmental authority
invests in the Fund at net asset value, Distributors or one of its affiliates
may make a payment, out of its own resources, to you in an amount not to exceed
0.25% of the amount invested. Please contact the Franklin Templeton
Institutional Services Department for additional information;
(viii) officers, trustees, directors and full-time employees of the Franklin
Templeton Funds, or of the Franklin Templeton Group, and their family members.
Although you may pay sales charges on investments in accounts opened after your
association with us has ended, you may continue to invest in accounts opened
while you were with us without paying sales charges; or
(ix) trust companies and bank trust departments that exercise exclusive
discretionary investment authority over funds held in a fiduciary, agency,
advisory, custodial or similar capacity and agree to invest at least $1 million
in Franklin Templeton Funds over a 13-month period. We will accept orders for
such accounts by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order;
(x) insurance company separate accounts investing for pension plan contracts;
(xi) 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; or
(xii) Designated Retirement Plans. Non-Designated Retirement Plans may also
qualify to purchase shares of the Fund if they meet the requirements
described under "Group Purchases," above.
If you would like more information, please see "How Do I Buy and Sell Shares?"
in the SAI.
How Do I Buy Shares in Connection with Tax-Deferred Retirement Plans?
Your individual or employer-sponsored tax-deferred retirement plans may invest
in the Fund. You may use the Fund for an existing retirement plan, or, because
Trust Company can serve as custodian or trustee for retirement plans, you may
ask Trust Company to provide the plan documents and serve as custodian or
trustee. A plan document must be adopted in order for a retirement plan to be in
existence.
Brochures for Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution requirements.
Please note that you must use an application other than the one contained in
this Prospectus to establish a retirement plan account with Trust Company. To
obtain a retirement plan brochure or application, please call 1-800/DIAL BEN
(1-800/342-5236). Trust Company is an affiliate of Distributors.
Please see "How Do I Sell Shares?" for information regarding redemptions from
retirement plan accounts. You must complete specific forms in order to receive
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition, if you
are a retirement plan investor, you should consider consulting your investment
representatives or advisors about investment decisions within your plans.
General
The Fund continuously offers it shares through securities dealers who have an
agreement with Distributors. The Fund and Distributors may refuse any order for
the purchase of shares.
Securities laws of states in which the Fund offers its shares may differ from
federal law. Banks and financial institutions that sell shares of the Fund may
be required to register as securities dealers pursuant to state law.
Other Payments to Securities Dealers. Distributors will pay the following
commissions, 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. These breakpoints are reset every 12 months for
purposes of additional purchases.
Distributors or one of its affiliates may also pay up to 1% of the amount
purchased to securities dealers who initiate and are responsible for purchases
made at net asset value by any of the entities described in paragraphs (ix) ,
(xi) or (xii) under "Purchases at Net Asset Value" above and 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. Please
see "How Do I Buy and Sell Shares?" in the SAI for the breakpoints applicable to
these purchases.
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with the
sale of shares of the Franklin Templeton Funds. In some cases, this compensation
may be available only to securities dealers whose representatives have sold or
are expected to sell significant amounts of shares of the Franklin Templeton
Funds. Compensation may include financial assistance and payments made in
connection with conferences, sales or training programs for employees of the
securities dealer, seminars for the public, advertising, sales campaigns and/or
shareholder services, programs regarding one or more of the Franklin Templeton
Funds and other programs or events sponsored by securities dealers, and payment
for travel expenses of invited registered representatives and their families,
including lodging, in connection with business meetings or seminars located
within or outside the United States. Securities dealers may not use sales of the
Fund's shares to qualify for this compensation if prohibited by the laws of any
state or self-regulatory agency, such as the National Association of Securities
Dealers, Inc. None of this compensation is paid for by the Fund or its
shareholders.
For additional information about shares of the Fund, please see "How Do I Buy
and Sell Shares?" in the SAI. The SAI also includes a listing of the officers
and
trustees of the Trust who are affiliated with Distributors. See "Officers and
Trustees."
What Programs and Privileges Are Available Me as a Shareholder?
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
"Registering Your Account" in this Prospectus).
Share Certificates
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name 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 you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or by
your securities dealer.
Confirmations
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you ownr,
including the number of shares in "plan balance" for your account.
Automatic Investment Plan
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
Systematic Withdrawal Plan
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
Electronic Fund Transfers
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
Institutional Accounts
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
What If My Investment Outlook Changes? - Exchange Privilege
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If a your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums.
No exchanges between different classes of shares will be allowed. Shareholders
may choose to redeem shares of the Fund and purchase Class II shares of another
Franklin Templeton Fund but such purchase will be subject to that fund's Class
II front-end and contingent deferred sales charges. Although there are no
exchanges between different classes of shares, Class II shareholders of a
Franklin Templeton Fund may elect to direct their dividends and capital gain
distributions to the Fund at net asset value.
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.
Before making an exchange, you should review the prospectus of the fund you wish
to exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
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.
By Telephone
You or your 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 (day or night) at 1-800/247-1753. If you
do not wish this privilege extended to a particular account, you should notify
the Fund or Investor Services.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "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(R)
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
Through Securities Dealers
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also " By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your 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 value 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 original
investment in the Franklin Templeton Funds was made pursuant to the privilege
permitting purchases at net asset value, as discussed under "How Do I Buy
Shares?" Exchanges of shares of the Fund which were purchased with a lower sales
charge into 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.
The contingency period during which a contingent deferred sales charge may be
assessed will be tolled (or stopped) for the period shares are exchanged into
and held in a Franklin or Templeton money market fund. If your account has
shares subject to a contingent deferred sales charge, shares will be exchanged
into the new account on a "first-in, first-out" basis. See "How Do I Sell
Shares? - Contingent Deferred Sales Charge" for a discussion of investments
subject to a contingent deferred sales charge.
If you request the exchange of the total value of your 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, you 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 under "Additional Information
Regarding Taxation" in the SAI.
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 objectiveexist immediately. Subsequently,
this money will be withdrawn from such short-term money market instrumentsand
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 Plan Accounts
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange
shares 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
exchange 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) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges 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 also reserves the right to refuse the purchase side of an exchange
request 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.
Your 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, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
How Do I Sell Shares?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
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. You will then receive from the Fund the
value of the shares redeemed based upon the net asset value per share (less a
contingent deferred sales charge, if applicable) 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 will receive
the price calculated on the following business day. The net asset value per
share is determined as of the scheduled close of the New York Stock Exchange
(the "Exchange") (generally 1:00 p.m. Pacific time) each day that the Exchange
is open for trading. You are requested to provide a telephone number where you
may be reached during business hours, or in the evening if preferred. Investor
Services' ability to contact you promptly when necessary will speed the
processing of the redemption.
To be considered in proper form, signatures 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 owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
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.
Signatures 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 owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your 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
officers 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 trustees and (2)
a copy of the pertinent pages of the trust document listing the trustee(s) or a
Certification for Trust if the trustees 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 applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
By Telephone
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts. You may obtain
additional information about telephone redemptions 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. You, however, bear
the risk of loss in certain cases as described under "Telephone Transactions -
Verification Procedures."
If your account has 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 the scheduled close of the Exchange
(generally 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, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
Through Securities Dealers
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
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 your 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 your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers, all or a portion of
investments of $1 million or more redeemed within the contingency period of 12
months of the calendar month of such investment will be assessed a contingent
deferred sales charge, unless one of the exceptions described below applies. The
charge is 1% of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the net asset value at
the time of purchase of such shares, and is retained by Distributors. The
contingent deferred sales charge is waived in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge is waived, as applicable, for; exchanges;
any account fees; distributions from an individual retirement plan account due
to death or disability or upon periodic distributions based on life expectancy;
tax-free returns of excess contributions from employee benefit plans;
distributions from employee benefit plans, including those due to termination or
plan transfer; redemptions initiated by the Fund due to an account falling below
the minimum specified account size; redemptions following the death of the
shareholder or beneficial owner; and redemptions through a Systematic Withdrawal
Plan set up for shares 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). For example, if an
account maintained an annual balance of $1,000,000, only $120,000 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge. Any
amount over that $120,000 would be assessed a 1% contingent deferred sales
charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of 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.
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.
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 you invested, depending on
fluctuations in the market value of securities owned by the Fund.
Retirement Plan Accounts
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
Other Information
Distribution or redemption checks sent to you 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 caused by your failure to cash such
checks.
"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.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
Telephone Transactions
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including 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) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you 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 you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You 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 redemption, distribution or
dividend payment changes. 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.
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.
General
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your 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 your inability to execute a telephone transaction.
How Are Fund Shares Valued?
The net asset value per share of the Fund is determined as of the scheduled
close of the Exchange (generally 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 front-end sales charge of the Fund).
The net asset value per share of the Fund is determined by deducting the
aggregate gross value of all liabilities from the aggregate gross value of all
assets, and then dividing the difference by the number of shares of the Fund
outstanding at the time. Assets in the Fund's and the Portfolio's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
How Do I Get More Information About My Investment?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS system at 1-800/247-1753, you may obtain
account information, current price, and, if available, yield or other
performance information specific to the Fund or any Franklin Templeton Fund. In
addition, you may process an exchange, within the same class, into an
identically registered Franklin account and request duplicate confirmation or
year-end statements and deposit slips.
The Fund code, which will be needed to access system information is 151. The
system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
Hours of Operation
(Monday through
Department Name Telephone No. Friday)
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-0637 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
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.
How Does the Fund Measure Performance?
Advertisements, sales literature and communications to you may contain several
measures of the Fund's performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's 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.
Current yield for the Fund, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to shareholders of
the Fund. Dividends or distributions paid to shareholders are reflected in the
current distribution rate, which may be quoted to you. 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. 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 total return, current yield, or distribution rate may be in any
future period.
General Information
Reports to Shareholders
The Trust'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. To reduce the volume of mail sent to one household as well
as to reduce Fund expenses, Investor Services will attempt to identify related
shareholders within a household, and send only one copy of the report.
Additional copies may be obtained by investors or shareholders, 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 Trust's Annual
Report to Shareholders and under "General Information" in the SAI.
Organization and Voting Rights
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.
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 shareholders meetings. The Trust may,
however, hold a special shareholders 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 will 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.
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."
Redemptions by the Fund
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by your prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Registering Your Account
An account registration should reflect your 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, you may transfer an account in the Fund carried in "street"
or "nominee" name by your 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 your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer 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 your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, the you
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 Investor Services, and to have authorized
them to execute the instructions without further inquiry. At the present time,
such services which are available 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. You
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Fund that the number furnished by you is incorrect or that
you are 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 you 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.
Useful Terms and Definitions in this Prospectus
Designated Retirement Plans - certain retirement plans, including
profit-sharing, pension, 401(k) and simplified employee pension plans, that: (i)
are sponsored by an employer with at least 200 employees; (ii) have aggregate
plan assets of at least $1 million; or (iii) agree to invest at least $1 million
in any of the Franklin Templeton Funds over a 13-month period. Distributors
determines the qualifications for Designated Retirement Plans.
Distributors - Franklin/Templeton Distributors, Inc., the Fund's principal
underwriter.
Franklin Funds - the mutual funds in the Franklin Group of Funds(R) except
Franklin Valuemark Funds and the Franklin Government Securities Trust.
Franklin Templeton Funds - the Franklin Funds and the Templeton Funds.
Franklin Templeton Group - Franklin Resources, Inc., a publicly owned holding
company, and its various subsidiaries.
Letter - Letter of Intent.
Net asset value (NAV) - the value of a mutual fund share determined by deducting
the fund's liabilities from the total assets of the portfolio and dividing this
by the number of shares outstanding. When you buy, sell or exchange shares, we
will use the NAV next calculated after we receive your request in proper form.
Non-Designated Retirement Plans - employee benefit plans not included as
"Designated Retirement Plans" and not qualified under Section 401 of the Code.
Proper Form (Purchases) - generally, the Fund must receive a completed
Shareholder Application accompanied by a negotiable check.
Securities Dealer - financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. This reference is for convenience only and does not
indicate a legal conclusion of capacity.
Templeton Funds - the U.S. registered mutual funds in the Templeton Group of
Funds except Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund.
Trust Company - Franklin Templeton Trust Company.
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, 1996
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 five separate diversified series and one
non-diversified series. This Statement of Additional Information ("SAI")
pertains only to the Franklin Short-Intermediate U.S. Government Securities Fund
(the "Short-Intermediate Fund"), the Franklin Convertible Securities Fund (the
"Convertible Fund"), and the Franklin Equity Income Fund, formerly the Franklin
Special Equity Income Fund (the "Equity Income Fund"). Each of these series is
diversified and may separately or collectively be referred to hereafter as the
"Fund," "Funds" or individually by the policy included as part of its name. As
described in the Prospectuses of the Convertible Fund and the Equity Income
Fund, these two Funds offer two classes of shares to their investors. This
structure allows you to consider, among other features, the impact of sales
charges and distribution fees ("Rule 12b-1 fees) on your investment in these two
Funds.
The Short-Intermediate Fund, which invests in a portfolio of U.S. government
securities with primary emphasis on securities with remaining maturities of 31/2
years or less, 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, carry a guarantee which is backed by the
full faith and credit of the U.S. government. The Short-Intermediate 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 objective will be
achieved.
Separate Prospectuses for the Funds, dated March 1, 1996, each as may be amended
from time to time, provide the basic information you should know before
investing in a Fund and may be obtained without charge from the Trust or from
its principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown above.
THIS SAI IS NOT A PROSPECTUS. IT CONTAINS INFORMATION IN ADDITION TO AND IN MORE
DETAIL THAN SET FORTH IN THE PROSPECTUSES. THIS SAI IS INTENDED TO PROVIDE YOU
WITH ADDITIONAL INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE TRUST
AND EACH FUND, AND SHOULD BE READ IN CONJUNCTION WITH EACH FUND'S PROSPECTUS.
CONTENTS PAGE
How Does Each Fund Invest its Assets?
Investment Restrictions
Trustees and Officers
Investment Advisory
and Other Services
How Do the Funds Purchase Securities
for Their Portfolio?
How Do I Buy and Sell Shares of the Funds?
Additional Information
Regarding Taxation
The Funds' Underwriter
General Information
Financial Statements
Appendix
HOW DOES EACH FUND INVEST ITS ASSETS?
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.
Call options written by these Funds 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 a 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 a
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 each 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, a Fund will not participate in the increase in price beyond
the exercise price. It will generally be each 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 a Fund
purchasing an option having the same terms as the option written by the Fund,
and has the effect of canceling the Fund's position as a writer. The premium
which a 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 a 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 option at any particular time. To mitigate this risk,
each 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 a
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 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, a Fund has no control
over 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.
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.
CREDIT UNION INVESTMENT REGULATIONS. This section summarizes the
Short-Intermediate Fund's investment policies, under which, in the opinion of
the Fund and 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 (1) obligations of, or securities guaranteed as
to principal and interest by, the U.S. government or its agencies and
instrumentalities, (2) time and savings deposits in financial institutions whose
accounts are insured by the FDIC, and (3) mortgage related securities.
Mortgage-related securities are interests or participations in, or other
securities secured by, first mortgages initiated by state or federally regulated
or HUD-approved lenders, and are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. As of the date of this SAI, the Fund does not intend to invest in
time and savings deposits or mortgage related securities.
(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) Any repurchase agreements, in which the Fund purchased U.S. government
securities subject to resale to a bank or dealer at an agreed-upon price and
date, would be subject to these conditions: the value of the U.S. government
securities will equal or exceed the initial price of the repurchase agreement,
plus interest; and a custodian of the Fund will hold the U.S. government
securities in an account for the benefit of the Fund.
(d) Although the Fund does not currently intend to invest in reverse repurchase
agreements, in the event that the Fund were to engage in such transactions, the
Fund would, in addition to abiding by its fundamental policies and the
regulations of the Securities and Exchange Commission with respect to borrowing,
engage in reverse repurchase transactions involving only securities with
maturity dates earlier than the closing date of the reverse repurchase
agreement.
(e) 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.
(f) Although the Fund does not intend, as of the date of this SAI, to 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, any investments by the Fund in such securities would be subject
to the following conditions. In general, the Fund may only invest in a CMO or
REMIC which either: (1) based on testing, at the time of purchase and at least
annually thereafter, has an average life which would be extended or shortened by
less than 6 years under modeling scenarios where mortgage commitment rates
immediately rise or fall 300 basis points; or (2) has an adjustable rate which
(i) resets at least annually, (ii) may rise to a maximum allowable rate at least
300 basis points above the rate at the time of purchase, and (iii) adjusts
directly with (rather than inversely to or as a multiple of) the interest rate
index on which it is based. In addition, the Fund may hold derivative
mortgage-backed securities which fail these tests at the time of investment or
at the time of any subsequent test, provided that the securities are held solely
to reduce interest rate risk and that the Fund confirms on a quarterly basis
that the security will reduce the Fund's interest rate risk, using a monitoring
and reporting system which enables the Fund to evaluate the actual and expected
performance of the security under different interest rate scenarios.
INVESTMENT RESTRICTIONS
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 12b-1, 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. It is intended,
however, 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.
Notwithstanding this limitation, the Trust's Board of Trustees has authorized
each Fund to invest in securities that cannot be offered to the public for sale
without first being registered under the Securities Act of 1933 ("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 investment 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 investment
manager to treat a restricted security as a liquid security on an ongoing basis,
including the investment 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 investment
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. As of the date of this SAI, the Short-Intermediate Fund
has not purchased and does not intend to purchase illiquid or restricted
securities.
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% of the value of the Fund's net
assets. No more than 2% 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.
TRUSTEES AND OFFICERS
The Board of Trustees (the "Board") has the responsibility for the overall
management of the Funds, including general supervision and review of their
investment activities. The Board, in turn, elect the officers of the Trust who
are responsible for administering day-to-day operations of the Funds. 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 Fund, as defined in the Investment Company Act of 1940 (the
"1940 Act") are indicated by an asterisk (*).
POSITIONS AND OFFICES PRINCIPAL OCCUPATION DURING
NAME AND ADDRESS WITH THE TRUST PAST FIVE YEARS
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63)
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; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63)
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, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
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 30 of the investment companies in the
Franklin Group of Funds.
*Edward B. Jamieson (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of five of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63)
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; 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 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
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.; 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 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (57)
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 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (51)
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.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
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 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47)
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 37 of
the investment companies in the Franklin Group of Funds.
Charles E. Johnson (39)
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;
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 26 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and the investment manager. Trustees not
affiliated with the investment manager ("nonaffiliated trustees") are currently
paid fees of $925 per month plus $925 per meeting attended. As indicated above,
certain of the Trust's nonaffiliated trustees also serve as directors, trustees
or managing general partners of other investment companies in the Franklin Group
of Funds(R) and the Templeton Group of Funds (the "Franklin Templeton Group of
Funds") from which they may receive fees for their services. The following table
indicates the total fees paid to nonaffiliated trustees by the Trust and by
other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS IN THE
FRANKLIN TEMPLETON GROUP OF
TOTAL FEES RECEIVED FROM FUNDS ON WHICH EACH SERVES*** THE FRANKLIN TEMPLETON
TOTAL FEES RECEIVED GROUP OF FUNDS**
FROM FUND*
NAME
<S> <C> <C> <C>
Frank H. Abbott, III $22,200 $176,870 31
Harris J. Ashton 22,200 318,125 56
S. Joseph Fortunato 22,200 334,265 58
David Garbellano 22,200 153,300 30
Frank W.T. LaHaye 22,200 150,817 26
Gordon S. Macklin 22,200 301,885 53
* For the fiscal year ended October 31, 1995.
** For the calendar year ended December 31, 1994.
*** The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 163
U.S. based funds or series.
</TABLE>
Nonaffiliated trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Trust. Certain officers or trustees who are shareholders of Franklin Resources,
Inc. ("Resources"). may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries. For
additional information concerning trustees compensation and expenses, please see
the Fund's Annual Report to Shareholders dated October 31, 1995.
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 Resources, a publicly owned
holding company whose shares are listed on the New York Stock Exchange (the
"Exchange"). Resources owns several other subsidiaries that are involved in
investment management and shareholder services.
Pursuant to the separate management agreements, 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 the Funds' portfolio transactions are executed. The Manager's
activities are subject to the review and supervision of the Board to whom the
Manager renders periodic reports of the Funds' investment activities. Under the
terms of the management agreements, the Manager provides office space and office
furnishings, facilities and equipment required for managing the business affairs
of the Funds; 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 Trust. Please see
the Statement of Operations in the financial statements included in the Fund's
Annual Report to Shareholders dated October 31, 1995.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Funds. Similarly, with respect to the Funds, the
Manager is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by the Funds or other
funds which it manages or administers. Of course, any transactions for the
accounts of the Manager and other access persons will be made in compliance with
the Trust's Code of Ethics.
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 agreed in advance to waive all or a portion of its management fees
and to make payments to reduce the expenses of the Funds. This arrangement may
be terminated by the Manager at any time upon notice to the Board. The
management agreements specify that the management fee will be reduced for each
Fund to the extent necessary to comply with the most stringent limits on the
expenses which may be borne by the Funds as prescribed by any state in which the
Funds' 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 each 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
the Fund, 2.0% of the next $70 million of average net assets of the Fund and
1.5% of average net assets of the Fund in excess of $100 million. Expense
reductions have not been necessary based on state requirements. For the last
three fiscal years, the management fees, before any advance waivers, and the
amounts paid by the Funds were as follows:
FISCAL YEAR ENDED OCTOBER 31:
1993*
MANAGEMENT FEES MANAGEMENT
FUND BEFORE WAIVER FEES PAID
Short-Intermediate
Fund $1,187,800 $1,187,800
Convertible Fund 453,492 453,492
Equity Income Fund $754,194 738,214
1994
Short-Intermediate
Fund 1,370,071 1,308,206
Convertible Fund 373,354 327,355
Equity Income Fund 437,330 312,644
1994
Short-Intermediate
Fund 1,058,133 897,620
Convertible Fund 170,607 8,346
Equity Income Fund 159,572 5,146
*Covers a nine-month period only due to a change to the Trust's fiscal year.
