SUPPLEMENT DATED OCTOBER 2, 1995
TO THE PROSPECTUS FOR
FRANKLIN CONVERTIBLE SECURITIES FUND
Franklin Investors Securities Trust
dated March 1, 1995
Introduction. As of October 2, 1995, the Franklin Convertible Securities Fund
(the "Fund") offers two classes of shares to its investors: Franklin Convertible
Securities Fund - Class I ("Class I") and Franklin Convertible Securities Fund -
Class II ("Class II"). Investors 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. Investors
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
their anticipated investment amount and time horizon. See "Differences Between
Class I and Class II" below.
This Supplement must be read in conjunction with the Prospectus for this Fund.
All investment objectives and policies described in the Prospectus apply equally
to both classes of shares in the new multiclass structure. Further, all
operational procedures apply equally to both classes, unless otherwise specified
in the following discussion. See "Deciding Which Class to Purchase" below.
THE NEW APPLICATION FORM INCLUDED WITH THIS SUPPLEMENT MUST BE USED FOR ALL
PURCHASES. DO NOT USE THE APPLICATION FORM INCLUDED IN THE PROSPECTUS.
Multiclass Fund Structure. The Fund has two classes of shares available for
investment: Class I and Class II. 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. Voting rights of
each class will be the same on matters affecting the Fund as a whole, but each
will vote separately on matters affecting its class. See the Prospectus for more
details about Class I shares. Class II shares are explained in detail in the
following discussion. Except as described below, shares of both classes
represent identical interests in the Fund's investment portfolio.
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. The figures are based on aggregate
operating expenses of the Class I shares (before fee waivers and expense
reductions) for the fiscal year ended October 31, 1994.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class I Class II
Maximum Sales Charge Imposed on Purchases
<S> <C> <C>
(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........................................................... 0.63%* 0.63%*
Rule 12b-1 Fees........................................................... 0.20%** 1.00%**
Other Expenses:
Reports to Shareholders.................................................. 0.05% 0.05%
Shareholder Servicing Costs.............................................. 0.05% 0.05%
Other.................................................................... 0.10% 0.10%
Total Other Expenses...................................................... 0.20% 0.20%
Total Fund Operating Expenses............................................. 1.03%* 1.83%*
</TABLE>
++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.
*Represents the amount that would have been payable to the investment manager
before any fee waiver by the investment manager. The investment manager has
agreed in advance, however, to waive a portion of its management fees and to
make certain payments to reduce expenses. With this waiver and expense
reduction, management fees represented 0.55% and total operating expenses for
Class I and Class II represented 0.95% and 1.75%, respectively, of the average
net assets of the Fund.
**Rule 12b-1 fees for Class I are annualized. Actual Rule 12b-1 fees incurred by
Class I for the six months ended October 31, 1994 were 0.09%, which represents
an annualized rate 0.19%. See "Plan of Distribution" under "Management of the
Fund" in the Prospectus. Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that the combination of front-end sales
charges and Rule 12b-1 fees could cause long-term shareholders to pay more than
the economic equivalent of the maximum front-end sales charges permitted under
those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of the Prospectus and this Supplement.
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
Class I.......................... $55* $76 $99 $165
Class II......................... $38 $67 $108 $222
*assumes that a contingent deferred sales charge will not apply to Class I
shares
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 $67 $108 $222
This example is based on the aggregate operating expenses, 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 shareholders as
a result of their investment in the Fund. (See "Management of the Fund" in the
Prospectus for a description of the Fund's expenses.) 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 unaudited financial highlights for a
Class I share of the Fund for the six months ended April 30, 1995. This table
supplements the information under "Financial Highlights" in the Prospectus.
Information regarding Class II shares will be included in the "Financial
Highlights" section of the Prospectus after they have been offered to the public
for a reasonable period of time.
Six Months Ended
April 30 ,1995
(Unaudited)
Per Share Operating Performance
Net asset value at beginning of period....................... $12.34
Net investment income........................................ $ 0.29
Net realized and unrealized gains (losses) on securities..... $ 0.109
Total from investment operations............................. $ 0.399
Distributions from net investment income..................... $(0.292)
Distributions from capital gains............................. $(0.697)
Total Distributions.......................................... $(0.989)
Net asset value at end of period............................. $11.75
Total Return+................................................ 3.81%
Net assets at end of period (in 000's)....................... $70,035
Ratio of expenses to average net assets**.................... 1.00*%
Ratio of net investment income to average net assets......... 5.02*%
Portfolio turnover rate...................................... 37.32%
+Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the offering price.
*Annualized.
Deciding Which Class To Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment 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 long-term investors even if no sales charge reductions are
available to them.
Investors who qualify to purchase Class I shares at reduced sales charges should
seriously consider purchasing Class I shares, especially if they intend to hold
their shares for approximately six years or more. Investors who qualify to
purchase Class I shares at reduced sales charges but who intend to hold their
shares less than approximately six years 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. Investors
investing $1 million or more in a single payment and other investors who qualify
to purchase Class I shares at net asset value will be precluded from purchasing
Class II shares. See "Purchases at Net