Each class of the Equity Income Fund and Convertible Fund pays its respective
share of the management fees as determined by the proportion of the Fund it
represents.
The management agreements are in effect until April 30, 1996. Thereafter, they
may continue in effect for successive annual periods providing such continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of a Fund's outstanding voting securities, and in
either event by a majority vote of the trustees who are not parties to the
management agreements 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 agreements may be terminated without penalty at any time by the Board
or, as to each Fund, by a vote of the holders of a majority of that Fund's
outstanding voting securities, 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"), 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
Trust. 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 L.L.P., 333 Market Street, San Francisco, California 94105,
are the Trust's independent auditors. During the fiscal year ended October 31,
1995 their auditing services consisted of rendering an opinion on the financial
statements of the Funds included in the Funds' Annual Report to Shareholders
dated October 31, 1995.
HOW DO THE FUNDS PURCHASE SECURITIES FOR THEIR PORTFOLIOS?
Under the current management agreement, the selection of brokers and dealers to
execute transactions in the Funds' portfolios is made by the Manager in
accordance with criteria set forth in the management agreement and any
directions which the Board may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions done on a
securities exchange, the amount of commission paid by the Funds is negotiated
between the Manager and the broker executing the transaction. The Manager seeks
to obtain the lowest commission rate available from brokers that 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. The Fund seeks 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 Funds' best
interest, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will pay a
higher commission than 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 services 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 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 the Manager 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 Trust'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
broker-dealers to execute the Funds' portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Funds tender
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Funds, any portfolio securities
tendered by the Funds 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 Funds 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 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.
During the past three fiscal years ended on October 31, 1995, the Funds paid
total brokerage commissions as follows:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
<S> <C> <C> <C>
Short-Intermediate Fund 0 0 0
Convertible Fund $ 5,226 $ 13,958 $ 29,731
Equity Income Fund 32,855 113,782 167,560
</TABLE>
As of October 31, 1995, none of the Funds owned the securities of their regular
broker-dealers.
HOW DO I BUY AND SELL 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. The Funds
reserve the right, in their 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 your account for the transaction as of a
date and with a foreign currency exchange factor determined by the drawee bank.
In connection with exchanges, it should be noted that since the proceeds from
the sale of shares of an investment company are generally not available until
the fifth business day following the redemption, the fund into which you are
seeking to exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of a Fund to
complete an exchange will be effected at the close of business on the day the
request for exchange is received in proper form at the net asset value then
effective. Please see "What if My Investment Outlook Changes? - Exchange
Privilege" in the Prospectus.
If, in connection with the purchase of Fund shares, you submit a check or a
draft that is returned unpaid to the Fund, the Fund may impose a $10 charge
against your account for each returned item.
Dividend checks returned to the Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your dividend option to
reinvest all distributions and the proceeds will be reinvested in additional
shares at net asset value until new instructions are received.
The Fund may deduct from your account the costs of its efforts to locate you if
mail is returned as undeliverable or the Fund is otherwise unable to locate you
or verify your current mailing address. These costs may include a percentage of
the account when a search company charges a percentage fee in exchange for its
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 one of its affiliates, to help defray expenses
of maintaining a service office in Taiwan, including expenses related to local
literature fulfillment and communication facilities.
Shares of the Funds 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 Funds will be
offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - U.S. DOLLARS CHARGE
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS
Orders for the purchase of shares of the Funds received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Funds will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange will be effected at the Funds' public
offering price on the day it is next calculated. The use of the term "securities
dealer" herein shall include other financial institutions which, either directly
or through affiliates, have an agreement with Distributors to handle customer
orders and accounts with the Funds. 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 you resulting from the failure to do so must be settled between you
and the securities dealer.
SPECIAL NET ASSET VALUE PURCHASES -
CLASS I SHARES
As discussed in the Prospectus under "How Do I Buy Shares? - Description of
Special Net Asset Value Purchases," certain categories of investors may purchase
Class I 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. Distributors may make
these payments in the form of contingent advance payments, which may be
recovered from the securities dealer, or set off against other payments due to
the securities dealer, in the event shares are redeemed within 12 months of the
calendar month of purchase. Other conditions may apply. All terms and conditions
may be imposed by an agreement between Distributors, or one of its affiliates,
and the securities dealer.
Either Distributors or one of its affiliates, may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
purchases made at net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers): 1% 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 for purchases made at net asset value by certain 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, either Distributors,
or one of its affiliates, out of its own resources, may pay up to 1% of the
amount invested.
LETTER OF INTENT
You may qualify for a reduced sales charge on the purchase of Class I shares of
the Funds, as described in the Prospectus. At any time within 90 days after the
first investment which you want to qualify for a reduced sales charge, you may
file with the Fund a signed Shareholder Application with the Letter of Intent
(the "Letter") section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based 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. Your
holdings in the Franklin Templeton Funds, including Class II shares, acquired
more than 90 days before the Letter is filed, will be counted towards completion
of the Letter but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make, unless by a designated retirement
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 have been
completed. If the Letter is not completed within the 13-month period, there will
be an upward adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. The upward adjustment does not
apply to designated retirement plans. If you execute a Letter prior to a change
in the sales charge structure for a Fund, you will be entitled to complete the
Letter at the lower of the new sales charge structure or the sales charge
structure in effect at the time the Letter was filed.
As mentioned in the Prospectuses, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your
name. This policy of reserving shares does not apply to a designated retirement
plan. If the total purchases, less redemptions, equal the amount specified under
the Letter, the reserved shares will be deposited to an account in your name or
delivered to you or your 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 securities dealer through whom purchases were made pursuant
to the Letter (to reflect such further quantity discount) on purchases made
within 90 days before and on those made after filing the Letter. The resulting
difference in offering price will be applied to the purchase of additional
shares at the offering price applicable to a single purchase or the dollar
amount of the total purchases. If the total purchases, less redemptions, are
less than the amount specified under the Letter, you will remit to Distributors
an amount equal to the difference in the dollar amount of sales charge actually
paid and the amount of sales charge that would have applied to the aggregate
purchases if the total of such purchases had been made at a single time. Upon
such remittance, the reserved shares held for your account will be deposited to
an account in your name or delivered to you or your order. If within 20 days
after written request the difference in sales charge is not paid, the redemption
of an appropriate number of reserved shares to realize the difference will be
made. In the event of a total redemption of the account prior to fulfillment of
the Letter, the additional sales charge due will be deducted from the proceeds
of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of a designated retirement plan, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
REDEMPTIONS IN KIND
Each Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of the 90-day period. This commitment is irrevocable
without the prior approval of the SEC. In the case of redemption requests in
excess of these amounts, the trustees reserve the right to make payments in
whole or in part in securities or other assets of the Funds, 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, you may incur brokerage fees in converting the securities
to cash. The Funds do not intend to redeem illiquid securities in kind. Should
it happen, however, you may not be able to timely recover your investment and
you may also incur brokerage costs in selling the securities.
REDEMPTIONS BY THE FUND
Due to the relatively high cost of handling small investments, the Funds reserve
the right to involuntarily redeem your shares at net asset value if your account
has a value of less than one-half of your initial required minimum investment,
but only where the value of your account has been reduced by the prior voluntary
redemption of shares. Until further notice, it is the present policy of the
Funds not to exercise this right if your account has a value of $50 or more. In
any event, before the Funds redeems your shares and sends you the proceeds, they
will notify you that the value of the shares in your account is less than the
minimum amount and allow you 30 days to make an additional investment in an
amount which will increase the value of your account to at least $100.
REINVESTMENT DATE
Shares of the Convertible and Equity Income Funds acquired through the
reinvestment of dividends will be purchased at the net asset value determined on
the business day following the dividend record date (sometimes known as the
"ex-dividend date"). The processing date for the reinvestment of dividends may
vary from month to month and does not affect the amount or value of the shares
acquired.
REPORTS TO SHAREHOLDERS
The Trust sends annual and semiannual reports regarding each Fund's performance
and portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may phone Fund Information at 1-800/DIAL BEN.
SPECIAL SERVICES
The Franklin Templeton Institutional Services Department 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 that maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee which the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
HOW ARE FUND SHARES VALUED?
As noted in the Prospectus, each Fund calculates net asset value as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. As of the date of this SAI, 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.
For the purpose of determining the aggregate net assets of each 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.
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the scheduled close of trading
on the Exchange, if that is earlier, and that value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the mean between the current bid and ask prices is used.
Occasionally events which affect the values of foreign securities and foreign
exchange rates may occur between the times at which they are determined and the
close of the exchange and will, therefore, not be reflected in the computation
of the Fund's net asset value. If events which materially affect the values of
these foreign securities occur during such period, then these securities will be
valued in accordance with procedures established by the Board.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask price. 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 a Fund
is its last sale 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.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of a Fund's shares is determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and the scheduled close of the Exchange
which will not be reflected in the computation of the Fund's net asset value. If
events materially affecting the values of these securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific issues. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
following procedures approved by the Board. With the approval of trustees, the
Funds may utilize a pricing service, bank or securities dealer to perform any of
the above described functions.
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, a 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
debt-financed by a Fund and is held for at least a minimum holding period) are
less than 100% of its distributable income, then the amount of a 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 for distributions made during the calendar year will be declared
by a 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 a Fund's 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 a 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 a Fund) to shareholders by December 31 of each year in order to avoid
the imposition of a federal excise tax. The Funds intend 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 do not guarantee
that their distributions will be sufficient to avoid any or all federal excise
taxes.
Redemptions and exchanges of Fund shares are taxable transactions for federal
and state income tax purposes. For most shareholders, gain or loss will be
recognized in an amount equal to the difference between 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 a 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.
All or a portion of the sales charge incurred in purchasing shares of a 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.
Transactions in options by the Convertible and Equity Income Funds, 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 such Funds; 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% short-term capital gain or loss.
When either the Convertible Fund or the 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
Fund securities and conversion of short-term 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 ("short-short income").
This requirement may limit the Convertible and Equity Income Funds' 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 and Equity Income Funds are each authorized to invest in foreign
securities (see the discussion in each Fund's Prospectus under "Investment
Objective and Policies of the Fund"). While neither Fund currently makes such
investments, if the investment manager makes the decision to invest a portion of
a Fund's portfolio in such securities, these investments may have the following
tax consequences.
The Convertible and Equity Income Funds may be subject to foreign withholding
taxes on income from certain of their 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.
If either the Convertible Fund or the Equity Fund owns shares in a foreign
corporation that constitutes a "passive foreign investment company" (a "PFIC")
for federal income tax purposes and the Fund does not elect to treat the foreign
corporation as a "qualified electing fund" within the meaning of the Code, the
Fund may be subject to U.S. federal income tax on a portion of any "excess
distribution" it receives from the PFIC or any gain it derives from the
disposition of such shares, even if such income is distributed as a taxable
dividend by the Fund to its U.S. shareholders. Such Funds may also be subject to
additional interest charges in respect of deferred taxes arising from such
distributions or gains. Any federal income tax paid by a Fund as a result of its
ownership of shares of a PFIC will not give rise to a deduction or credit to the
Fund or to any shareholder. A PFIC means any foreign corporation if, for the
taxable year involved, either (i) it derives at least 75 percent of its income
from "passive income" (including, but not limited to, interest, dividends,
royalties, rents and annuities), or (ii) on average, at least 50 percent of the
value (or adjusted basis, if elected) of the assets held by the corporation
produce "passive income".
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by a Fund in
a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which a Fund will be
required to distribute to shareholders even though the Fund has not received any
cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
The Short-Intermediate Fund may purchase securities issued or guaranteed by the
U.S. government, or one of its agencies or instrumentalities, such as the
Government National Mortgage Association, 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. 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 the 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.]
THE FUNDS' UNDERWRITER
Pursuant to an underwriting agreement in effect until April 30, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Funds. 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 Board 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 pays the expenses of the 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.
Until April 30, 1994, income dividends were reinvested at the offering price
(which includes the sales charge) and Distributors allowed 50% of the entire
commission to the securities dealer of record, if any, on an account. Income
dividends paid after April 30, 1994, are reinvested at net asset value.
In connection with the offering of the Funds' shares, aggregate underwriting
commissions and the amount retained by Distributors after allowances to dealers
for the nine month period ended October 31, 1993 and the fiscal years ended
October 31, 1994 and 1995 were as indicated below.
FISCAL YEAR ENDED OCTOBER 31:
TOTAL
COMMISSIONS AMOUNT
FUND RECEIVED RETAINED
1993*
Short-Intermediate
Fund $891,309 $139,758
Convertible Fund 347,284 16,986
Equity Income Fund 299,851 11,325
1994
Short-Intermediate Fund 641,082 96,507
Convertible Fund 465,108 18,675
Equity Income Fund 697,331 36,015
1995
Short-Intermediate Fund 248,800 31,768
Convertible Fund 458,575 51,364
Equity Income Fund 1,255,780 142,848
*covers a nine-month period only, due to a change in fiscal year.
Distributors may be entitled to reimbursement under each Fund's distribution
plan, as discussed below. Except as noted, Distributors received no other
compensation from the Funds for acting as underwriter.
PLANS OF DISTRIBUTION
Each class of the Funds has adopted a Distribution Plan ("Class I Plans and
"Class II Plans," respectively, or "Plan[s]") pursuant to Rule 12b-1 under the
1940 Act.
THE CLASS I PLAN
Pursuant to the Class I Plans, the Convertible and Equity Funds may each pay up
to a maximum of 0.25% per annum of its average daily net assets, and the Short
Intermediate Fund 0.10% of its average daily net assets, for expenses incurred
in the promotion and distribution of shares.
In implementing the Class I Plans, the Board has determined that the annual fees
payable by the Convertible and Equity Income Funds 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 Class I that were acquired by investors on or after May
1, 1994, 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 Class I that were acquired before May 1, 1994 ("Old Assets"). The
annual fee payable by Class I of the Short Intermediate Fund will be (i) 0.10%
of New Assets and 0.05% of 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 is reached on a yearly basis, up to an
additional 0.05% will be paid by the Convertible and Equity Income Funds and an
additional 0.02% by the Short Intermediate Fund to Distributors under the Class
I Plans. 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 0.20% (0.15% plus 0.05%) for the Convertible and
Equity Income Funds and 0.07% for the Short Intermediate Fund, of the average
daily net assets of each Class I shares and, as new shares are sold on or after
May 1, 1994, will increase over time. Thus, as the proportion of Class I 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 maximums indicated above.) While this is
the currently anticipated calculation for fees payable under the Plans, each
Plan permits the trustees to allow each Class I shares to pay the maximum fee
under the Plan at any time. The approval of the Board would be required to
change the calculation of the payments to be made under the Class I Plans.
Pursuant to the Class I 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 Class I 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 each Class I 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.
THE CLASS II PLANS
Under the Class II Plans, the Equity Income and Convertible Funds each pays to
Distributors annual distribution fees, payable quarterly, of 0.75% of each Class
II's average daily net assets. Such fees may be used in order to compensate
Distributors or others for providing distribution and related services and
bearing certain expenses of the Classes. All expenses of distribution and
marketing over that amount will be borne by Distributors, or others who have
incurred them, without reimbursement by the Fund. In addition to this amount,
under the Class II Plans, each Fund pays 0.25% per annum, payable quarterly, of
the Class' average daily net assets as a servicing fee. This fee will be used to
pay dealers or others for, among other things, assisting in establishing and
maintaining customer accounts and records; assisting with purchase and
redemption requests; receiving and answering correspondence; monitoring dividend
payments from the Funds on behalf of the customers, and similar activities
related to furnishing personal services and maintaining shareholder accounts.
Distributors may pay the securities dealer, from its own resources, a commission
of up to 1% of the amount invested at the time of investment.
IN GENERAL
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 each class 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 a Plan, plus any other payments deemed to be made pursuant to a 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)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 you are a
customer of a bank that is prohibited from providing such services, you would be
permitted to remain a shareholder 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 you might no longer be able to
avail yourself of any automatic investment or other services then being provided
by the bank. It is not expected that you would suffer any adverse financial
consequences as a result of any of these changes.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Class I Plans and the Class II Plans are effective through April 30, 1996,
and are renewable annually by a vote of the Board, 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 the Trust's trustees be done by the non-interested trustees. The
Plans and any related agreement may be terminated at any time, without 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 the 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 such class 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 at least quarterly on
the amounts and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
For the fiscal year ended October 31, 1995, the total amount paid by Class I
shares pursuant to the Class I Plan was $165,809, $152,573 and $285,906, for the
Short-Intermediate Fund, the Convertible Fund and the Equity Income Fund,
respectively. Class II Plan payments for the period from inception (October 1,
1995) to October 31, 1995 was $268 and $204 for Convertible Fund and Equity
Income Fund, respectively, which was paid to broker-dealers. The amounts for
Class I were spent for the following purposes.
<TABLE>
<CAPTION>
SHORT INTERMEDIATE FUND
EQUITY INCOME FUND
CONVERTIBLE FUND
<S> <C> <C> <C>
Payment to Underwriter
$ 5,451 $ 4,596 $ 12,580
Payment to broker-dealers 130,050
120,886 222,483
Advertising 24,693 8,356 24,575
Printing and
Mailing 14,779 9,571 26,268
</TABLE>
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectus, each class of a 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 Funds 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 Funds are based on the standardized methods
of computing performance mandated by the SEC. An explanation of those and other
methods used by the Funds 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 that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum front-end sales charge is deducted from the
initial $1,000 purchase order, and income dividends and capital gains are
reinvested at net asset value. 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. If a change is made in the sales charge
structure, historical performance information will be restated to reflect the
maximum sales charge currently in effect.
In considering the quotations of total return by the Funds, you should remember
that the maximum front-end sales charge reflected in each quotation is a one
time fee (charged on all direct purchases) which will have its greatest impact
during the early stages of your investment in a Fund. The charge will affect
actual performance less the longer you retains your investment in the Funds. The
average annual compounded rate of return for Class I shares of each Fund for the
indicated periods ended October 31, 1995 was as follows:
<TABLE>
<CAPTION>
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
<S> <C> <C> <C>
Short-Intermediate
Fund* 6.45% 6.60% 7.06%
Convertible Fund* 10.01% 17.97% 10.13%
Equity Income
Fund** 9.01% 15.45% 11.79%
CLASS II
Convertible Fund+ -4.24%
Equity Income Fund+ -2.85%
*Inception 4/15/87
**Inception 3/15/88
+Inception 10/1/95
</TABLE>
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of 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 Fund's 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 they will be based on each Fund's actual return for a specified
period rather than on its average return over one-, five-, and ten-year periods,
or fractional portion thereof. The total rates of return for each Fund for the
indicated periods ended on October 31, 1995 was as follows:
<TABLE>
<CAPTION>
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
<S> <C> <C> <C>
CLASS I
Short-Intermediate
Fund* 6.45% 37.62% 79.27%
Convertible Fund* 10.01% 128.53% 128.28%
Equity Income
Fund** 9.01% 105.09* 134.22
CLASS II
Convertible Fund+ -4.24%
Equity Income Fund+ -2.85%
*Inception 4/15/87
**Inception 3/15/88
+inception 10/1/95
</TABLE>
YIELD
Current yield reflects the income per share earned by each Fund's portfolio
investments and 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, 1995 was as
follows:
FUND NAME 30-DAY YIELD
CLASS I
Short-Intermediate Fund 4.96%
Convertible Fund 2.97%
Equity Income Fund 4.05%
CLASS II
Convertible Fund 2.29%
Equity Income Fund 3.53%
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE
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,
1995, was as follows:
CLASS I
Short-Intermediate Fund 5.33%
Convertible Fund 4.50%
Equity Income Fund 3.77%
CLASS II
Convertible Fund 4.39%
Equity Income Fund 3.67%
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
S&Ps 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
For 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 SAI, with the substitution of net
asset value for the public offering price.
Sales literature referring to the use of the Funds 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 Funds may include in their advertising or sales material information
relating to investment objectives and performance results of funds belonging to
the Franklin Templeton Group of Funds. Resources is the parent company of the
advisers and underwriter of both the Franklin Group of Funds and Templeton Group
of Funds.
COMPARISONS
To help you better evaluate how an investment in a Fund may satisfy your
investment objective, advertisements and other materials regarding the Fund may
discuss certain measures of Fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. 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, Lipper - Mutual Fund Yield Survey
and Lipper - Fixed Income Fund Performance Analysis - measure total return and
average current yield for the mutual fund industry and rank individual mutual
fund performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
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, 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 Bond
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 High-Yield 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, tax-free 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 include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
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 a
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 a 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 formula used by a 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.
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 a Fund cannot guarantee that such goals will be met.
MISCELLANEOUS INFORMATION
The Funds are members of the Franklin Templeton Group of Funds, 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 47 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 $130
billion in assets under management for more than 3.93 million U.S. based mutual
fund shareholders and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offers to the public 115 U.S. based mutual funds. The
Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past seven 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. The
Trust's Declaration of Trust, however, 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 Fund 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.
As of December 7, 1995, the principal shareholder of the Short-Intermediate
Fund, beneficial or of record, the shareholder's addresses and the amount of
share ownership were as follows:
<TABLE>
<CAPTION>
NUMBER
FUND OF SHARES PERCENTAGE
SHORT-INTERMEDIATE
FUND - CLASS I
<S> <C> <C>
City of Scottsdale 2,969,967.495 14.7%
3939 Civic Center Blvd.
Scottsdale, AZ 85251-4433
CONVERTIBLE FUND - CLASS II
NFSC FEBO # ODM-014079 Jeff Byroade TTEE 3,069.839 7.4%
P/ADM Capitol Const Inc Profit Sharing Plan
541 Main Street
Windber PA 15963
Franklin Resources, Inc. 7,711.734 18.7%
P.O. Box 7777
San Mateo CA 94403-7777
FTTC Cust for the IRA Rollover of Donald D. 3,777.863 9.1%
Smith
910 East Bennett
Glendora CA 91740
Elsie B. Evans & Trevor H. Evans Ten Com 4,926.967 11.9%
3025 NE 137th #406
Seattle WA 98125
EQUITY INCOME FUND - CLASS II
Shirley P. Graci 3,656.068 5.1%
2120 North Arnoult Road
Metairie LA 70001
William D. Waddington & Bruce A. Bradburn 4,727.237 6.5%
TTEES Ikon Corp. Retirement Trust FBO
William D. Waddington
William D. Waddington & Bruce A. Bradburn 4,890.774 6.8%
TTEES Ikon Corp. Retirement Trust FBO Bruace
A. Bradburn
Franklin Resources, Inc. 6,541.341 9.0%
P.O. Box 7777
San Mateo CA 94403-7777
</TABLE>
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.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii) copies of all brokerage confirmations must be sent
to a compliance officer and, within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
compliance officer; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
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 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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Fund Trust dated October 31, 1995, including the auditors' report, are
incorporated herein by reference.
APPENDIX
DESCRIPTION OF MOODY'S INVESTORS SERVICE'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 STANDARD & POOR'S CORPORATION'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
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
San Mateo, CA 94403-7777 1-800/DIAL BEN
MARCH 1, 1996
Franklin Investors Securities Trust (the "Trust") is an open-end management
investment company consisting of six separate diversified series. This Statement
of Additional Information ("SAI") 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.
Separate prospectuses for the Adjustable U.S. Government Fund and the Adjustable
Rate Securities Fund, dated March 1, 1996, each as may be amended from time to
time, provide the basic information a prospective investor should know before
investing 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 SAI is not a prospectus. It contains information in addition to and in more
detail than set forth in each Prospectus. This SAI 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 shown on the cover.
Contents Page
How Do the Funds and Portfolios Invest Their Assets?
Investment Restrictions
Officers and Trustees
Administration and Other Services
How Do the Portfolios Purchase Securities For Their Portfolios?
How Do I Buy and Sell Shares?
How Are Fund Shares Valued?
Additional Information Regarding Taxation
The Funds' Underwriter
General Information
Summary of Procedures to Monitor Conflicts of Interest
Financial Statements
Appendix
How Do the Funds and Portfolios Invest Their Assets?
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.
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. 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 depends 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.
Credit supported asset-backed securities are 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.
Investment Restrictions
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 the Fund. Under the Investment Company
Act of 1940, as amended (the "1940 Act"), a "vote of a majority of the
outstanding voting securities" of a Fund means the affirmative vote of the
lesser of (i) more than 50% of the outstanding shares of the Fund or (ii) 67% or
more of the shares of the Fund present at a shareholder meeting if more than 50%
of the outstanding shares of the Fund are represented at the meeting in person
or by proxy.
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 operation
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.
Officers and Trustees
The Board of Trustees (the "Board") has the responsibility for the overall
management of the Funds, 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 Funds. 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
(*).
Positions and Offices with the Fund
Principal Occupation During Past Five Years
Name and Address
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63)
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; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63)
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, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
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 30 of the investment companies in the
Franklin Group of Funds.
*Edward B. Jamieson (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of five of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63)
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; 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 57 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
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.; 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 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (57)
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 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (51)
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.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
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 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47)
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 37 of
the investment companies in the Franklin Group of Funds.
Charles E. Johnson (39)
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;
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 26 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
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. Charles E. Johnson, Vice President of the Trust is
President and Trustee of the Adjustable Rate Securities Portfolios. The
following trustee of Adjustable Rate Securities Portfolios is not an officer or
trustee of the Trust.
William J. Lippman (71)
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 six of the investment companies in the Franklin
Group of Funds.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and Advisers. Trustees not affiliated with
the investment manager ("nonaffiliated trustees") are currently paid fees of
$925 per month plus $925 per meeting attended. As indicated above, certain of
the Trust's nonaffiliated trustees also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Group of Funds(R)
and the Templeton Group of Funds (the "Franklin Templeton Group of Funds") from
which they may receive fees for their services. The following table indicates
the total fees paid to nonaffiliated trustees by the Trust and by other funds in
the Franklin Templeton Group of Funds.
Number of
Boards in the
Total Fees Franklin
Total Fees Received from Templeton Group
Received the Franklin of Funds on
from the Templeton Group Which Each
Trust* of Funds** Serves***
Name
Frank H. Abbott, III $22,200 $176,870 31
Harris J. Ashton 22,200 318,125 56
S. Joseph Fortunato 22,200 334,265 58
David Garbellano 22,200 153,300 30
Frank W.T. LaHaye 22,200 150,817 26
Gordon S. Macklin 22,200 301,885 53
* For the fiscal year ended October 31, 1995.
** For the calendar year ended December 31, 1994.
*** The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 163
U.S. based funds or series.
Nonaffiliated trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Trust. Certain officers or trustees who are shareholders of Franklin Resources,
Inc. ("Resources") may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries. For
additional information concerning trustee compensation and expenses, please see
the Trust's Annual Report to Shareholders.
As of December 7, 1995, the officers and trustees, as a group, owned of record
and beneficially approximately 89.83 shares of the Adjustable U.S. Government
Fund and 85.49 shares of the Adjustable Rate Securities Fund, or less than 1% of
the total outstanding shares of each Fund. Many of the Trust's trustees also own
shares in various of the other funds in the Franklin Templeton Group of Funds.
Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and
uncle, respectively of Charles E. Johnson.
The Board, 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 the same persons
serving on each trust's Board. The Board has determined that there are no
conflicts of interest presented by this arrangement at the present time.
See "Summary of Procedures to Monitor Conflicts of Interest."
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 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 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 "Summary of Procedures to Monitor
Conflicts of Interest" in this SAI.
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 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. Please see the Statement of Operations in the
financial statements included in the Trusts's Annual Report to Shareholders
dated October 31, 1995.
Advisers also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. Advisers
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by Advisers
on behalf of a Fund or Portfolio. Similarly, with respect to a Fund or
Portfolio, Advisers is not obligated to recommend, purchase or sell, or to
refrain from recommending, purchasing or selling any security that Advisers and
access persons, as defined by the 1940 Act, may purchase or sell for its or
their own account or for the accounts of any other fund. Furthermore, Advisers
is not obligated to refrain from investing in securities held by a Fund or
Portfolio or other funds which it manages or administers. Of course, any
transactions for the accounts of Advisers and other access persons will be made
in compliance with the Trust's Code of Ethics.
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 and including $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 2.5% 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 1.5% 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.
The following table sets forth below on
a per Fund basis the administration fees before advance waiver by Advisers for
the fiscal year ended January 31, 1993, for the nine-month period ended October
31, 1993, and for the fiscal years ended October 31, 1994 and 1995 and the
administration fees paid by the Funds for the same periods.
<TABLE>
<CAPTION>
Administration Administration
Period Fees Before Waiver Fees Paid
January 31, 1993
<S> <C> <C>
Adjustable U.S.
Government Fund $3,473,010 $2,811,776
Adjustable Rate
Securities Fund $ 7,126 $ 0
October 31, 1993
Adjustable U.S.
Government Fund $1,798,293 $1,798,293
Adjustable Rate
Securities Fund $ 20,135 $ 0
October 31, 1994
Adjustable U.S.
Government Fund $1,077,633 $1,077,633
Adjustable Rate
Securities Fund $ 37,387 $ 0
October 31, 1995
Adjustable U.S. $ 584,957 $584,957
Government Fund
Adjustable Rate $ 139,260 $ 60,732
Securities Fund
</TABLE>
The Management Agreements for the Mortgage Portfolio and the Securities
Portfolio are in effect until February 29, 1996. Thereafter, they may continue
in effect for successive annual periods, providing such continuance is
specifically approved at least annually by a vote of the Portfolios' 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 before
advance waiver by Advisers, for the fiscal period ended January 31, 1992, the
fiscal year ended January 31, 1993, the nine-month period ended October 31,
1993, and the fiscal year ended October 31, 1994 and the management fees paid by
the Portfolios for the same periods. As a shareholder in its respective
Portfolio, each Fund is attributed its proportionate share of the management
fees.
<TABLE>
<CAPTION>
Period Management Management
Fees Before Waiver Fees Paid
<S> <C> <C>
January 31, 1993
Mortgage Portfolio $18,538,661 $13,194,882
Securities Portfolio $ 93,016 $ 0
October 31, 1993
Mortgage Portfolio $ 9,965,963 $ 6,534,699
Securities Portfolio $ 222,753 $ 20,602
October 31, 1994
Mortgage Portfolio $ 4,787,133 $ 0
Securities Portfolio $ 372,319 $ 205,735
October 31, 1995
Mortgage Portfolio $ 2,456,413 $ 968,077
Securities Portfolio $ 119,324 $ 55,384
</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 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 cash custodian of each Fund. Each Fund acts as a self
custodian for the securities in its portfolio. 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 L.L.P., 333 Market Street, San Francisco, California 94105,
are the Trust's independent auditors. During the fiscal year ended October 31,
1995, 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
to Shareholders dated October 31, 1995.
How Do the Portfolios Purchase Securities For Their Portfolios?
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 commission 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. 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'
best interests, Advisers may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Portfolios
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 to assist Advisers in carrying out
its responsibilities to the Portfolios, or when it is otherwise in the best
interest of the Portfolios 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, 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 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.
During the past three fiscal years ended October 31, 1995, the Funds paid no
brokerage commissions.
As of October 31, 1995, the Funds did not own securities of its regular
broker-dealers.
How Do I Buy and Sell 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 your account for the transaction as of a
date and with a foreign currency exchange factor determined by the drawee bank.
In connection with exchanges, it should be noted that since the proceeds from
the sale of shares of an investment company are generally not available until
the fifth business day following the redemption, the funds into which you are
seeking to exchange reserve the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of the Funds to
complete an exchange will be effected at the close of business on the day the
request for exchange is received in proper form at the net asset value then
effective. Please see "What If My Investment Outlook Changes? - Exchange
Privilege" in the Prospectuses.
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.
If, in connection with the purchase of Fund
shares, you submit a check or a draft that is returned unpaid to the Fund, the
Fund may impose a $10 charge against your account for each returned item.
Dividend checks returned to a Fund marked "unable to forward" by the postal
service will be deemed to be a request to change your dividend option to
reinvest all distributions and the proceeds will be reinvested in additional
shares at the net asset value until new instructions are received.
Each Fund may deduct from your account the costs of its efforts to locate you if
mail is returned as undeliverable or such Fund is otherwise unable to locate you
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 its
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 one of it's affiliates, 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 - U.S. dollars Charge
- ------------------------------- ------
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
Purchases and Redemptions
through Securities Dealers
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 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 the scheduled close of the Exchange 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, either directly
or through affiliates, have to an agreement with Distributors to 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 you resulting from the failure to do so must be settled between you
and the securities dealer.
Other Payments to Securities Dealers
As discussed in the Prospectuses under "How Do I Buy Shares? - General," either
Distributors or one of its affiliates may make payments, out of its own
resources, to securities dealers who initiate and are responsible for purchases
made at net asset value by certain trust companies and trust departments of
banks,certain designated retirement plans (excluding IRA and IRA Rollovers),
certain non-designated plans, and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more, as described below.
Distributors may make these payments in the form of contingent advance payments,
which may be recovered from the securities dealer or set off against other
payments due to the securities dealer in the event shares are redeemed within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or one of
its affiliates, and the securities dealer.
Either Distributors or one of its affiliates may pay the following amounts, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases made at net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers): 1% 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) for purchases of most taxable income Franklin Templeton Funds made at
net asset value by certain 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, either Distributors or one of its affiliates, out of its
own resources, may pay up to 1% of the amount invested.
Letter of Intent
You may qualify for a reduced sales charge on the purchase of shares of each
Fund, as described in the Prospectuses. At any time within 90 days after the
first investment which you want to qualify for a reduced sales charge, you may
file with the Fund a signed Shareholder Application, with the Letter of Intent
(the "Letter") section completed. After the Letter is filed, each additional
investment will be entitled to the sales charge applicable to the level of
investment indicated on the Letter. Sales charge reductions based 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. Your
holdings in the Franklin Templeton Funds, including Class II shares, acquired
more than 90 days before the Letter is filed, will be counted towards completion
of the Letter but will not be entitled to a retroactive downward adjustment in
the sales charge. Any redemptions you make, unless by a designated retirement
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 have been
completed. If the Letter is not completed within the 13-month period, there will
be an upward adjustment of the sales charge, depending upon the amount actually
purchased (less redemptions) during the period. The upward adjustment does not
apply to designated retirement plans. If you execute a Letter prior to a change
in the sales charge structure for the Fund, you will be entitled to complete the
Letter at the lower of the new sales charge structure or the sales charge
structure in effect at the time the Letter was filed.
As mentioned in the Prospectuses, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your
name. This policy of reserving shares does not apply to a designated retirement
plan. If the total purchases, less redemptions, equal the amount specified under
the Letter, the reserved shares will be deposited to an account in your name or
delivered to you or your 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 (to reflect such further quantity discount) on purchases
made within 90 days before and on those made after filing the Letter. The
resulting difference in offering price will be applied to the purchase of
additional shares at the offering price applicable to a single purchase or the
dollar amount of the total purchases. If the total purchases, less redemptions,
are less than the amount specified under the Letter, you will remit to
Distributors an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge that would have applied to
the aggregate purchases if the total of such purchases had been made at a single
time. Upon such remittance, the reserved shares held for your account will be
deposited to an account in your name or delivered to you or your 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 the
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter, the additional sales charge due will be deducted
from the proceeds of the redemption, and the balance will be forwarded to you.
If a Letter is executed on behalf of a designated retirement plan, the level and
any reduction in sales charge for these plans will be based on actual plan
participation and the projected investments in the Franklin Templeton Funds
under the Letter. These plans are not subject to the requirement to reserve 5%
of the total intended purchase, or to any penalty as a result of the early
termination of a plan, nor are these plans entitled to receive retroactive
adjustments in price for investments made before executing the Letter.
Redemptions in Kind
The Trust has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of the 90-day period. This commitment is irrevocable
without the prior approval of the SEC. In the case of redemption requests in
excess of these amounts, the 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, you may incur
brokerage fees in converting the securities to cash. The Funds do not intend to
redeem illiquid securities in kind. Should it happen, however, you may not be
able to recover your investment in a timely manner and you may incur brokerage
costs in selling the securities.
Redemptions by the Funds
Due to the relatively high cost of handling small investments, each Fund
reserves the right to involuntarily redeem your shares at net asset value if
your account has a value of less than one-half of your initial minimum
investment, but only where the value of such account has been reduced by the
prior voluntary redemption of shares. Until further notice, it is the present
policy of each Fund not to exercise this right if your account has a value of
$50 or more. In any event, before a Fund redeems your shares and sends you the
proceeds, it will notify you that the value of the shares in your account is
less than the minimum amount and allow you 30 days to make an additional
investment in an amount which will increase the value of your account to at
least $100.
Reinvestment Date
For the Adjustable U.S. Government Fund, 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. For the Adjustable Rate Securities Fund the dividend reinvestment date
is the same date as the payable date for cash dividends.
Reports to Shareholders
The Trust sends annual and semiannual reports regarding it's performance and
portfolio holdings to shareholders. If you would like to receive an interim
quarterly report, you may phone Fund Information at 1-800/DIAL BEN.
Special Services
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Funds. The
cost of these services is not borne by the Funds.
Investor Services may pay certain financial institutions that maintain omnibus
accounts with a Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such owners. For each beneficial owner in
the omnibus account, the Fund may reimburse Investor Services an amount not to
exceed the per account fee which the Fund normally pays Investor Services. These
financial institutions may also charge a fee for their services directly to
their clients.
How Are Fund Shares Valued?
As noted in the Prospectuses, each Fund calculates net asset value as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. As of the date of this SAI, 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.
For the purpose of determining the aggregate net assets of each Fund, cash and
receivables are valued at their realizable amounts.
Portfolio securities listed on a securities exchange or on the NASDAQ National
Market System for which market quotations are readily available are valued at
the last quoted sale price of the day or, if there is no such reported sale,
within the range of the most recent quoted bid and ask prices. Over-the-counter
portfolio securities are valued within the range of the most recent quoted bid
and ask prices. Portfolio securities 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.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled close of the Exchange. The value of these securities used in
computing the net asset value of the Funds' shares is determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the secheduled close of the
Exchange which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the values of these securities occur
during such period, then the securities will be valued at their fair value as
determined in good faith by the Board.
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.
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.
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 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 February 29,
1996, 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 pays the expenses of the distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. Each Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Distributors 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, 1993, October
31, 1993, October 31, 1994 and October 31, 1995, were as indicated below.
<TABLE>
<CAPTION>
Amount Amount
Period Received Retained
<S> <C> <C>
January 31, 1993
Adjustable U.S. Government Fund $7,527,107 $759,529
Adjustable Rate Securities Fund+ $ 152,205 $ 16,292
October 31, 1993
Adjustable U.S. Government Fund $945,767 $126,824
Adjustable Rate Securities Fund $106,062 $ 14,282
October 31, 1994
Adjustable U.S. Government Fund $306,789 $38,831
Adjustable Rate Securities Fund $ 78,020 $10,090
October 31, 1995
Adjustable U.S. Government Fund $121,256 $12,155
Adjustable Rate Securities Fund $ 12,586 $ 1,366
</TABLE>
Effective February 1, 1995, Distributors may be entitled to retain net
underwriting discounts and commissions in connection with redemptions or
repurchases of shares. Distributors retained $500 from the Adjustable U.S.
Government Fund and none were retained from the Adjustable Rate Securities Fund
for the period ending on October 30, 1995. Distributors may be entitled to
reimbursement under the distribution plans of the Funds as discussed below.
Except as noted, Distributors received no other compensation from the Funds for
acting as underwriter.
Distribution Plans
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 preparing and distributing 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, 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 Trust on behalf of a Fund, Distributors or its affiliates.
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)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. 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 you are a
customer of a bank that is prohibited from providing such services, you would be
permitted to remain shareholders of that Fund and alternate means for continuing
the servicing would be sought. In such an event, changes in the services
provided might occur and you might no longer be able to avail yourself of any
automatic investment or other services then being provided by the bank. It is
not expected that you would suffer any adverse financial consequences as a
result of any of these changes.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through February 29, 1996 and are renewable annually by
a vote of the Board, 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 noninterested trustees. The Plans and any related
agreement may be terminated at any time, without any penalty, by vote of a
majority of the noninterested 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 Administration Agreements between the Funds and
Advisers, the Management Agreements between the Portfolios and Advisers or the
Distribution Agreement between the Funds and Distributors 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 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
at least quarterly on the amounts and purpose of any payment made under the
Plans and any related agreements, as well as to furnish the Board with such
other information as may reasonably be requested in order to enable the Board to
make an informed determination of whether the Plans should be continued.
For the fiscal year ended October 31, 1995, the Adjustable U.S. Government Fund
and the Adjustable Rate Securities Fund incurred fees of $1,380,307 and $41,946,
respectively, in distribution expenses under their respective Plan, all of which
were paid as service fees to broker-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 and 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 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 front-end sales
charge is deducted from the initial $1,000 purchase order, and income dividends
and capital gains are reinvested at net asset value. 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. If a change is made
on the sales charge structure, historical performance information will be
restated to reflect the maximum front-end sales charge currently in effect.
In considering the quotations of total return by the Funds, you should remember
that the maximum front-end sales charge reflected in each quotation is a
one-time fee (charged on all direct purchases), which will have its greatest
impact during the early stages of your investment in a Fund. This will affect
actual performance less the longer you retain your 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, 1995, were as follows:
<TABLE>
<CAPTION>
One- Five-
Year Year Inception
<S> <C> <C> <C>
Adjustable U.S.
Government Fund* 5.06% 0% 4.25%
Adjustable Rate
Securities Fund* 5.17% 3.77% 5.45%
*Adjustable U.S. Government Fund and Adjustable Rate Securities Fund commenced
operations on October 20, 1987, and December 26, 1991, respectively.
</TABLE>
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of 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. These quotations are computed in
the same manner as each Fund's average annual compounded rate, except that they
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. The Funds' total rates of return for the periods ended on October 31,
1995 were as follows:
<TABLE>
<CAPTION>
One- Five-
Year Year Inception
<S> <C> <C> <C>
Adjustable U.S.
Government Fund* 5.17% 20.30% 53.17%
Adjustable Rate
Securities Fund* 5.06% 0% 17.40%
*Adjustable U.S. Government Fund and Adjustable Rate Securities Fund commenced
operations on October 20, 1987, and December 26, 1991, respectively.
</TABLE>
Current Yield
Current yield reflects the income per share earned by each Fund's portfolio
investments and 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, 1995, was as
follows:
30-Day
Yield
Adjustable U.S. Government Fund 5.62%
Adjustable Rate Securities Fund 5.68%
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Current Distribution Rate
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 October 31,
1995, was as follows:
Adjustable U.S. Government Fund 6.03%
Adjustable Rate Securities Fund 5.66%
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 idea is that
greater volatility means greater risk undertaken in achieving performance.
Other Performance Quotations
For 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 SAI 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.
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 advisors
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 - 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) 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 include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
Advertisements or information may also compare
a Fund's performance to the return on certificates of deposit or other
investments. You 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 comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the Funds' portfolios, that the indices and averages are generally
unmanaged, and that the items included in the calculations of the 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 you 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 either Fund cannot guarantee that such goals will be met.
The Funds are members of the Franklin Templeton Group of Funds, 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 47 years and
now services more than 2.5 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 $130
billion in assets under management for more than 3.9 million shareholder and
other accounts. The Franklin Group of Funds and the Templeton Group of Funds
offers to the public 115 U.S.-based mutual funds. A Fund may identify itself by
its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one in
service quality for five of the past seven years.
As of December 7, 1995, the principal shareholders of the Adjustable Rate
Securities Fund, beneficial or of record, their addresses and the amount of
their share ownership were as follows:
Shares Percentage
Adjustable Rate
Securities Fund
Nations Bank of NC NA 182,403 10.53%
TTEE FBO National
Welders Supply 401K
P.O. Box 831575
Dallas, TX 75283-1575
The Steamfitters 85,149 10.69%
Vacation Plan
5 Penn Plaza 19th Floor
New York, NY 10001-1810
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.
Employees of Resources or its subsidiaries who are access persons under the 1940
Act are permitted to engage in personal securities transactions subject to the
following general restrictions and procedures: (i) the trade must receive
advance clearance from a compliance officer and must be completed within 24
hours after clearance; (ii)copies of all brokerage confirmations must be sent to
the compliance officer and within 10 days after the end of each calendar
quarter, a report of all securities transactions must be provided to the
compliance officer; and (iii) access persons involved in preparing and making
investment decisions must, in addition to (i) and (ii) above, file annual
reports of their securities holdings each January and inform the compliance
officer (or other designated personnel) if they own a security that is being
considered for a fund or other client transaction or if they are recommending a
security in which they have an ownership interest for purchase or sale by a fund
or other client.
Miscellaneous
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Trust's Declaration of Trust, however, 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 if you are 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 you 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
risk of you incurring financial loss on account of shareholder liability is
limited to the unlikely 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 your 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.
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 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.
Financial Statements
The financial statements contained in the Annual Report to Shareholders of the
Trust dated October 31, 1995 and Adjustable Rate Securities Portfolios dated
October 31, 1995, including the auditors' report, are incorporated herein by
reference.
Appendix
Description of Corporate Bond Ratings:
Moody's
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or 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 rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered 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 rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
FRANKLIN
GLOBAL GOVERNMENT
INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
MARCH 1, 1996
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. There can, of course, be no guarantee that the
Fund's objective will be achieved.
A Prospectus for the Fund, dated March 1, 1996, as may be amended from time to
time, provides the basic information an investor should know before investing in
the Fund and may be obtained without charge from the Fund or from its principal
underwriter, Franklin/Templeton Distributors, Inc. ("Distributors") at the
address or telephone number shown above.
As explained in the Prospectus, this Fund offers two classes of shares to its
investors: Franklin Global Government Income Fund - Class I ("Class I") and
Franklin Global Government Income Fund - Class II ("Class II"). The Fund's dual
class structure ("multiclass") allows investors to consider, among other
features, the impact of sales charges and distribution fees ("Rule 12b-1 fees")
on their investments in the Fund.
THIS STATEMENT OF ADDITIONAL INFORMATION (THE "SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUS. THIS SAI IS INTENDED TO PROVIDE INVESTORS WITH ADDITIONAL
INFORMATION REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE
READ IN CONJUNCTION WITH THE FUND'S PROSPECTUS.
CONTENTS PAGE
How Does the Fund Invest Its Assets?
Investment Restrictions
Officers and Trustees
Investment Advisory and Other Services
How Does the Fund Purchase Securities For Its Portfolio?
How Do I Buy and Sell Shares?
How Are Fund Shares Valued?
Additional Information Regarding Taxation
The Fund's Underwriter
General Information
Financial Statements
HOW DOES THE FUND INVEST ITS ASSETS?
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 purchase 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 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 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.
To the extent the Fund enters into a futures contract, it will deposit in a
segregated account with its custodian cash or U.S. Treasury obligations equal to
a specified percentage of the value of the futures contract (the "initial
margin"), as required by the relevant contract market and futures commission
merchant. The futures contract will be marked-to-market daily. Should the value
of the futures contract decline relative to the Fund's position, the Fund will
be required to pay to the futures commission merchant an amount equal to such
change in value. 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 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 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 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.
INVESTMENT RESTRICTIONS
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 affirmative
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.
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.
OFFICERS AND TRUSTEES
The Board of Trustees (the "Board") 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 Fund. 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 (*).
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); and
director, trustee or managing general partner, as the case may be, of 31 of the
investment companies in the Franklin Group of Funds.
Harris J. Ashton (63)
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; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63)
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, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (81)
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 30 of the investment companies in the
Franklin Group of Funds.
*Edward B. Jamieson (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Trustee
Senior Vice President and Portfolio Manager, Franklin Advisers, Inc.; and
officer and/or director or trustee of five of the investment companies in the
Franklin Group of Funds.
*Charles B. Johnson (63)
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; 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 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
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.; 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 43 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (57)
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 26 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (51)
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.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
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 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47)
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 37 of the investment companies in the Franklin Group of Funds.
Charles E. Johnson (39)
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;
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 26 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (57)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
The preceding table indicates those officers and trustees who are also
affiliated persons of Distributors and Advisers. Trustees not affiliated with
the investment manager ("nonaffiliated trustees") are currently paid fees of
$925 per month plus $925 per meeting attended. As indicated above, certain of
the Fund's nonaffiliated trustees also serve as directors, trustees or managing
general partners of other investment companies in the Franklin Group of Funds
and the Templeton Group of Funds (the "Franklin Templeton Group of Funds") from
which they may receive fees for their services. The following table indicates
the total fees paid to nonaffiliated trustees by the Fund and by other funds in
the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
.
NUMBER OF BOARDS IN
THE FRANKLIN
TOTAL FEES RECEIVED TEMPLETON GROUP OF
FROM THE FRANKLIN FUNDS ON WHICH EACH
TOTAL FEES TEMPLETON GROUP OF SERVES***
RECEIVED FROM FUNDS**
NAME FUND*
<S> <C> <C> <C>
Frank H. Abbott, III $22,200 $176,870 31
Harris J. Ashton 22,200 318,125 56
S. Joseph Fortunato 22,200 334,265 58
David Garbellano 22,200 153,300 30
Frank W.T. LaHaye 22,200 150,817 26
Gordon S. Macklin 22,200 301,885 53
* For the fiscal year ended October 31, 1995.
** For the calendar year ended December 31, 1994.
*** The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
trustees are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 163
U.S. based funds or series.
</TABLE>
Nonaffiliated trustees are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or trustee received any other compensation directly from the
Trust. 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. For additional
information concerning trustee compensation and expenses, please see the Trust's
Annual Report to Shareholders.
As of December 7, 1995, the trustees and officers owned of record and
beneficially approximately 861 shares, or less than 1% of the total outstanding
shares of the Fund. Many of the Trust's trustees also own shares in various of
the other funds in the Franklin Templeton Group of Funds. Charles B. Johnson
(the father of Charles E. Johnson) and Rupert H. Johnson, Jr. 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 shares.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of the 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 (the "Exchange"). Resources owns several other
subsidiaries which are involved in investment management and shareholder
services.
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 Board to whom the Manager renders periodic
reports of the Fund's investment activities. Under the terms of the management
agreement, the Manager provides 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. See the Statement of Operations in the
financial statements included in the Trust's Annual Report to Shareholders dated
October 31, 1995.
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 2.5% 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 1.5% 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 year ended January 31, 1993 would have been
$763,966; however, Advisers waived a portion of its management fees so that the
amount paid by the Fund for that fiscal year was $747,403. For the nine-month
period ended October 31, 1993 and the fiscal years ended October 31, 1994 and
1995, the Fund paid Advisers fees totaling $746,129, $1,130,298 and 984,273,
respectively. Each class will pay its share of the fee as determined by the
proportion of the Fund that it represents.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager
is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by the Fund or other
funds which it manages or administers. Of course, any transactions for the
accounts of the Manager and other access persons will be made in compliance with
the Fund's Code of Ethics.
The management agreement is in effect until February 29, 1996. Thereafter, it
may continue in effect for successive annual periods providing such continuance
is specifically approved at least annually by a vote of the Board or by a vote
of the holders of a majority of the Fund's outstanding voting securities, and in
either event by a majority vote of the 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.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, with respect to the Fund, the Manager
is not obligated to recommend, purchase or sell, or to refrain from
recommending, purchasing or selling any security that the Manager and access
persons, as defined by the 1940 Act, may purchase or sell for its or their own
account or for the accounts of any other fund. Furthermore, the Manager is not
obligated to refrain from investing in securities held by the Fund or other
funds which it manages or administers. Of course, any transactions for the
accounts of the Manager and other access persons will be made in compliance with
the Fund's Code of Ethics.
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 L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended October 31,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated October 31, 1995.
SUBADVISORY AGREEMENT
Pursuant to a subadvisory agreement with Advisers, which was approved by the
Fund's shareholders on April 27, 1994 and will remain in effect for two years,
Templeton Global Bond Managers, a division of Templeton Investment Counsel, Inc.
("TICI"), acts as subadviser to the Fund. TICI, a Florida corporation with
offices at Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida
33394-3091, is registered under the Investment Advisers Act of 1940 and is an
affiliate of Templeton, Galbraith & Hansberger, Ltd. ("TGH"), an investment
advisory firm which manages the Templeton Family of Funds. TGH and Advisers are
both subsidiaries of Resources, whose affiliates manage approximately $117
billion as noted above.
Under the subadvisory agreement, the subadviser provides, 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 receives from the Manager a fee equal to
an annual rate of 0.35% of the average daily net assets up to and including $100
million of net assets of the Fund; 0.25% of average daily net assets over $100
million up to and including $250 million; and 0.20% of average daily net assets
over $250 million.
HOW DOES THE FUND PURCHASE SECURITIES FOR ITS PORTFOLIO?
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 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. The Fund seeks 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 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 broker
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 and the fiscal years ended
October 31, 1994 and 1995, the Fund paid no brokerage commissions. For fiscal
year ended January 31, 1993, the Fund paid $867 in brokerage commissions. As of
October 31, 1995, the Fund did not own securities of its regular broker-dealers.
HOW DO I BUY AND SELL 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) 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.
In connection with exchanges (see Prospectus ""What If My Investment Outlook
Changes? - Exchange Privilege"), it should be noted that since the proceeds from
the sale of shares of an investment company generally are not available until
the fifth business day following the redemption, the funds into which the Fund
shareholders are seeking to exchange reserve the right to delay issuing shares
pursuant to an exchange until said fifth business day. The redemption of shares
of the Fund to complete an exchange will be effected at the close of business on
the day the request for exchange is received in proper form at the net asset
value then effective.
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.
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 net
asset value 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:
SALES
SIZE OF PURCHASE IN U.S. DOLLARS CHARGE
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS
Orders for the purchase of shares of the Fund received in proper form prior to
the scheduled close of the Exchange (generally 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 the scheduled close of the Exchange 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, either directly
or through affiliates, have an agreement with Distributors to 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.
SPECIAL NET ASSET VALUE PURCHASES - CLASS I
As discussed in the Prospectus under "How Do I Buy Shares? - Description of
Special Net Asset Value Purchases," certain categories of investors may purchase
shares of the Fund without a front-end sales charge ("net asset value") or a
contingent deferred sales charge. Either 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. Distributors may
make these payments in the form of contingent advance payments, which may be
recovered from the securities dealer, or set off against other payments due to
the securities dealer, in the event of investor redemptions made within 12
months of the calendar month of purchase. Other conditions may apply. All terms
and conditions may be imposed by an agreement between Distributors, or 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 fixed-income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1% 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, either Distributors or
one of its affiliates, out of its own resources, may pay up to 1% of the amount
invested.
LETTER OF INTENT
LETTER OF INTENT - CLASS I
An investor may qualify for a reduced sales charge on the purchase of Class I
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
("Letter") section completed, may be filed with the Fund. After the Letter is
filed, each additional investment will be entitled to the sales charge
applicable to the level of investment indicated on the Letter. Sales charge
reductions based 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, including Class II shares, acquired more than 90 days before the Letter
is filed will be counted towards completion of the Letter 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 have been completed.
If the Letter is not completed within the 13-month period, there will be an
upward adjustment of the sales charge, depending 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 prior to a
change in the sales charge structure for the Fund will be entitled to complete
the Letter at the lower of the new sales charge structure or the sales charge
structure in effect at the time the Letter was filed 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 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 is executed on behalf of a benefit plan (such plans are described
under "How Do I Buy Shares? - 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. 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.
REDEMPTIONS IN KIND
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of the Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission ("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 the 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.
HOW ARE FUND SHARES VALUED?
As noted in the Prospectus, each class of the Fund calculates net asset value as
of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each
day that the Exchange is open for trading. As of the date of this SAI, 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.
For the purpose of determining the aggregate net assets of each class, 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. The value of a foreign security is
determined as of the close of trading on the foreign exchange on which it is
traded or as of the scheduled close of trading on the Exchange, if that is
earlier, and that value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
security is valued within the range of the most recent quoted bid and ask
prices. Occasionally, events which affect the values of foreign securities and
foreign exchange rates may occur between the times at which they are determined
and the close of the exchange and will, therefore, not be reflected in the
computation of each class' net asset value. If events materially affecting the
value of these foreign securities occur during such period, then these
securities will be valued in accordance with procedures established by the
Board.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask price. 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 sale 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. With the approval of trustees, the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above described
functions.
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.
REPORTS TO SHAREHOLDERS
The Fund sends annual and semiannual reports to its shareholders regarding the
Fund's performance and its portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800/DIAL
BEN.
SPECIAL SERVICES
The Franklin Templeton Institutional Services Department 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.
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.
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.
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").
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 derived by a Fund with respect to
the Fund's business of investing in stock or securities, or options or futures
with respect to such stock or securities, is qualifying income for purposes of
this 90% limitation.
Currency speculation or the use of currency forward contracts or other currency
instruments for non-hedging purposes may generate gains deemed to be not derived
with respect 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.
If the Fund owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Series does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Fund may be subject to U.S. federal
income on a portion of any "excess distribution" it receives from the PFIC or
any gain it derives from the disposition of such shares, even if such income is
distributed as a taxable dividend by the Fund to its U.S. shareholders. The Fund
may also be subject to additional interest charges in respect of deferred taxes
arising from such distributions or gains. Any federal income tax paid by the
Fund as a result of its ownership on shares of a PFIC will not give rise to a
deduction or credit to the Fund or to any shareholder. A PFIC means any foreign
corporation if, for the taxable year involved, either (i) it derives at least 75
percent of its income from "passive income" (including, but not limited to,
interest, dividends, royalties, rents and annuities), or (ii) on average, at
least 50 percent of the value (or adjusted basis, if elected) of the assets held
by the corporation produce "passive income".
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark-to-market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the Fund
in a PFIC would be treated as an excess distribution received by the Fund in the
current year, eliminating the deferral and the related interest charge. Such
excess distribution amounts are treated as ordinary income, which the Fund will
be required to distribute to shareholders even though the Fund has not received
any cash to satisfy this distribution requirement. These regulations would be
effective for taxable years ending after the promulgation of the proposed
regulations as final regulations.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until February 29, 1996,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. 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 Board, or by a vote of the holders of a
majority of the Fund's outstanding voting securities, and in either event by a
majority vote of the 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 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.
Until April 30, 1994, income dividends were reinvested at the offering price
(which includes the sales charge) and Distributors allowed 50% of the entire
commission to the securities dealer of record, if any, on an account. Starting
with any income dividends paid after April 30, 1994, such reinvestment will be
at net asset value.
In connection with the offering of the Fund's shares, aggregate underwriting
commissions for the fiscal periods ended January 31, 1993, October 31, 1993,
1994 and 1995 were $2,396,458, $1,099,431, $1,226,772 and 388,327, respectively.
After allowances to dealers, Distributors retained $76,698, $76,161, $63,571 and
4,942 for the respective periods. Effective February 1, 1995, Distributors is
entitled to retain net underwriting discounts and commissions in connection with
some redemptions or repurchases of shares. For the fiscal year ended October 31,
1995, Distributors retained $24. Distributors may be entitled to reimbursement
under the distribution plan of the Fund as discussed below. Except as noted,
Distributors received no other compensation from the Fund for acting as
underwriter.
PLANS OF DISTRIBUTION
Each class of the Fund has adopted a distribution plan ("Class I Plan" and
"Class II Plan," respectively, or "Plan(s)") pursuant to Rule 12b-1 under the
1940 Act.
THE CLASS I PLAN
Pursuant to the Class I Plan, the Fund may pay up to a maximum of 0.15% per
annum of its average daily net assets, payable quarterly, for expenses incurred
in the promotion and distribution of its shares.
In implementing the Class I 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 Class I 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 Class I 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 Class I
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
Class I Plan, such as advertising.
The fee is a Class I expense so that all Class I 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 Class I shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Class I shares purchased on or
after the Effective Date increases in relation to outstanding Class I shares,
the expenses attributable to payments under the Class I 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 Class I Plan, the
Class I Plan permits the Trust's trustees to allow the Fund to pay a full 0.15%
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.
Pursuant to the Class I Plan, 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 Class I 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 Class I 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 CLASS II PLAN
Under the Class II Plan, the Fund pays to Distributors or others annual
distribution fees, payable quarterly, of 0.50% of Class II's average daily net
assets, in order to compensate Distributors or others for providing distribution
and related services and bearing certain expenses of the Class. All expenses of
distribution and marketing over that amount will be borne by Distributors, or
others who have incurred them, without reimbursement by the Fund. In addition to
this amount, under the Class II Plan, the Fund shall pay 0.15% per annum,
payable quarterly, of the Class' average daily net assets as a servicing fee.
This fee will be used to pay dealers or others for, among other things,
assisting in establishing and maintaining customer accounts and records;
assisting with purchase and redemption requests; receiving and answering
correspondence; monitoring dividend payments from the Fund on behalf of
customers, and similar activities related to furnishing personal services and
maintaining shareholder accounts. Distributors may pay the securities dealer,
from its own resources, a commission of up to 1% of the amount invested at the
time of investment.
IN GENERAL
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide that to the extent the Fund, the Manager or
Distributors or other parties on behalf of the Fund, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of each class 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 Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a 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)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 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 the 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 Fund may be required to register as
dealers pursuant to state law.
The Plans have been approved in accordance with the provisions of Rule 12b-1.
The Plans are effective through February 29, 1996 and renewable annually by a
vote of the Board, including a majority vote of the trustees who are
non-interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plans, cast in person at a meeting called for
that purpose. It is also required that the selection and nomination of such
trustees be done by the non-interested trustees. The Plans and any related
agreement 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 outstanding shares of such class. Distributors or any
dealer or other firm may also terminate their respective distribution or service
agreement at any time upon written notice.
With respect to a Plan, the Plan and any related agreements may not be amended
to increase materially the amount to be spent for distribution expenses without
approval by a majority of the respective class' outstanding shares, and all
material amendments to the Plan 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 at least quarterly on
the amounts and purpose of any payment made under the Plan 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 Plan should be continued.
For the fiscal year ended October 31, 1995, the total amounts paid by the Fund
pursuant to the Class I and Class II Plans were $140,502 and $1,690,
respectively, which were used for the following purposes:
Dollar
Amount
............................. Class I Class II
Advertising.................. $ 27,242 $1,017
Printing and mailing of
prospectuses to other than
current shareholders......... 5,253 243
Payments to underwriters..... 1,115 40
Payments to brokers or dealers 106,892 390
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectus, each class of 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, and income dividends and
capital gains are reinvested at net asset value. 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. If a change is made on the sales charge structure, historical
performance information will be restated to reflect the maximum front-end sales
charge in effect currently.
In considering the quotations of total return by the Fund, 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 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 rates of
return for the Class I shares of the Fund for the indicated one- and five- year
period ended October 31, 1995, were 7.83% and 6.86% and for the period from
inception (March 15, 1988) to October 31, 1995, was 6.94%, respectively.
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of 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 on its average return over one-, five- and ten-year periods (to the
extent applicable). The total rates of return for the Class I shares of the Fund
for the one- and five-year periods ending October 31, 1995 were 7.83% and
39.35%, respectively, and the aggregate total return for the period covering its
inception (March 15, 1988) to October 31, 1995 was 66.88%. The total rate of
return for the Class II shares of the Fund for the period covering its inception
(May 1, 1995) to October 31, 1995 was 5.71%.
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 Class I shares and the Class II shares of the Fund for the 30-day
period ended on October 31, 1995 were 7.09% and 6.48%, respectively.
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE
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.
The current distribution rates for the Class I and Class II shares of the Fund
for the fiscal year ended October 31, 1995, based on the maximum offering price,
were 6.91% and 6.98%, respectively.
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(R). 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 SAI with
the substitution of net asset value for the public offering price.
Sales literature referring to the use of the Fund as a potential investment for
Individual Retirement Accounts (IRAs), Business Retirement Plans, and other
tax-advantaged retirement plans may quote a total return based upon compounding
of dividends on which it is presumed no federal income tax applies. 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 underwriter 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
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) Lipper- Mutual Fund Performance Analysis and Lipper Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
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 include symbols, headlines, or
other material which highlight or summarize the information discussed in more
detail in the communication.
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 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 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.
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 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 47 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 $130 billion in
assets under management worldwide for more than 3.93 million U.S. based mutual
fund shareholder and other accounts. The Franklin Group of Funds and the
Templeton Group of Funds offers to the public 115 U.S. based mutual funds. The
Fund may identify itself by its NASDAQ symbol or CUSIP number.
The Dalbar Surveys, Inc. broker-dealer survey has ranked Franklin number one
in service quality for five of the past seven years.
MISCELLANEOUS INFORMATION
As of December 7, 1995, the principal shareholders of the Fund, beneficial or of
record, their addresses and the amount of their share ownership were as follows:
SHARES PERCENTAGE
FRANKLIN GLOBAL GOVERNMENT INCOME
FUND - CLASS II:
William E. Barrow, 12,618 7.98%
Michael A. Barrow,
Elizabeth B. Moore TTEES
3506 E. Hwy 16
P.O. Box 99
Sharpsburg, GA 30277-0099
Raymond P. Coppinger 17,985 11.38%
Lorna L. Coppinger Jr WROS
111 E. Chestnut Hill Rd.
Montague, MA 01351
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.
Access persons of the Franklin Templeton Group, as defined in SEC Rule 17(j)
under the 1940 Act, who are employees of Resources or its subsidiaries, are
permitted to engage in personal securities transactions subject to the following
general restrictions and procedures: (1) The trade must receive advance
clearance from a Compliance Officer and must be completed within 24 hours after
this clearance; (2) Copies of all brokerage confirmations must be sent to the
Compliance Officer and within 10 days after the end of each calendar quarter, a
report of all securities transactions must be provided to the Compliance
Officer; (3) In addition to items (1) and (2), access persons involved in
preparing and making investment decisions must file annual reports of their
securities holdings each January and also inform the Compliance Officer (or
other designated personnel) if they own a security that is being considered for
a fund or other client transaction or if they are recommending a security in
which they have an ownership interest for purchase or sale by a fund or other
client.
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.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Fund dated October 31, 1995, including the auditors' report, are
incorporated herein by reference.
FRANKLIN INVESTORS SECURITIES TRUST
File Nos. 33-11444 & 811-4986
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
(a) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated October 31, 1995
as filed with the SEC electronically on form type N-30D on
December 27, 1995
Franklin Investors Securities Trust
(i) Report of Independent Auditors - December 8, 1995
(ii) Statements of Investments in Securities and Net Assets - October
31, 1995
(iii) Statements of Assets and Liabilities - October 31, 1995
(iv) Statements of Operations - for the year ended October 31, 1995
(v) Statements of Changes in Net Assets - for the years ended October
31, 1995 and 1994.
(vi) Notes to Financial Statements
Adjustable Rate Securities Portfolios
(i) Report of Independent Auditors - December 8, 1995
(ii) Statements of Investments in Securities and Net Assets - October
31, 1995
(iii) Statements of Assets and Liabilities - October 31, 1995
(iv) Statements of Operations - for the year ended October 31, 1995
(v) Statements of Changes in Net Assets - for the years ended October
31, 1995 and 1994.
(vi) Notes to Financial Statements
b) Exhibits:
The following exhibits are incorporated by reference as noted except 5(v),
5(vi), 6(i), 8(ii), 8(iv), 10(i), 11(I), 11(ii), 15(viii), 15(ix), 16(i),
17(iii), 17(iv), 27(i), 27(ii), 27(iii), 27(iv), 27(v), 27(vi), 27(vii),
27(viii) and 27(ix) which are attached herewith:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated December 16, 1986
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(ii) Certificate of Amendment to Agreement and Declaration of
Trust dated March 13, 1990
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(iii)Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(ii) Amendment to By-Laws dated February 28, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(3) copies of any voting trust agreement with respect to more than
five percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement dated April 15, 1987 between Franklin
Investors Securities Trust and Franklin Advisers, Inc.
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(ii) Administration Agreement dated June 3, 1991 between Franklin
Adjustable U.S. Government Securities Fund and Franklin
Advisers, Inc.
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(iii)Administration Agreement dated December 26, 1991 between
Franklin Adjustable Rate Securities Fund and Franklin
Advisers, Inc.
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(iv) Subadvisory Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. providing for service to
Franklin Investors Securities Trust on behalf of Franklin
Global Government Income Fund dated May 1, 1994.
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(v) Amendment to Administration Agreement between
Franklin Investors Securities Trust on behalf of Franklin
Adjustable Rate Securities Fund and Franklin Advisers, Inc.
dated August 1, 1995
(vi) Amendment to Administration Agreement between
Franklin Investors Securities Trust on behalf of Franklin
Adjustable U.S. Government Securities Fund and Franklin
Advisers, Inc. dated August 1, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies
of all agreements between principal underwriters and dealers;
(i) Form of Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
(ii) Form of Dealer Agreement between Franklin/ Templeton
Distributors, Inc. and securities dealers
Registrant: Franklin Federal Tax-Free Income Fund
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: March 28, 1995
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish
a reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Custody Agreement between Registrant and Bank of America
National Trust and Savings Association dated March 12, 1993
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(ii) Amendment to Custodian Agreement between Registrant and Bank
of America National Trust and Savings Association dated
April 12, 1995
(iii)Copy of Custodian Agreements between Registrant and Citibank
Delaware:
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master
Agreement
3. Short Form Bank Agreement - Deposits and
Disbursements of Funds
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 54 to Registration on
Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(iv) Global Custody Agreement between The Chase
Manhattan Bank, N.A. and Franklin Investors
Securities Trust on behalf of Franklin Global
Government Income Fund dated July 28, 1995
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part
at or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when
sold be legally issued, fully paid and nonassessable;
(i) opinion and consent of counsel dated December 26, 1995
(11) copies of any other opinions, appraisals or rulings and consents
to the use thereof relied on in the preparation of this
Registration Statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors for Franklin Investors
Securities Trust dated December 27, 1995
(ii) Consent of Independent Auditors for Adjustable Rate
Securities Portfolio dated December 27, 1995
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration
for providing the initial capital between or among the
Registrant, the underwriter, adviser, promoter or initial
stockholders and written assurances from promoters or initial
stockholders that their purchases were made for investment
purposes without any present intention of redeeming or reselling;
(i) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(ii) Letter of Understanding relating to Franklin Adjustable Rate
Securities Fund
Filing: Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: June 1, 1992
(14) copies of the model plan used in the establishment of any
retirement plan in conjunction with which Registrant offers its
securities, any instructions thereto and any other documents
making up the model plan. Such form(s) should disclose the costs
and fees charged in connection therewith;
(i) Copy of model retirement plan
Registrant: AGE High Income Fund
Filing: Post-effective amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule
12b-1 under the 1940 Act, which describes all material aspects of
the financing of distribution of Registrant's shares, and any
agreements with any person relating to implementation of such
plan.
(i) Distribution Plan between Franklin Global Government Income
Fund and Franklin/Templeton Distributors, Inc., effective
May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(ii) Distribution Plan between Franklin Short-Intermediate U.S.
Government Securities Fund and Franklin/Templeton
Distributors, Inc., effective May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(iii) Distribution Plan between Franklin Convertible Securities
Fund and Franklin/Templeton Distributors, Inc., effective
May 1, 1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(iv) Amended and restated Distribution Plan between Franklin
Adjustable U.S. Government Securities Fund and
Franklin/Templeton Distributors, Inc., effective July 1,
1993
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(v) Distribution Plan between Franklin Equity Income Fund and
Franklin/Templeton Distributors, Inc., effective May 1,
1994
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(vi) Amended and restated Distribution Plan between Franklin
Adjustable Rate Securities Fund and Franklin/Templeton
Distributors, Inc., effective July 1, 1993
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(vii)Class II Distribution Plan pursuant to Rule 12b-1 on behalf
of Franklin Global Government Income Fund effective March
30, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(viii)Class II Distribution Plan pursuant to Rule 12b-1 on behalf
of Franklin Convertible Securities Fund effective September
29, 1995
(ix) Class II Distribution Plan pursuant to Rule 12b-1 on behalf
of Franklin Equity Income Fund effective March 30,
1995
(16) Schedule for computation of each performance quotation provided in
the Registration Statement in response to Item 22 (which need not
be audited).
(i) Schedule for computation of performance quotation
(17) Power of Attorney
(i) Power of Attorney for Franklin Investors Securities Trust
dated February 16, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(ii) Certificate of Secretary for Franklin Investors
Securities Trust dated February 16, 1995
Filing: Post-Effective Amendment No. 15 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(iii)Power of Attorney for Adjustable Rate Securities
Portfolios dated February 16, 1995
(iv) Certificate of Secretary for Adjustable Rate
Securities Portfolios dated February 16, 1995
(18) Copies of any plan entered into by registrant pursuant to Rule
18f-3 under the 1940 Act
(i) Form of multiple class plan
Filing: Post-effective amendment No. 16 to
Registration Statement on Form N-1A
File Nos. 33-11444 and 811-4986
Filing Date: August 2, 1995
(27) Financial Data Schedule Computation
(i) Financial Data Schedule for Franklin Global
Government Income Fund - Class I
(ii) Financial Data Schedule for Franklin Global
Government Income Fund - Class II
(iii)Financial Data Schedule for Franklin Short- Intermediate
U.S. Government Securities Fund
(iv) Financial Data Schedule for Franklin Convertible
Securities Fund - Class I
(v) Financial Data Schedule for Franklin Convertible
Securities Fund - Class II
(vi) Financial Data Schedule for Franklin Adjustable
U.S. Government Securities Fund
(vii)Financial Data Schedule for Franklin Equity
Income Fund - Class I
(viii)Financial Data Schedule for Franklin Equity Income Fund -
Class II
(ix) Financial Data Schedule for Franklin Adjustable
Rate Securities Fund
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
As of October 31, 1995, the number of shareholders of record of Registrant's
shares were as follows:
<TABLE>
<CAPTION>
Number of Record Holders
Class I Class II
<S> <C> <C>
Franklin Global Government Income Fund 11,287 73
Franklin Short-Intermediate U.S. Government Securities Fund 7,415 N/A
Franklin Convertible Securities Fund 6,173 18
Franklin Adjustable U.S. Government Securities Fund 26,352 N/A
Franklin Equity Income Fund 12,524 37
Franklin Adjustable Rate Securities Fund 984 N/A
</TABLE>
Item 27. Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to Trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person in
connection with securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court or appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
a) Franklin Advisers, Inc.
The officers and directors of the Registrant's manager also serve as officers
and/or directors for (1) the manager's corporate parent, Franklin Resources,
Inc., and/or (2) other investment companies in the Franklin Templeton Group
of Funds. In addition, Mr. Charles B. Johnson is a director of General Host
Corporation. For additional information please se Part B and Schedules A and
D of Form ADV of the Funds Investment Manager (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors
of the Investment Manager and information as to any business, profession,
vocation or employment of a substantial nature engages in by those officers
and directors during the past two years.
b) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), an indirect, wholly owned
subsidiary of Franklin Resources, Inc., serves as the Franklin Global
Government Income Fund's Sub-adviser, furnishing to Franklin Advisers, Inc.
in that capacity, portfolio management services and investment research. For
additional information please Part B and Schedules A and D of Form ADV of the
Franklin Global Government Income Fund's Sub-adviser (SEC File 801-15125),
incorporated herein by reference, which sets forth the officers and directors
of the Sub-advisers and information as to any business, profession, vocation
or employment of a substantial nature engages in by those officers and
directors during the past two years.
Item 29. Principal Underwriters.
a) Franklin/Templeton Distributors, Inc., ("Distributors") also acts as
principal underwriter of shares of Franklin Gold Fund, Franklin Premier
Return Fund, Franklin Equity Fund, AGE High Income Fund, Inc., Franklin
Custodian Funds, Inc., Franklin Money Fund, Franklin California Tax-Free
Income Fund, Inc., Franklin Federal Money Fund, Franklin Tax-Exempt Money
Fund, Franklin New York Tax-Free Income Fund, Inc., Franklin Federal Tax-Free
Income Fund, Franklin Tax-Free Trust, Franklin California Tax-Free Trust,
Franklin New York Tax-Free Trust, Franklin Investors Securities Trust,
Institutional Fiduciary Trust, Franklin Value Investors Trust, Franklin
Tax-Advantaged International Bond Fund, Franklin Tax-Advantaged U.S.
Government Securities Fund, Franklin Tax-Advantaged High Yield Securities
Fund, Franklin Municipal Securities Trust, Franklin Managed Trust, Franklin
Strategic Series, Franklin International Trust, Franklin Real Estate
Securities Trust, Franklin Templeton Global Trust, Franklin Templeton Money
Fund Trust, Franklin Templeton Japan Fund, Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Developing Markets Trust,
Templeton Funds, Inc., Templeton Global Investment Trust, Templeton Global
Opportunities Trust, Templeton Growth Fund, Inc., Templeton Income Trust,
Templeton Institutional Funds, Inc., Templeton Real Estate Securities Fund,
Templeton Smaller Companies Growth Fund, Inc., and Templeton Variable
Products Series Fund
Item 32. Undertakings
(a) Registrant hereby undertakes to promptly call a meeting of shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not less
than 10 per cent of the Registrant's outstanding shares and to assist its
shareholders in the communicating with other shareholders in accordance with
the requirements of Section 16(c) of the Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required information
in the Fund's annual report and to furnish each person to whom a prospectus
is delivered a copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused
this Post-Effective Amendment to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of San
Mateo and the State of California, on the 28th day of December, 1995.
FRANKLIN INVESTORS SECURITIES TRUST
(Registrant)
By: Edward B. Jamieson*
Edward B. Jamieson, President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated.
Edward B. Jamieson* Trustee and Principal Executive Officer
Edward B. Jamieson Dated: December 28, 1995
Martin L. Flannagan* Principal Financial Officer
Martin L. Flannagan Dated: December 28, 1995
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated : December 28, 1995
Charles B. Johnson* Trustee
Charles B. Johnson Dated: December 28, 1995
Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: December 28, 1995
Harris J. Ashton* Trustee
Harris J. Ashton Dated: December 28, 1995
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: December 28, 1995
David W. Garbellano* Trustee
David W. Garbellano Dated: December 28, 1995
Rupert H. Johnson, Jr.*Trustee
Rupert H. Johnson, Jr. Dated: December 28, 1995
Frank W.T. LaHaye* Trustee
Frank W.T. LaHaye Dated: December 28, 1995
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: December 28, 1995
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
Pursuant to Powers of Attorney previously filed.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended and
the Investment Company Act of 1940, as amended, the undersigned has duly
consented to the filing of this Post-effective amendment to the Registration
Statement of Franklin Investors Securities Trust to be signed by the
undersigned, thereunto duly authorized in the City of San Mateo and the State
of California, on the 28th day of December, 1995.
ADJUSTABLE RATE SECURITIES PORTFOLIOS
By: Charles E. Johnson*
Charles E. Johnson, President
Pursuant to the requirements of the Securities Act of 1933, this consent to
the Registration Statement of Franklin Investors Securities Trust has been
signed below by the following persons in the capacities and on the dates
indicated.
Charles E. Johnson Trustee and Principal Executive Officer
Charles E. Johnson Dated: December 28, 1995
Martin L. Flannagan* Principal Financial Officer
Martin L. Flannagan Dated: December 28, 1995
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: December 28, 1995
Charles B. Johnson* Trustee
Charles B. Johnson Dated: December 28, 1995
Frank H. Abbott III* Trustee
Frank H. Abbott III Dated: December 28, 1995
Harris J. Ashton* Trustee
Harris J. Ashton Dated: December 28, 1995
S. Joseph Fortunato* Trustee
S. Joseph Fortunato Dated: December 28, 1995
David W. Garbellano* Trustee
David W. Garbellano Dated: December 28, 1995
Rupert H. Johnson, Jr.* Trustee
Rupert H. Johnson, Jr. Dated: December 28, 1995
Frank W. T. LaHaye* Trustee
Frank W. T. LaHaye Dated: December 28, 1995
William J. Lippman* Trustee
William J. Lippman Dated: December 28, 1995
Gordon S. Macklin* Trustee
Gordon S. Macklin Dated: December 28, 1995
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
Pursuant to Powers of Attorney filed herewith.
FRANKLIN INVESTORS SECURITIES TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. IN
SEQUENTIAL
NUMBERING SYSTEM
EX-99.B1(i) Agreement and Declaration of Trust *
dated December 16, 1986
EX-99.B1(ii) Certificate of Amendment to Agreement *
and Declaration of Trust dated March
13, 1990
EX-99.B1(iii) Certificate of Amendment to Agreement *
and Declaration of Trust dated March
21, 1995
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Amendment to By-laws dated February 28, *
1994
EX-99.B5(i) Management Agreement between Registrant *
and Franklin Advisors, Inc. dated April
15, 1987
EX-99.B5(ii) Administration Agreement between *
Franklin Adjustable U.S. Government
Securities Fund and Franklin Advisors,
Inc. dated June 3, 1991
EX-99.B5(iii) Administration Agreement between *
Franklin Adjustable Rate Securities
Fund and Franklin Advisors, Inc. dated
December 26, 1991
EX-99.B5(iv) Sub-advisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, Inc., on behalf of Franklin
Global Government Income Fund Dated May
1, 1994
EX-99.B5(v) Amendment to Administration Agreement Attached
between Franklin Investors Securities
Trust on behalf of Franklin Adjustable
Rate Securities Fund and Franklin
Advisers, Inc. dated August 1, 1995
EX-99.B5(vi) Amendment to Administration Agreement Attached
between Franklin Investors Securities
Trust on behalf of Franklin Adjustable
U.S. Government Securities Fund and
Franklin Advisers, Inc. dated August 1,
1995
EX-99.B6(i) Form of Amended and Restated Attached
Distribution Agreement between
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B6(ii) Form of Dealer Agreement between *
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B8(i) Custody Agreement between Registrant *
and Bank of America National Trust and
Savings Association dated March 12, 1993
EX-99.B8(ii) Amendment to Custodian Agreement Attached
between Registrant and Bank of America
National Trust and Savings Association
dated April 12, 1995
EX-99.B8(iii) Copy of Custodian Agreements between *
Registrant and Citibank Delaware
EX-99.B8(iv) Global Custody Agreement between The Attached
Chase Manhattan Bank, N.A. and Franklin
Investors Securities Trust on behalf of
Franklin Global Government Income Fund
dated July 28, 1995
EX-99.B10(i) Opinion and consent of counsel dated Attached
December 26, 1995
EX-99.B11(i) Consent of Independent Auditors for Attached
Franklin Investors Securities Trust
dated December 27, 1995
EX-99.B11(ii) Consent of Independent Auditors for Attached
Adjustable Rate Securities Portfolio
dated December 27, 1995
EX-99.B13(i) Letter of Understanding dated April 12, *
1995
EX-99.B13(ii) Letter of Understanding relating to *
Franklin Adjustable Rate Securities Fund
EX-99.B14(i) Franklin IRA Form *
EX-99.B15(i) Distribution Plan between Franklin *
Global Government Income Fund and
Franklin/Templeton Distributors, Inc.,
Effective May 1, 1994
EX-99.B15(ii) Distribution Plan between Franklin *
Short-Intermediate U.S. Government
Securities Fund and Franklin/Templeton
Distributors, Inc., Effective May 1,
1994
EX-9.B15(iii) Distribution plan between Franklin *
Convertible Securities Fund and
Franklin/Templeton Distributors, Inc.,
Effective May 1, 1994
EX-99.B15(iv) Amended and restated Distribution Plan *
between Franklin Adjustable U.S.
Government Securities Fund and
Franklin/Templeton Distributors, Inc.,
Effective July 1, 1993
EX-99.B15(v) Distribution Plan between Franklin *
Equity Income Fund and
Franklin/Templeton Distributors, Inc.,
Effective May 1, 1994
EX-99.B15(vi) Amended and restated Distribution Plan *
between Franklin Adjustable Rate
Securities Fund and Franklin/Templeton
Distributors, Inc., Effective July 1,
1993
EX-99.B15(vii) Class II Distribution Plan pursuant to *
Rule 12b-1 on behalf of Franklin Global
Government Income Fund effective March
30, 1995
EX-99.B15(viii) Class II Distribution Plan pursuant to Attached
Rule 12b-1 on behalf of Franklin
Convertible Securities Fund effective
September 29, 1995
EX-99.B15(ix) Class II Distribution Plan pursuant to Attached
Rule 12b-1 on behalf of Franklin Equity
Income Fund effective March 30, 1995
EX-99.B16(i) Schedule for computation of performance Attached
quotation
EX-99.B17(i) Power of Attorney for Franklin *
Investors Securities Trust dated
February 16, 1995
EX-99.B17(ii) Certificate of Secretary for Franklin *
Investors Securities Trust dated
February 16, 1995
EX-99.B17(iii) Power of Attorney for Adjustable Rate Attached
Securities Portfolios dated February
16, 1995
EX-99.B17(iv) Certificate of Secretary for Adjustable Attached
Rate Securities Portfolios dated
February 16, 1995
EX-99.B18(i) Form of Multiple Class Plan *
EX-27.B(i) Financial Data Schedule for Franklin Attached
Global Government Income Fund - Class I
EX-27.B(ii) Financial Data Schedule for Franklin Attached
Global Government Income Fund - Class II
EX-27.B(iii) Financial Data Schedule for Franklin Attached
Short-Intermediate U.S. Government
Securities Fund
EX-27.B(iv) Financial Data Schedule for Franklin Attached
Convertible Securities Fund - Class I
EX-27.B(v) Financial Data Schedule for Franklin Attached
Convertible Securities Fund - Class II
EX-27.B(vi) Financial Data Schedule for Franklin Attached
Adjustable U.S. Government Securities
Fund
EX-27.B(vii) Financial Data Schedule for Franklin Attached
Equity Income Fund - Class I
EX-27.B(viii) Financial Data Schedule for Franklin Attached
Equity Income Fund - Class II
EX-27.B(ix) Financial Data Schedule for Franklin Attached
Adjustable Rate Securities Fund
*Incorporated by Reference
AMENDMENT TO ADMINISTRATION AGREEMENT
This Amendment dated as of August 1, 1995, is to the Administration
Agreement dated December 26, 1991, by and between FRANKLIN INVESTORS SECURITIES
TRUST, a Massachusetts business trust (the "Trust"), on behalf of FRANKLIN
ADJUSTABLE RATE SECURITIES FUND (the "Fund"), a series of the Trust, and
FRANKLIN ADVISERS, INC., a California corporation, (the "Administrator"). The
undersigned parties, intending to be legally bound, hereby agree as follows:
(1) Paragraph 4 is amended to include section C:
C. The Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of the Fund's expenses, as if such waiver or limitation were full set
forth herein.
(2) All other provisions of the Administration Agreement dated December
26, 1991, remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Amendment as of the date and
year first above written.
FRANKLIN INVESTORS SECURITIES TRUST
On behalf of Franklin Adjustable Rate
Securities Fund
By /s/ Deborah R. Gatzek
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
AMENDMENT TO ADMINISTRATION AGREEMENT
This Amendment dated as of August 1, 1995, is to the Administration
Agreement dated June 3, 1991, by and between FRANKLIN INVESTORS SECURITIES
TRUST, a Massachusetts business trust (the "Trust"), on behalf of FRANKLIN
ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND (the "Fund"), a series of the Trust,
and FRANKLIN ADVISERS, INC., a California corporation, (the "Administrator").
The undersigned parties, intending to be legally bound, hereby agree as follows:
(1) Paragraph 4 is amended to include section C:
C. The Administrator may waive all or a portion of its fees provided
for hereunder and such waiver shall be treated as a reduction in purchase price
of its services. The Administrator shall be contractually bound hereunder by the
terms of any publicly announced waiver of its fee, or any limitation of the
Fund's expenses, as if such waiver or limitation were full set forth herein.
(2) All other provisions of the Administration Agreement dated June 3,
1991, remain in full force and effect.
IN WITNESS WHEREOF, we have signed this Amendment as of the date and year
first above written.
FRANKLIN INVESTORS SECURITIES TRUST
On behalf of Franklin Adjustable U.S.
Government Securities Fund
By /s/ Deborah R. Gatze,
FRANKLIN ADVISERS, INC.
By /s/ Harmon E. Burns
FRANKLIN INVESTORS SECURITIES TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for our Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales of
its Shares without sales charges consistent with the terms of the then current
prospectus and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that series and class plus any applicable
percentage of the public offering price as sales commission or as otherwise set
forth in our then current prospectus. On each business day on which the New York
Stock Exchange is open for business, we will furnish you with the net asset
value of the Shares of each available series and class which shall be determined
in accordance with our then effective prospectus. All Shares will be sold in the
manner set forth in our then effective prospectus and statement of additional
information, and in compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under
the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of our Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus and
statement of additional information included therein;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred;
(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any supplements
thereto and statements of additional information which are
necessary to continue to offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses and statements
of additional information if the Amendment or supplement
arises from your (including your "Parent's") activities or
Rules and Regulations related to your activities and those
expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling our
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund or, if the
Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.
This Agreement may at any time be terminated by the Fund or by any
series without the payment of any penalty, (i) either by vote of the Board or by
vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties. As used herein, the terms "Net Asset Value," "Offering
Price," "Investment Company," "Open-End Investment Company," "Assignment,"
"Principal Underwriter," "Interested Person," "Parent," "Affiliated Person," and
"Majority of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN INVESTORS SECURITIES TRUST
By:_______________________________
Accepted:
Franklin/Templeton Distributors, Inc.
By:__________________________________
DATED: ______________
(Franklin logo)
FRANKLIN
RESOURCES, INC.
777 Mariners Island Blvd.
San Mateo, CA 94404
415/312-5818
FAX 415/312-3528
Martin L. Flanagan CPA, CFA
Senior Vice President
Chief Financial Officer
April 12, 1995
Mr. Stephen H. Kilbuck
Vice President Corporate Banking
Bank of America, NT & SA
555 California Street, 41st Floor
San Francisco, CA 94104
Dear Steve:
Various Franklin Funds/Portfolios (the "Funds") and Bank of America,
National Trust and Savings Association ("Bank") are parties to custody
agreements (the "Agreements") as well as separate cash management and deposit
services arrangements.
By this Letter Agreement, each of the Funds and Bank desire to establish
the cash compensation to be paid by each Fund for services rendered to it by
Bank.
Effective April 1, 1995, commencing with the first statement prepared
thereafter each Fund will pay to Bank a monthly fee in cash equal to an annual
rate of 87.5/100 ths. (.875) basis points of the net asset value of each such
Funds domestic portfolios held in custody by Bank and nine and three-tenths
(9.3) basis points of the net asset value of each such Funds international
portfolios held in custody by Bank or held by foreign sub-custodians calculated
as of the last business day of the month. For purposes of calculating the
monthly fee, 000007291 will be used as the monthly factor for the domestic
portfolio and .0000775 will be used as the monthly factor for the international
portfolio. The obligation of each Fund is separate from the obligation of any
other Fund.
The purpose of this Letter of Agreement is to provide for a fair level of
compensation to Bank for its service. The fee is based on the assumption that
each Fund will continue to use services of a type and volume comparable to the
services currently used. The parties agree that any party may initiate
discussions concerning revisions to the terms of this Letter Agreement at any
time it believes the level of compensation to be inappropriate. The parties
further agree that any party may, upon at least sixty (60) days' written notice,
terminate this Letter Agreement with respect to that party. Upon its
termination, if the parties have not agreed to a substitute fee arrangement, any
party may also terminate all or some of the service provided by Bank upon
additional sixty (60) days' written notice.
On an ongoing basis, Bank will continue to prepare the monthly corporate
account analysis statements on behalf of each Fund, which estimates all revenues
and expenses for the parties' relationship. From time to time, Bank and any
Fund(s) may renegotiate the estimated "prices" used in the account analysis
process. The account analysis statement will provide a basis for any
negotiations between the parties on the appropriateness of the fee agreement as
embodied in this Letter Agreement. However, no payment of any kind shall be due
on account of any shortfall on the account analysis statement.
Sincerely,
Authorized Officer for Each Trust/Franklin
Fund Portfolio (List Attached)
By /s/ Martin L. Flanagan
Martin L. Flanagan
Executive Financial Officer
ACCEPTED AND AGREED TO BY:
BANK OF AMERICA, NT & SA
By /s/ Stephen H. Kilbuck
Title: Vice President
FRANKLIN GROUP OF FUNDS
FUND # FUND INIT NAME OF FUND
022 FUT FRANKLIN UNIVERSAL TRUST - (closed-end)
033 FPMT FRANKLIN PRINCIPAL MATURITY TRUST - (closed-end)
024 FMIT FRANKLIN MULTI-INCOME TRUST - (closed-end)
101 FGF FRANKLIN GOLD FUND
102 FPRF FRANKLIN PREMIER RETURN FUND
(Franklin Option Fund until April 30, 1991)
103 FEF FRANKLIN EQUITY FUND
105 AGE AGE HIGH INCOME FUND, INC.
FCF FRANKLIN CUSTODIAN FUNDS, INC.
106 GROWTH SERIES
107 UTILITIES SERIES
108 DYNATECH SERIES
109 INCOME SERIES
110 U.S. GOVERNMENT SECURITIES SERIES
111* FMF FRANKLIN MONEY FUND (MMP feeder as of 8/1/94)
112 FCTFIF FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.
113* FFMF FRANKLIN FEDERAL MONEY FUND (USGSMMP feeder as of 8/1/94)
114 FTEMF FRANKLIN TAX-EXEMPT MONEY FUND
115 FNYTFIF FRANKLIN NEW YORK TAX-FREE INCOME FUND, INC.
116 FFTFIF FRANKLIN FEDERAL TAX-FREE INCOME FUND
FTFT FRANKLIN TAX-FREE TRUST
118 FRANKLIN MASSACHUSETTS INSURED TAX-FREE INCOME FUND
119 FRANKLIN MICHIGAN INSURED TAX-FREE INCOME FUND
120 FRANKLIN MINNESOTA INSURED TAX-FREE INCOME FUND
121 FRANKLIN INSURED TAX-FREE INCOME FUND
122 FRANKLIN OHIO INSURED TAX-FREE INCOME FUND
123 FRANKLIN PUERTO RICO TAX-FREE INCOME FUND
126 FRANKLIN ARIZONA TAX-FREE INCOME FUND
127 FRANKLIN COLORADO TAX-FREE INCOME FUND
128 FRANKLIN GEORGIA TAX-FREE INCOME FUND
129 FRANKLIN PENNSYLVANIA TAX-FREE INCOME FUND
130 FRANKLIN HIGH YIELD TAX-FREE INCOME FUND
160 FRANKLIN MISSOURI TAX-FREE INCOME FUND
161 FRANKLIN OREGON TAX-FREE INCOME FUND
162 FRANKLIN TEXAS TAX-FREE INCOME FUND
163 FRANKLIN VIRGINIA TAX-FREE INCOME FUND
164 FRANKLIN ALABAMA TAX-FREE INCOME FUND
165 FRANKLIN FLORIDA TAX-FREE INCOME FUND
166 FRANKLIN CONNECTICUT TAX-FREE INCOME FUND
167 FRANKLIN INDIANA TAX-FREE INCOME FUND
168 FRANKLIN LOUISIANA TAX-FREE INCOME FUND
169 FRANKLIN MARYLAND TAX-FREE INCOME FUND
170 FRANKLIN NORTH CAROLINA TAX-FREE INCOME FUND
171 FRANKLIN NEW JERSEY TAX-FREE INCOME FUND
172 FRANKLIN KENTUCKY TAX-FREE INCOME FUND
174 FRANKLIN FEDERAL INTERMEDIATE-TERM TAX-FREE INCOME FUND
177 FRANKLIN ARIZONA INSURED TAX-FREE INCOME FUND
178 FRANKLIN FLORIDA INSURED TAX-FREE INCOME FUND
FCTFT FRANKLIN CALIFORNIA TAX-FREE TRUST
124 FRANKLIN CALIFORNIA INSURED TAX-FREE INCOME FUND
125 FRANKLIN CALIFORNIA TAX-EXEMPT MONEY FUND
152 FRANKLIN CALIFORNIA INTERMEDIATE-TERM TAX-FREE INCOME
FUND
FNYTFT FRANKLIN NEW YORK TAX-FREE TRUST
(Franklin New York-Tax Exempt Money Fund until 1/91)
131 FRANKLIN NEW YORK TAX-EXEMPT MONEY FUND
153 FRANKLIN NEW YORK INTERMEDIATE-TERM TAX-FREE INCOME FUND
181 FRANKLIN NEW YORK INSURED TAX-FREE INCOME FUND
FIST FRANKLIN INVESTORS SECURITIES TRUST
135 FRANKLIN GLOBAL GOVERNMENT INCOME FUND
(formerly Franklin Global Opportunity Income Fund)
136 FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT
SECURITIES FUND
137 FRANKLIN CONVERTIBLE SECURITIES FUND
138* FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
(formerly Franklin Adjustable Rate Mortgage Fund)
(USGARMP feeder)
139 FRANKLIN EQUITY INCOME FUND
(Franklin Special Equity Income Fund until 8/17/93)
151* FRANKLIN ADJUSTABLE RATE SECURITIES FUND
(ARSP retail feeder)
IFT INSTITUTIONAL FIDUCIARY TRUST
140* MONEY MARKET PORTFOLIO (MMP feeder)
141* FRANKLIN LATE DAY MONEY MARKET PORTFOLIO
(Franklin Government Investors Money Market
Portfolio until 6/15/93)
142* FRANKLIN U.S. GOVERNMENT SECURITIES MONEY MARKET
PORTFOLIO (USGSMMP feeder)
143* FRANKLIN U.S. TREASURY MONEY MARKET PORTFOLIO
144* FRANKLIN INSTITUTIONAL ADJUSTABLE U.S. GOVERNMENT
SECURITIES FUND (USGARMP feeder)
145* FRANKLIN INSTITUTIONAL ADJUSTABLE RATE SECURITIES FUND
(ARSP feeder)
146* FRANKLIN U.S. GOVERNMENT AGENCY MONEY MARKET FUND
147* AEA CASH MANAGEMENT FUND (MMP feeder)
(formerly Franklin Star MOney Market Portfolio)
149* FRANKLIN CASH RESERVES FUND (MMP feeder)
150 FBSIF FRANKLIN BALANCE SHEET INVESTMENT FUND
154 FTAIBF FRANKLIN TAX-ADVANTAGED INTERNATIONAL BOND FUND
155 FTAUSGSF FRANKLIN TAX-ADVANTAGED U.S. GOVERNMENT SECURITIES FUND
156 FTAHYSF FRANKLIN TAX-ADVANTAGED HIGH YIELD SECURITIES FUND
FMT FRANKLIN MANAGED TRUST
117 FRANKLIN CORPORATE QUALIFIED DIVIDEND FUND
(Franklin Corporate Cash Portfolio until 5/31/91)
158 FRANKLIN RISING DIVIDENDS FUND
159 FRANKLIN INVESTMENT GRADE INCOME FUND
- ---- FRANKLIN INSTITUTIONAL RISING DIVIDENDS FUND (PT feeder)
(not yet filed)
157 FSMP FRANKLIN STRATEGIC MORTGAGE PORTFOLIO (effective 2/1/93)
FMST FRANKLIN MUNICIPAL SECURITIES TRUST
173 FRANKLIN HAWAII MUNICIPAL BOND FUND
175 FRANKLIN CALIFORNIA HIGH YIELD MUNICIPAL FUND
176 FRANKLIN WASHINGTON MUNICIPAL BOND FUND
220 FRANKLIN TENNESSEE MUNICIPAL BOND FUND
221 FRANKLIN ARKANSAS MUNICIPAL BOND FUND
FSS FRANKLIN STRATEGIC SERIES (changed from Cal 250)
194 FRANKLIN STRATEGIC INCOME FUND
195 FRANKLIN MIDCAP GROWTH FUND (filed - not yet being sold)
196 FRANKLIN INSTITUTIONAL MIDCAP GROWTH FUND
(formerly FISCO MidCap Growth Fund)
197 FRANKLIN GLOBAL UTILITIES FUND
198 FRANKLIN SMALL CAP GROWTH FUND
199 FRANKLIN GLOBAL HEALTH CARE FUND
ARSP ADJUSTABLE RATE SECURITIES PORTFOLIOS (THE PARENT)
182 U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
(master fund)
183 ADJUSTABLE RATE SECURITIES PORTFOLIO (filed under 1940
Act Only) (master fund)
MMP THE MONEY MARKET PORTFOLIOS (master fund parent)
(filed under 1940 Act only)
184* THE MONEY MARKET PORTFOLIO (master fund)
186* THE U.S. GOVERNMENT SECURITIES MONEY MARKET PORTFOLIO
(master fund)
187 MGP MIDCAP GROWTH PORTFOLIO (master fund) (1940 Act filing only
- not yet being sold)
PT THE PORTFOLIOS TRUST (master fund parent) (1940 Act filing
only - not yet being sold)
188 THE RISING DIVIDENDS PORTFOLIO (master fund)
FIT FRANKLIN INTERNATIONAL TRUST
190 FRANKLIN PACIFIC GROWTH FUND
191 FRANKLIN INTERNATIONAL EQUITY FUND
FREST FRANKLIN REAL ESTATE SECURITIES TRUST
192 FRANKLIN REAL ESTATE SECURITIES FUND
FTGT FRANKLIN TEMPLETON GLOBAL TRUST (formerly Huntington Funds)
210* FRANKLIN TEMPLETON GERMAN GOVERNMENT BOND FUND
211* FRANKLIN TEMPLETON GLOBAL CURRENCY FUND
212* FRANKLIN TEMPLETON HARD CURRENCY FUND
213* FRANKLIN TEMPLETON HIGH INCOME CURRENCY FUND
FVF FRANKLIN VALUEMARK FUNDS (ALLIANZ)
821 MONEY MARKET FUND
822 EQUITY GROWTH FUND
823 PRECIOUS METALS FUND
824 REAL ESTATE SECURITIES FUND
825 UTILITY EQUITY FUND
826 HIGH INCOME FUND
827 GLOBAL INCOME FUND
828 INVESTMENT GRADE INTERMEDIATE BOND FUND
829 INCOME SECURITIES FUND
830 U.S. GOVERNMENT SECURITIES FUND
831 ZERO COUPON FUND - 1995
832 ZERO COUPON FUND - 2000
833 ZERO COUPON FUND - 2005
834 ZERO COUPON FUND - 2010
835 ADJUSTABLE U.S. GOVERNMENT FUND
836 RISING DIVIDENDS FUND
837 TEMPLETON PACIFIC GROWTH FUND (Pacific Growth Fund
until 10/15/93)
838 TEMPLETON INTERNATIONAL EQUITY FUND (International
Equity Fund until 10/15/93)
839 TEMPLETON DEVELOPING MARKETS EQUITY FUND
840 TEMPLETON GLOBAL GROWTH FUND
841 TEMPLETON WORLDWIDE ASSET ALLOCATION FUND
(not yet effective)
891 FGST FRANKLIN GOVERNMENT SECURITIES TRUST (AETNA)
193 FRANKLIN STABLE VALUE FUND
511 FRANKLIN TEMPLETON MONEY FUND II (expected effective
date: 05/01/95)
This GLOBAL CUSTODY AGREEMENT is effective as of July 28, 1995 and is between
THE CHASE MANHATTAN BANK, n.a. (the "Bank") and FRANKLIN INVESTORS SECURITIES
TRUST, (the "Customer") on behalf of its Franklin Global Government Income Fund
series, and any additional series of Customer which may be added by amendment to
this Custody Agreement in the future.
1. CUSTOMER ACCOUNTS.
The Bank agrees to establish and maintain the following accounts
("Accounts"):
(a) A custody account in the name of the Customer ("Custody Account") for
any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same or evidencing or representing any other rights or
interests therein and other similar property whether certificated or
uncertificated as may be received by the Bank or its Subcustodian (as defined in
Section 3) for the account of the Customer ("Securities"); and
(b) A deposit account in the name of the Customer ("Deposit Account") for
any and all cash in any currency received by the Bank or its Subcustodian for
the account of the Customer, which cash shall not be subject to withdrawal by
draft or check.
The Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) ("Instructions") concerning the Accounts. The Bank may deliver
securities of the same class in place of those deposited in the Custody Account.
Upon written agreement between the Bank and the Customer, additional
Accounts may be established and separately accounted for as additional Accounts
under the terms of this Agreement.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.
Unless Instructions specifically require another location acceptable to
the Bank:
(a) Securities will be held in the country or other jurisdiction in which
the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired: and
(b) Cash will be credited to an account in a country or other jurisdiction
in which such cash may be legally deposited or is the legal currency for the
payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and the Bank can comply with such
Instructions, the Bank is authorized to maintain cash balances on deposit for
the Customer with itself or one of its affiliates at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as the Customer may direct, if acceptable to the Bank.
If the Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians or their securities
depositories, such arrangement must be authorized by a written agreement, signed
by the Bank and the Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
The Bank may act under this Agreement through the subcustodians listed in
Schedule A of this Agreement with which the Bank has entered into subcustodian
agreements ("Subcustodians). The Customer authorizes the Bank to hold Assets in
the Accounts in accounts which the Bank has established with one or more of its
branches or Subcustodians. The Bank and Subcustodians are authorized to hold any
of the Securities in their account with any securities depository in which they
participate.
The Bank reserves the right to add new, replace or remove Subcustodians.
The Customer will be given reasonable notice by the Bank of any amendment to
Schedule A. Upon request by the Customer, the Bank will identify the name,
address and principal place of business of any Subcustodian of the Customer's
Assets and the name and address of the governmental agency or other regulatory
authority that supervises or regulates such Subcustodian.
The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible foreign
custodian or an eligible foreign securities depository, which are further
defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined in
Rule 17f-5 under the Investment Company Act (the "Act"):
(b) "eligible foreign custodian" shall mean (i) a banking institution or
trust company incorporated or organized under the laws of a country other than
the United States that is regulated as such by that country's government or an
agency thereof and that has shareholders' equity in excess of $200 million in
U.S. currency (or a foreign currency equivalent thereof), (ii) a majority owned
direct or indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other than the
United States and that has shareholders' equity in excess of $100 million in
U.S. currency (or a foreign currency equivalent thereof), (iii) a banking
institution or trust company incorporated or organized under the laws of a
country other than the United States or a majority owned direct or indirect
subsidiary of a qualified U.S. bank or bank holding company that is incorporated
or organized under the laws of a country other than the United States which has
such other qualifications as shall be specified in Instructions and approved by
the Bank, or (iv) any other entity that shall have been so qualified by
exemptive rule or other appropriate action of the SEC: and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of a
country other than the United States, which operates (i) the central system for
handling securities or equivalent book-entries in that country or (ii) a
transnational system for the central handling of securities or equivalent
book-entries.
The Customer represents that its Board of Trustees has approved each of
the Subcustodians listed in Schedule A of this Agreement and the terms of the
subcustody agreements between the Bank and each Subcustodian, and further
represents that its Board has determined that the use of each Subcustodian and
the terms of each subcustody agreement are consistent with the best interests of
the Customer's fund(s) and its (their) shareholders. The Bank will supply the
Customer with any amendment to Schedule A for approval. The Customer has
supplied or will supply the Bank with certified copies of its Board of Trustees
resolution(s) with respect to the foregoing prior to placing Assets with any
Subcustodian so approved.
4. USE OF SUBCUSTODIAN.
(a) The Bank will identify Assets on its books as belonging to the
Customer.
(b) A Subcustodian will hold Assets together with assets belonging to
other customers of the Bank in accounts identified on such Subcustodian's books
as special custody accounts for the exclusive benefit of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will be subject only
to the Instructions of the Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian will be subject only to
the Instructions of such Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian for holding its
customer's assets shall provide that such assets will not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets will be freely transferable without the payment of
money or value other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or arrangement made by
the Customer with any particular Subcustodian.
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) The Bank or its Subcustodians will make payments from the Deposit
Account upon receipt of Instructions which include all information required by
the Bank.
(b) In the event that any payment to be made under this Section 5 exceeds
the funds available in the Deposit Account, the Bank, in its discretion, may
advance the Customer such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by the Bank on similar
loans.
(c) If the Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, the Customer will
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If the Customer does not promptly return
any amount upon such notification, the Bank shall be entitled, upon oral or
written notification to the Customer to reverse such credit by debiting the
Deposit Account for the amount previously credited. The Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings, file a claim or
a proof of claim in any insolvency proceeding or take any other action with
respect to the collection of such amount, but may act for the Customer upon
Instructions after consultation with the Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities will be transferred, exchanged or delivered by the Bank or
its Subcustodian upon receipt by the Bank of Instructions which include all
information required by the Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to the Bank.
(b) The Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transaction will be credited
or debited to the Accounts on the date cash or Securities are actually received
by the Bank and reconciled to the Accounts.
(i) The Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within a reasonable
period, determined by the Bank in its discretion, after the contractual
settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, the Bank may reverse the credits and debits
of the particular transaction at any time.
7. ACTIONS OF THE BANK.
The Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, the Bank will
perform the following functions.
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items which
call for payment upon presentation, to the extent that the Bank or Subcustodian
is actually aware of such opportunities.
(b) Execute in the name of the Customer such ownership and other
certificates as may be required to obtain payments in respect of Securities.
(c) Exchange interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, affiliates of the Bank or any
Subcustodian.
(e) Issue statements to the Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
The Bank will send the Customer an advice or notification of any transfers
of Assets to or from the Accounts. Such statements, advices or notifications
shall indicate the identity of the entity having custody of the Assets. Unless
the Customer sends the Bank a written exception or objection to any Bank
statement within sixty days of receipt, the Customer shall be deemed to have
approved such statement. In such event, or where the Customer has otherwise
approved any such statement, the Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters set forth in such
statement or reasonably implied therefrom as though it had been settled by the
decree of a court of competent jurisdiction in an action where the Customer and
all persons having or claiming an interest in the Customer or the Customer's
Accounts were parties.
All collections of funds or other property paid or distributed in respect
of Securities in the Custody Account shall be made at the risk of the Customer.
The Bank shall have no liability for any loss occasioned by delay in the actual
receipt of notice by the Bank or by its Subcustodians of any payment, redemption
or other transaction regarding Securities in the Custody Account in respect of
which the Bank has agreed to take any action under this Agreement.
8. CORPORATE ACCOUNTS; PROXIES.
Whenever the Bank receives information concerning the Securities which
requires discretionary action by the beneficial owner of the Securities (other
than a proxy), such as subscription rights, bonus issues, stock repurchase plans
and rights offerings, or legal notices or other material intended to be
transmitted to securities holders ("Corporate Actions"), the Bank will give the
Customer notice of such Corporate Actions to the extent that the Bank's central
corporate actions department has actual knowledge of a Corporate Action in time
to notify its customers.
When a rights entitlement or a fractional interest resulting from a rights
issue, stock dividend, stock split or similar Corporate Action is received which
bears an expiration date, the Bank will endeavor to obtain Instructions from the
Customer or its Authorized Person, as defined in Section 10, but if Instructions
are not received in time for the Bank to take timely action, or actual notice of
such Corporate Action was received too late to seek Instructions, the Bank is
authorized to sell such rights entitlement or fractional interest and to credit
the Deposit Account with the proceeds or take any other action it deems, in good
faith, to be appropriate in which case it shall be held harmless for any such
action.
The Bank will deliver proxies to the Customer or its designed agent
pursuant to special arrangements which may have been agreed to in writing. Such
proxies shall be executed in the appropriate nominee name relating to Securities
in the Custody Account registered in the name of such nominee but without
indicating the manner in which such proxies are to be voted, and where bearer
Securities are involved, proxies will be delivered in accordance with
Instructions.
9. NOMINEES.
Securities which are ordinarily held in registered form may be registered in
a nominee name of the Bank, Subcustodian or securities depository, as the case
may be. The Bank may, without notice to the Customer, cause any such Securities
to cease to be registered in the name of any such nominee and to be registered
in the name of the Customer. In the event that any Securities registered in a
nominee name are called for partial redemption by the issuer, the Bank may allot
the called portion to the respective beneficial holders of such class of
security in any manner the Bank deems to be fair and equitable. The Customer
agrees to hold the Bank, Subcustodians, and their respective nominees harmless
from any liability arising directly or indirectly from their status as a mere
record holder of Securities in the Custody Account.
10. AUTHORIZED PERSONS.
As used in this Agreement the term "Authorized Person" means employees or
agents including investment managers as have been designated by written notice
from the Customer or its designated agent to act on behalf of the Customer under
this Agreement. Such persons shall continue to be Authorized Persons until such
time as the Bank receives Instructions from the Customer or its designated agent
that any such employee or agent is no longer an Authorized Person.
11. INSTRUCTIONS.
The term "Instructions" means Instructions of any Authorized Person received
by the Bank, via telephone, telex, TWX, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to the Bank which the Bank believes in good faith to have been given
by Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Bank may specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded.
Any Instructions delivered to the Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but the Customer will hold the
Bank harmless for the failure of an Authorized Person to send such confirmation
in writing, the failure of such confirmation to conform to the telephone
Instructions received or the Bank's failure to produce such confirmation at any
subsequent time. Either Party may electronically record any Instructions given
by telephone, and any other telephone discussions with respect to the Custody
Account. The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall make
available to the Customer or its Authorized Persons.
Account transactions made pursuant to Sections 5 and 6 of this Agreement
may be made only for the purposes listed below. Instructions must specify the
purpose for which any transaction is to be made and the Customer shall be solely
responsible to assure that Instructions are in accord with any limitations or
restrictions applicable to the Customer by law or as may be set forth in its
prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise become
payable.
(c) In exchange for or upon conversion into other securities alone or other
securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a pledge of
Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer and the delivery to, or the crediting to the account of the Bank,
its Subcustodian or the Customer's transfer agent, such shares to be
purchased or redeemed.
(j) For the purpose of redeeming in kind shares of the Customer against
delivery of the shares to be redeemed to the Bank, its Subcustodian or the
Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement among
the Customer, the Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of the National
Association of Securities Dealers, Inc, relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only
upon payment to the Bank of monies for the premium due and a receipt for
the Securities which are to be held in escrow. Upon exercise of the option,
or at expiration, the Bank will receive the Securities previously deposited
from brokers. The Bank will act strictly in accordance with Instructions in
the delivery of Securities to be held in escrow and will have no
responsibility or liability for any such Securities which are not returned
promptly when due other than to make proper request for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions.
(n) For other proper purposes as may be specified in Instructions issued by
an officer of the Customer which shall include a statement of the purpose
for which the delivery or payment is to be made, the amount of the payment
or specific Securities to be delivered, the name of the person or persons
to whom delivery or payment is to be made, and a certification that the
purpose is a proper purpose under the instruments governing the Customer.
(o) Upon the termination of this Agreement as set forth in Section 14(i).
12. STANDARD OF CARE; LIABILITIES.
a) The Bank shall be responsible for the performance of only such duties as
are set forth in this Agreement or expressly contained in Instructions which are
consistent with the provisions of this Agreement.
(i) The Bank will use reasonable care with respect to its obligations under
this Agreement and the safekeeping of Assets. The Bank shall be liable to
the Customer for any loss which shall occur as the result of the failure of
a Subcustodian to exercise reasonable care with respect to the safekeeping
of such Assets to the same extent that the Bank would be liable to the
Customer if the Bank were holding such Assets in New York. In the event of
any loss to the Customer by reason of the failure of the Bank or its
Subcustodian to utilize reasonable care, the Bank shall be liable to the
Customer only to the extent of the Customers direct damages, to be
determined based on the market value of the property which is the subject
of the loss at the date of discovery of such loss and without reference to
any special conditions or circumstances.
(ii) The Bank will not be responsible of any act, omission, default or for
the solvency of any broker or agent which it or a Subcustodian appoints
unless such appointment was made negligently or in bad faith.
(iii) The Bank shall be indemnified by and without liability to the
Customer for any action taken or omitted by the Bank whether pursuant to
Instructions or otherwise within the scope of this Agreement if such act or
omission was in good faith without negligence. In performing its
obligations under this Agreement, the Bank may rely on the genuineness of
any document which it believes in good faith to have been validly executed.
(iv) The Customer agrees to pay for and hold the Bank harmless from any
liability or loss resulting from the imposition or assessment of any taxes
or other governmental charges, and any related expenses with respect to
income from or Assets in the Accounts.
(v) The Bank shall be entitled to rely and may act upon the advice of
counsel (who may be counsel for the Customer) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice.
(vi) The Bank need not maintain any insurance for the benefit of the
Customer.
(vii) Without limiting the foregoing, the Bank shall not be liable for any
loss which results from: 1) the general risk of investing or 2) investing
or holding Assets in a particular country including, but not limited to,
losses resulting from nationalization, expropriation or other governmental
actions; regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions which
prevent the orderly execution of securities transactions or affect the
value of Assets.
(viii) Neither party shall be liable to the other for any loss due to
forces beyond their control including, but not limited to strikes or work
stoppages, acts of war or terrorism, insurrection, revolution, nuclear
fusion, fission or radiation, or acts of God.
b) Consistent with and without limiting the first paragraph of this Section
12, it is specifically acknowledged that the Bank shall have no duty or
responsibility to:
(i) Question Instructions or make any suggestions to the Customer or an
Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to investments or the
retention of Securities;
(iii) advise the Customer or an Authorized Person regarding any default in
the payment of principal or income of any security other than as provided
in Section 5(c) of this Agreement;
(iv) evaluate or report to the Customer or an Authorized Person regarding
the financial condition of any broker. agent or other party to which
Securities are delivered or payments are made pursuant to this Agreement;
or
v) review or reconcile trade confirmations received from brokers. The
Customer or its Authorized Persons issuing Instructions shall bear any
responsibility to review such confirmations against Instructions issued to
and statements issued by the Bank.
c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or affiliates may have a
material interest in a transaction, or circumstances are such that the Bank may
have a potential conflict of duty or interest including the fact that the Bank
or any of its affiliates may provide brokerage services to other customers, act
as financial advisor to the issuer of Securities, act as a lender to the issuer
of Securities, act in the same transaction as agent for more than one customer
have a material interest in the issue of Securities, or earn profits from any of
the activities listed herein.
(d) the Bank hereby warrants to the Customer that in its opinion, after
due inquiry, the established procedures to be followed by each of its branches,
each branch of a qualified U.S. bank, each eligible foreign custodian and each
eligible foreign securities depository holding the Customer's Securities
pursuant to this Agreement afford protection for such Securities at least equal
to that afforded by the Bank's established procedures with respect to similar
securities held by the Bank and its securities depositories in New York.
13. FEES AND EXPENSES.
The Customer agrees to pay the Bank for its services under this Agreement
such amount as may be agreed upon in writing, together with the Bank's
reasonable out-of-pocket or incidental expenses, including, but not limited to
legal fees. The Bank shall have a lien on and is authorized to charge any
Accounts of the Customer for any amount owing to the Bank under any provision of
this Agreement.
14. MISCELLANEOUS.
(a) Foreign Exchange Transactions. To facilitate the administration of the
Customers trading and investment activity, the Bank is authorized to enter into
spot or forward foreign exchange contracts with the Customer or an Authorized
Person for the Customer and may also provide foreign exchange through its
subsidiaries, affiliates or Subcustodians. Instructions, including standing
Instructions, may be issued with respect to such contracts but the Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where the Bank, its subsidiaries, affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of the Bank,
its subsidiary, affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement, shall apply to such transaction.
(b) Certification of Residency, etc. The Customer certifies that it is a
resident of the United States and agrees to notify the Bank of any changes in
residency. The Bank may rely upon this certification or the certification of
such other facts as may be required to administer the Bank's obligations under
this Agreement. The Customer will indemnify the Bank against all losses,
liability, claims or demands arising directly or indirectly from any such
certifications.
(c) Access to Records. The Bank shall allow the Customers independent
public accountants reasonable access to the records of the Bank relating to the
Assets as is required in connection with their examination of books and records
pertaining to the Customer's affairs. Subject to restrictions under applicable
law, the Bank shall also obtain an undertaking to permit the Customer's
independent public accountants reasonable access to the records of any
Subcustodian which has physical possession of any Assets as may be required in
connection with the examination of the Customers books and records. Upon
reasonable request from the Customer, the Bank shall furnish the Customer such
reports (or portions thereof) of the Bank's system of internal accounting
controls applicable to the Bank's duties under this Agreement. The Bank shall
endeavor to obtain and furnish the Customer with such similar reports as it may
reasonably request with respect to each Subcustodian and securities depository
holding the Customer's assets.
(d) Governing Law; Successors and Assigns. This Agreement shall be governed
by the laws of the State of New York and shall not be assignable by either
party, but shall bind the successors in interest of the Customer and the Bank.
(e) Entire Agreement; Applicable Riders. Customer represents that the Assets
deposited in the Accounts are (check one):
____ employee benefit plan or other assets subject to the Employee
Retirement Income Security Act of 1974; as amended ("ERlSA");
X mutual fund assets subject to Securities and Exchange Commission
("SEC") rules and regulations; or
____ neither of the above.
This Agreement consists exclusively of this document together with Schedule
A and the following rider(s) [check applicable rider(s)]:
_____ ERISA
X MUTUAL FUND
_____ SPECIAL TERMS AND CONDITIONS
There are no other provisions of this Agreement and this Agreement
supersedes any other agreements, whether written or oral, between the parties.
Any amendment to this Agreement must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions of this Agreement
are held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of any such provision and the remaining provisions, under other
circumstances or in other jurisdictions will not in any way be affected or
impaired.
(g) Waiver. Except as otherwise provided in this Agreement, no failure or
delay on the part of either party in exercising any power or right under this
Agreement operates as a waiver, nor does any single or partial exercise of any
power or right preclude any other or further exercise thereof, or the exercise
of any other power or right. No waiver by a party of any provision of this
Agreement, or waiver of any breach or default, is effective unless in writing
and signed by the party against whom the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be effective when
actually received. Any notices or other communications which may be required
under this Agreement are to be sent to the parties at the following addresses or
such other addresses as may subsequently be given to the other party in writing;
Bank: The Chase Manhattan Bank, N.A.
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Attention: Global Securities Services
Customer: FRANKLIN INTERNATIONAL TRUST
777 Mariners Island Blvd.
San Mateo, California 94404
Attention: D. Loo-Tam
Fund Accounting
with a copy to:
Templeton Group of Funds
Broward Financial Center
500 East Broward, Suite 2100
Ft. Lauderdale, Florida 33394-3091
Attention: Jim Baio
Fund Accounting
(i) Termination. This Agreement may be terminated by the Customer or the
Bank by giving sixty days written notice to the other, provided that such notice
to the Bank shall specify the names of the persons to whom the Bank shall
deliver the Assets in the Accounts. If notice of termination is given by the
Bank, the Customer shall, within sixty days following receipt of the notice,
deliver to the Bank Instructions specifying the names of the persons to whom the
Bank shall deliver the Assets. In either case the Bank will deliver the Assets
to the persons so specified, after deducting any amounts which the Bank
determines in good faith to be owed to it under Section 13. If within sixty days
following receipt of a notice of termination by the Bank, the Bank does not
receive Instructions from the Customer specifying the names of the persons to
whom the Bank shall deliver the Assets, the Bank, at its election, and
consistent with the requirements of the Investment Company Act of 1940, may
deliver the Assets to a bank or trust company doing business in the State of New
York to be held and disposed of pursuant to the provisions of this Agreement, or
to Authorized Persons, or may continue to hold the Assets until Instructions are
provided to the Bank.
FRANKLIN INTERNATIONAL TRUST
By /s/ Harmon E. Burns
Vice President
Title
THE CHASE MANHATTAN BANK, N.A.
By /s/ illegible
Vice President
Title
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank. N.A. and
FRANKLIN INVESTORS SECURITIES TRUST
effective as of______________
Customer represents that the Assets being placed in the Bank's custody are
subject to the Investment Company Act of 1940, as the same may be amended from
time to time.
Except to the extent that the Bank has specifically agreed to comply with
a condition of a rule, regulation or interpretation promulgated by or under the
authority of the Securities and Exchange Commission or the Exemptive Order
applicable to accounts of this nature issued to the Bank (Investment Company Act
of 1940, Release No. 12053, November 20, 1981), as amended, or unless the Bank
has otherwise specifically agreed, the Customer shall be solely responsible to
assure that the maintenance of Assets under this Agreement complies with such
rules, regulations, interpretations or exemptive order promulgated by or under
the authority of the Securities and Exchange Commission.
SCHEDULE A
SUBCUSTODIANS
[TO BE SUPPLIED BY CUSTODIAN, CONSISTENT WITH RULE 17F-5 MATERIALS]
Stradley Ronon Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103-7098
Direct Dial: (215) 564-8024
December 27, 1995
Franklin Investors Securities Trust
777 Mariners Island Blvd.
San Mateo, California 94404
Re: FRANKLIN INVESTORS SECURITIES TRUST
Gentlemen:
We have examined the Declaration of Trust and Bylaws of Franklin Investors
Securities Trust ("Fund"), a Massachusetts Business Trust, and the various
pertinent records, documents and proceedings we deem material. We have also
examined the Notification of Registration and the Registration Statements filed
under the Investment Company Act of 1940 ("Investment Company Act") and the
Securities Act of 1933 ("Securities Act"), all as amended to date, as well as
other items we deem material to this opinion.
You have indicated that, pursuant to Section 24(e)(l) of the Investment
Company Act, the Fund intends to file Post-Effective Amendment No. 17 to its
registration statement under the Securities Act to register 22,268,534
additional shares of beneficial interest for sale pursuant to its currently
effective registration statement under the Securities Act.
Based upon the foregoing information and examination, it is our opinion
that the Fund is a valid and subsisting business trust organized under the laws
of the Commonwealth of Massachusetts and that the proposed registration of the
22,268,534 shares of beneficial interest is proper and such shares of beneficial
interest, when issued will be legally outstanding, fully-paid and non-assessable
shares of beneficial interest, and the holders of such shares of beneficial
interest will have all the rights provided for with respect to such holding by
the Declaration of Trust and the laws of the Commonwealth of Massachusetts.
We hereby consent to the use of this opinion as an exhibit to
Post-Effective Amendment No. 17 to be filed by the Fund, covering the
registration of the said shares under the Securities Act and the applications
and registration statements, and amendments thereto, filed in accordance with
the securities laws of the several states in which shares of the Fund are
offered, and we further consent to reference in the Prospectus and Statement of
Additional Information of the Fund to the fact that this opinion concerning the
legality of the issue has been rendered by us.
Very truly yours,
STRADLEY, RONON, STEVENS & YOUNG
BY: /s/ Mark H. Plafker
Mark H. Plafker
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees of Franklin Investors Securities Trust.
We consent to the incorporation by reference in Post-Effective Amendment No. 17
to the Registration Statement of Franklin Investors Securities Trust on Form
N-1A (File No. 33-11444) of our report dated December 8, 1995 on our audit of
the financial statements and financial highlights of Franklin Investors
Securities Trust which report is included in the Annual Report to Shareholders
for the year ended October 31, 1995, which is incorporated by reference in the
Registration Statement.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 27, 1995
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees of Adjustable Rate Securities Portfolios.
We consent to the incorporation by reference in Post-Effective Amendment No. 17
to the Registration Statement of Franklin Investors Securities Trust on Form
N-1A (File No. 33-11444) of our report dated December 8, 1995 on our audit of
the financial statements and financial highlights of Adjustable Rate Securities
Portfolios which report is included in the Annual Report to Shareholders for the
year ended October 31, 1995, which is incorporated by reference in the
Registration Statement.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 27, 1995
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN INVESTORS SECURITIES TRUST
II. Fund and Class: FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors or
Trustees of the Investment Company (the "Board"), including a majority of the
Board members who are not interested persons of the Investment Company and who
have no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, 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 pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
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 Class shares issued by
the Fund within the context of Rule 12b-1 under the 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 specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, 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. Distributors shall furnish to the Board, for its 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 should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: September 29, 1995
Investment Company
By:/s/ Deborah R. Gatzek
Franklin/Templeton Distributors, Inc.
By:/s/ Gregory E. Johnson
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN INVESTORS SECURITIES TRUST
II. Fund and Class: FRANKLIN EQUITY INCOME FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors or
Trustees of the Investment Company (the "Board"), including a majority of the
Board members who are not interested persons of the Investment Company and who
have no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, 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 pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
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 Class shares issued by
the Fund within the context of Rule 12b-1 under the 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 specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, 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. Distributors shall furnish to the Board, for its 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 should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: March 30, 1995
Investment Company
By: /s/ Deborah R. Gatzek
Franklin/Templeton Distributors, Inc.
By: /s/ Gregory E. Johnson
Fund Name:
Period Ending: 12/31/94 12/31/94
MAX OFF NAV
1 Yr T.Return: -6.58% -2.41%
5 Yr T.Return: 61.27% 68.47%
10 Yr T.Return: NA NA
From Inception: 85.09% 93.24%
Inception Date: 05/04/87 05/04/87
SEC STANDARD TOTAL RETURN
AS OF: 12/31/94
MAX OFFER NAV
ONE YEAR -6.58% -2.41%
P= 1000.00 1000.00
T= -0.0658 -0.0241
n= 1 1
ERV= 934.20 975.90
FIVE YEAR 10.03% 11.00%
P= 1000.00 1000.00
T= 0.1003 0.1100
n= 5 5
ERV= 1612.71 1685.06
TEN YEAR 0.00% 0.00%
P= 1000.00 1000.00
T= 0.0000 0.0000
n= 10 10
ERV= 1000.00 1000.00
FROM INCEPTION 05/04/87 8.36% 8.97%
P= 1000.00 1000.00
T= 0.0836 0.0897
n= 7.6685 7.6685
ERV= 1850.94 1932.36
AGGREGATE TOTAL RETURN
1 YEAR -6.58% -2.41%
5 YEAR 61.27% 68.47%
10 YEAR NA NA
FROM INCEPTION 85.09% 93.24%
30-DAY SEC YIELD 10.15%
30-DAY SEC YIELD W/O NA
WAIVER
FISCAL YEAR-END 9.52%
DISTRIBUTION RATE (ON MAX
OFFERING)
FISCAL YEAR-END 9.93%
DISTRIBUTION RATE (ON
NAV)
FUND #
For the year ended 12/31/94
SEC - YIELD CALCULATION
a = interest/dividends earned 751,960
b = expenses accrued 58,736
c = avg # of shares o/s 10,026,685
d = maximum offering price 8.344
a - b 6
SEC Yield= 2[(---------------------------------- + 1) -1]
cd
751,960 - 58,736 6
= 2[(----------------------------------- + 1) -1]
10,026,685 * 8.344
693,224 6
= 2[(------------------------- + 1) -1]
83,662,660
6
= 2[( 1.00828594265330 ) -1]
= 2( 1.05075695727946 - 1)
= 0.1015139146
= 10.15%
POWER OF ATTORNEY
The undersigned officers and trustees of ADJUSTABLE RATE SECURITIES
PORTFOLIOS (the "Registrant") hereby appoint HARMON E. BURNS, DEBORAH R. GATZEK,
KAREN L. SKIDMORE, LARRY L. GREENE, and MARK H. PLAFKER (with full power to each
of them to act alone) as their attorney-in-fact and agent, in all capacities, to
execute, and to file any of the documents referred to below relating to
Post-Effective Amendments to the Registrant's registration statement, or the
registration statements of other funds investing all or substantially all of
their assets in shares issued by the Registrant, on Form N-1A under the
Investment Company Act of 1940, as amended, and, in the case of a fund investing
all or substantially all of its assets in shares issued by the Registrant, the
Securities Act of 1933, covering the sale of shares of beneficial interest by
the Registrant or such other fund under prospectuses becoming effective after
the date hereof, including any amendment or amendments filed for the purpose of
updating the prospectus/or SAI, registering securities to be issued in
transactions permitted under the federal securities laws or increasing or
decreasing the amount of securities for which registration is being sought, with
all exhibits and any and all documents required to be filed with respect thereto
with any regulatory authority. Each of the undersigned grants to each of said
attorneys full authority to do every act necessary to be done in order to
effectuate the same as fully, to all intents and purposes as he could do if
personally present, thereby ratifying all that said attorneys-in-fact and agents
may lawfully do or cause to be done by virtue hereof.
The undersigned officers and trustees hereby execute this Power of Attorney
as of this 16th day of February 1995.
/s/ Charles E. Johnson /s/ Charles B. Johnson
Charles E. Johnson, Principal Charles B. Johnson,
Executive Officer and Trustee Trustee
/s/ Rupert H. Johnson, Jr. /s/ Frank H. Abbott, III
Rupert H. Johnson, Jr., Trustee Frank H. Abbott, III, Trustee
/s/ Harris J. Ashton /s/ S. Joseph Fortunato
Harris J. Ashton, Trustee S. Joseph Fortunato, Trustee
/s/ David W. Garbellano /s/ Frank W. T. LaHaye
David W. Garbellano, Trustee Frank W. T. LaHaye, Trustee
/s/ William J. Lippman /s/ Gordon S. Macklin
William J. Lippman, Trustee Gordon S. Macklin, Trustee
/s/ Diomedes Loo-Tam /s/ Martin L. Flanagan
Diomedes Loo-Tam, Martin L. Flanagan, Principal
Principal Accounting Officer Financial Officer
CERTIFICATE OF SECRETARY
I, Deborah R. Gatzek, certify that I am Secretary of Adjustable Rate
Securities Portfolios (the "Trust").
As Secretary of the Trust, I further certify that the following resolution was
adopted by a majority of the Trustees of the Trust present at a meeting held at
777 Mariners Island Boulevard, San Mateo, California, on February 16, 1995.
RESOLVED, that a Power of Attorney, substantially in the form of the
Power of Attorney presented to this Board, appointing Harmon E. Burns,
Deborah R. Gatzek, Karen L. Skidmore, Larry L. Greene and Mark H.
Plafker as attorneys-in-fact for the purpose of filing documents with
the Securities and Exchange Commission, be executed by each Trustee and
designated officer.
I declare under penalty of perjury that the matters set forth in this
certificate are true and correct of my own knowledge.
/s/ Deborah R. Gatzek
Dated: February 16, 1995 Deborah R. Gatzek
Secretary
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 051
[NAME] FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS I
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 159,742,614
[INVESTMENTS-AT-VALUE] 156,648,217
[RECEIVABLES] 21,509,342
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 1,002
[TOTAL-ASSETS] 178,158,561
[PAYABLE-FOR-SECURITIES] 9,779,831
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,215,823
[TOTAL-LIABILITIES] 11,995,654
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 173,992,975
[SHARES-COMMON-STOCK] 19,849,662
[SHARES-COMMON-PRIOR] 23,212,589
[ACCUMULATED-NII-CURRENT] 100,998
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (4,593,867)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (3,337,199)
[NET-ASSETS] 166,162,907
[DIVIDEND-INCOME] 427,054
[INTEREST-INCOME] 15,392,484
[OTHER-INCOME] 0
[EXPENSES-NET] (1,645,420)
[NET-INVESTMENT-INCOME] 14,174,118
[REALIZED-GAINS-CURRENT] (4,205,563)
[APPREC-INCREASE-CURRENT] 9,792,417
[NET-CHANGE-FROM-OPS] 19,760,972
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (13,730,112)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (1,386,320)
[NUMBER-OF-SHARES-SOLD] 5,432,041
[NUMBER-OF-SHARES-REDEEMED] (9,709,607)
[SHARES-REINVESTED] 914,639
[NET-CHANGE-IN-ASSETS] (21,040,936)
[ACCUMULATED-NII-PRIOR] 16,291,164
[ACCUMULATED-GAINS-PRIOR] (15,963,546)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (984,273)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (1,645,420)
[AVERAGE-NET-ASSETS] 170,811,183
[PER-SHARE-NAV-BEGIN] 8.060
[PER-SHARE-NII] .670
[PER-SHARE-GAIN-APPREC] .290
[PER-SHARE-DIVIDEND] (.645)
[PER-SHARE-DISTRIBUTIONS] .000
[RETURNS-OF-CAPITAL] (.065)
[PER-SHARE-NAV-END] 8.310
[EXPENSE-RATIO] .960
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 052
[NAME] FRANKLIN GLOBAL GOVERNMENT INCOME FUND - CLASS II
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 159,742,614
[INVESTMENTS-AT-VALUE] 156,648,217
[RECEIVABLES] 21,509,342
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 1,002
[TOTAL-ASSETS] 178,158,561
[PAYABLE-FOR-SECURITIES] 9,779,831
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,215,823
[TOTAL-LIABILITIES] 11,995,654
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 173,992,975
[SHARES-COMMON-STOCK] 143,557
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 100,998
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (4,593,867)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (3,337,199)
[NET-ASSETS] 166,162,907
[DIVIDEND-INCOME] 427,054
[INTEREST-INCOME] 15,392,484
[OTHER-INCOME] 0
[EXPENSES-NET] (1,645,420)
[NET-INVESTMENT-INCOME] 14,174,118
[REALIZED-GAINS-CURRENT] (4,205,563)
[APPREC-INCREASE-CURRENT] 9,792,417
[NET-CHANGE-FROM-OPS] 19,760,972
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (18,628)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (1,753)
[NUMBER-OF-SHARES-SOLD] 145,023
[NUMBER-OF-SHARES-REDEEMED] (3,208)
[SHARES-REINVESTED] 1,742
[NET-CHANGE-IN-ASSETS] (21,040,936)
[ACCUMULATED-NII-PRIOR] 16,291,164
[ACCUMULATED-GAINS-PRIOR] (15,963,546)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (984,273)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (1,645,420)
[AVERAGE-NET-ASSETS] 514,274
[PER-SHARE-NAV-BEGIN] 8.030
[PER-SHARE-NII] .310
[PER-SHARE-GAIN-APPREC] .301
[PER-SHARE-DIVIDEND] (.301)
[PER-SHARE-DISTRIBUTIONS] .000
[RETURNS-OF-CAPITAL] (.030)
[PER-SHARE-NAV-END] 8.310
[EXPENSE-RATIO] 1.540
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 1
[NAME] FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 201,589,041
[INVESTMENTS-AT-VALUE] 205,249,016
[RECEIVABLES] 3,503,761
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 208,752,777
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 695,337
[TOTAL-LIABILITIES] 695,337
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 209,784,649
[SHARES-COMMON-STOCK] 20,101,531
[SHARES-COMMON-PRIOR] 22,470,954
[ACCUMULATED-NII-CURRENT] 613,089
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (6,000,273)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 3,659,975
[NET-ASSETS] 208,057,440
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 13,146,067
[OTHER-INCOME] 0
[EXPENSES-NET] (1,563,830)
[NET-INVESTMENT-INCOME] 11,582,237
[REALIZED-GAINS-CURRENT] (3,564,637)
[APPREC-INCREASE-CURRENT] 10,082,805
[NET-CHANGE-FROM-OPS] 18,100,405
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (11,517,255)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 4,024,376
[NUMBER-OF-SHARES-REDEEMED] (7,081,035)
[SHARES-REINVESTED] 687,236
[NET-CHANGE-IN-ASSETS] (17,294,291)
[ACCUMULATED-NII-PRIOR] 548,107
[ACCUMULATED-GAINS-PRIOR] (2,435,636)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 1,187,800
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,563,830
[AVERAGE-NET-ASSETS] 213,512,738
[PER-SHARE-NAV-BEGIN] 10.030
[PER-SHARE-NII] .560
[PER-SHARE-GAIN-APPREC] .309
[PER-SHARE-DIVIDEND] (0.549)
[PER-SHARE-DISTRIBUTIONS] .000
[RETURNS-OF-CAPITAL] .000
[PER-SHARE-NAV-END] 10.350
[EXPENSE-RATIO] .730
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 021
[NAME] FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS I
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 75,353,759
[INVESTMENTS-AT-VALUE] 77,740,166
[RECEIVABLES] 7,321,639
[ASSETS-OTHER] 105,290
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 85,167,095
[PAYABLE-FOR-SECURITIES] 1,253,125
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 181,152
[TOTAL-LIABILITIES] 1,434,277
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 76,543,261
[SHARES-COMMON-STOCK] 6,561,376
[SHARES-COMMON-PRIOR] 5,418,177
[ACCUMULATED-NII-CURRENT] 152,947
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 4,650,203
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 2,386,407
[NET-ASSETS] 83,732,818
[DIVIDEND-INCOME] 1,554,812
[INTEREST-INCOME] 2,659,811
[OTHER-INCOME] 0
[EXPENSES-NET] (740,465)
[NET-INVESTMENT-INCOME] 3,474,158
[REALIZED-GAINS-CURRENT] 4,651,306
[APPREC-INCREASE-CURRENT] 2,080,220
[NET-CHANGE-FROM-OPS] 10,205,684
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (3,522,594)
[DISTRIBUTIONS-OF-GAINS] (3,804,886)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,010,356
[NUMBER-OF-SHARES-REDEEMED] (1,305,974)
[SHARES-REINVESTED] 438,817
[NET-CHANGE-IN-ASSETS] 16,863,792
[ACCUMULATED-NII-PRIOR] 201,976
[ACCUMULATED-GAINS-PRIOR] 3,803,783
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 453,492
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 740,465
[AVERAGE-NET-ASSETS] 72,086,889
[PER-SHARE-NAV-BEGIN] 12.340
[PER-SHARE-NII] .580
[PER-SHARE-GAIN-APPREC] 1.099
[PER-SHARE-DIVIDEND] (.592)
[PER-SHARE-DISTRIBUTIONS] (.697)
[RETURNS-OF-CAPITAL] .000
[PER-SHARE-NAV-END] 12.730
[EXPENSE-RATIO] 1.030
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 022
[NAME] FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS II
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 75,353,759
[INVESTMENTS-AT-VALUE] 77,740,166
[RECEIVABLES] 7,321,639
[ASSETS-OTHER] 105,290
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 85,167,095
[PAYABLE-FOR-SECURITIES] 1,253,125
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 181,152
[TOTAL-LIABILITIES] 1,434,277
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 76,543,261
[SHARES-COMMON-STOCK] 16,471
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 152,947
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 4,650,203
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 2,386,407
[NET-ASSETS] 83,732,818
[DIVIDEND-INCOME] 1,554,812
[INTEREST-INCOME] 2,659,811
[OTHER-INCOME] 0
[EXPENSES-NET] (740,465)
[NET-INVESTMENT-INCOME] 3,474,158
[REALIZED-GAINS-CURRENT] 4,651,306
[APPREC-INCREASE-CURRENT] 2,080,220
[NET-CHANGE-FROM-OPS] 10,205,684
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (593)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 47,208
[NUMBER-OF-SHARES-REDEEMED] (30,783)
[SHARES-REINVESTED] 46
[NET-CHANGE-IN-ASSETS] 16,863,792
[ACCUMULATED-NII-PRIOR] 201,976
[ACCUMULATED-GAINS-PRIOR] 3,803,783
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 453,492
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 740,465
[AVERAGE-NET-ASSETS] 308,309
[PER-SHARE-NAV-BEGIN] 13.060
[PER-SHARE-NII] .070
[PER-SHARE-GAIN-APPREC] (.373)
[PER-SHARE-DIVIDEND] (.047)
[PER-SHARE-DISTRIBUTIONS] .000
[RETURNS-OF-CAPITAL] .000
[PER-SHARE-NAV-END] 12.710
[EXPENSE-RATIO] 1.600
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST FUND OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 3
[NAME] FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 548,994,094
[INVESTMENTS-AT-VALUE] 509,752,849
[RECEIVABLES] 142,499
[ASSETS-OTHER] 67,505
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 509,962,853
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 592,271
[TOTAL-LIABILITIES] 592,271
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 617,511,791
[SHARES-COMMON-STOCK] 54,517,877
[SHARES-COMMON-PRIOR] 76,126,510
[ACCUMULATED-NII-CURRENT] 1,352,705
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (70,252,669)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (39,241,245)
[NET-ASSETS] 509,370,582
[DIVIDEND-INCOME] 36,196,034
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] (2,503,621)
[NET-INVESTMENT-INCOME] 33,692,413
[REALIZED-GAINS-CURRENT] (18,757,683)
[APPREC-INCREASE-CURRENT] 26,814,593
[NET-CHANGE-FROM-OPS] 41,749,323
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (33,597,566)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 14,029,557
[NUMBER-OF-SHARES-REDEEMED] (37,854,275)
[SHARES-REINVESTED] 2,216,085
[NET-CHANGE-IN-ASSETS] (191,246,240)
[ACCUMULATED-NII-PRIOR] 1,257,858
[ACCUMULATED-GAINS-PRIOR] (51,494,986)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 584,957
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2,503,621
[AVERAGE-NET-ASSETS] 584,983,866
[PER-SHARE-NAV-BEGIN] 9.200
[PER-SHARE-NII] .540
[PER-SHARE-GAIN-APPREC] .136
[PER-SHARE-DIVIDEND] (.536)
[PER-SHARE-DISTRIBUTIONS] .000
[RETURNS-OF-CAPITAL] .000
[PER-SHARE-NAV-END] 9.340
[EXPENSE-RATIO] .610
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 041
[NAME] FRANKLIN EQUITY INCOME FUND - CLASS I
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 159,954,724
[INVESTMENTS-AT-VALUE] 169,137,015
[RECEIVABLES] 1,857,789
[ASSETS-OTHER] 169,977
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 171,164,781
[PAYABLE-FOR-SECURITIES] 1,644,561
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 236,384
[TOTAL-LIABILITIES] 1,880,945
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 155,096,673
[SHARES-COMMON-STOCK] 11,121,614
[SHARES-COMMON-PRIOR] 6,560,288
[ACCUMULATED-NII-CURRENT] 399,686
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 4,605,186
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 9,182,291
[NET-ASSETS] 169,283,836
[DIVIDEND-INCOME] 4,900,662
[INTEREST-INCOME] 1,819,320
[OTHER-INCOME] 0
[EXPENSES-NET] (1,241,358)
[NET-INVESTMENT-INCOME] 5,478,624
[REALIZED-GAINS-CURRENT] 4,616,219
[APPREC-INCREASE-CURRENT] 6,569,952
[NET-CHANGE-FROM-OPS] 16,664,795
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (5,162,293)
[DISTRIBUTIONS-OF-GAINS] (1,652,725)
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 6,072,743
[NUMBER-OF-SHARES-REDEEMED] (1,878,096)
[SHARES-REINVESTED] 366,679
[NET-CHANGE-IN-ASSETS] 76,521,072
[ACCUMULATED-NII-PRIOR] 83,999
[ACCUMULATED-GAINS-PRIOR] 1,641,692
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 754,194
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,257,338
[AVERAGE-NET-ASSETS] 123,499,801
[PER-SHARE-NAV-BEGIN] 14.140
[PER-SHARE-NII] 0.630
[PER-SHARE-GAIN-APPREC] 1.272
[PER-SHARE-DIVIDEND] (0.609)
[PER-SHARE-DISTRIBUTIONS] (0.243)
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.190
[EXPENSE-RATIO] 1.000
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 042
[NAME] FRANKLIN EQUITY INCOME FUND - CLASS II
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 159,954,724
[INVESTMENTS-AT-VALUE] 169,137,015
[RECEIVABLES] 1,857,789
[ASSETS-OTHER] 169,977
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 171,164,781
[PAYABLE-FOR-SECURITIES] 1,644,561
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 236,384
[TOTAL-LIABILITIES] 1,880,945
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 155,096,673
[SHARES-COMMON-STOCK] 25,444
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 399,686
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 4,605,186
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 9,182,291
[NET-ASSETS] 169,283,836
[DIVIDEND-INCOME] 4,900,662
[INTEREST-INCOME] 1,819,320
[OTHER-INCOME] 0
[EXPENSES-NET] (1,241,358)
[NET-INVESTMENT-INCOME] 5,478,624
[REALIZED-GAINS-CURRENT] 4,616,219
[APPREC-INCREASE-CURRENT] 6,569,952
[NET-CHANGE-FROM-OPS] 16,664,795
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (644)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 25,828
[NUMBER-OF-SHARES-REDEEMED] (425)
[SHARES-REINVESTED] 41
[NET-CHANGE-IN-ASSETS] 76,521,072
[ACCUMULATED-NII-PRIOR] 83,999
[ACCUMULATED-GAINS-PRIOR] 1,641,692
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 754,194
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 1,257,338
[AVERAGE-NET-ASSETS] 386,376
[PER-SHARE-NAV-BEGIN] 15.380
[PER-SHARE-NII] 0.050
[PER-SHARE-GAIN-APPREC] (0.193)
[PER-SHARE-DIVIDEND] (0.047)
[PER-SHARE-DISTRIBUTIONS] 0.000
[RETURNS-OF-CAPITAL] 0.000
[PER-SHARE-NAV-END] 15.190
[EXPENSE-RATIO] 1.990
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0.000
</TABLE>
[ARTICLE] 6
[LEGEND]
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
INVESTORS SECURITIES TRUST FUND OCTOBER 31, 1995 ANNUAL REPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[SERIES]
[NUMBER] 061
[NAME] FRANKLIN ADJUSTABLE RATE SECURITIES FUND
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] OCT-31-1995
[PERIOD-END] OCT-31-1995
[INVESTMENTS-AT-COST] 17,443,950
[INVESTMENTS-AT-VALUE] 17,037,804
[RECEIVABLES] 49
[ASSETS-OTHER] 2,337
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 17,040,190
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 26,434
[TOTAL-LIABILITIES] 26,434
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 18,137,841
[SHARES-COMMON-STOCK] 1,732,290
[SHARES-COMMON-PRIOR] 2,532,014
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (717,939)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (406,146)
[NET-ASSETS] 17,013,756
[DIVIDEND-INCOME] 1,278,303
[INTEREST-INCOME] 0
[OTHER-INCOME] 0
[EXPENSES-NET] (92,077)
[NET-INVESTMENT-INCOME] 1,186,226
[REALIZED-GAINS-CURRENT] (298,102)
[APPREC-INCREASE-CURRENT] 508,371
[NET-CHANGE-FROM-OPS] 1,396,495
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (1,186,226)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,190,439
[NUMBER-OF-SHARES-REDEEMED] (2,082,373)
[SHARES-REINVESTED] 92,210
[NET-CHANGE-IN-ASSETS] (7,550,484)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (419,837)
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 19,936
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 106,665
[AVERAGE-NET-ASSETS] 20,375,421
[PER-SHARE-NAV-BEGIN] 9.700
[PER-SHARE-NII] .580
[PER-SHARE-GAIN-APPREC] .120
[PER-SHARE-DIVIDEND] (.580)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 9.820
[EXPENSE-RATIO] .700
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] .000
</TABLE>
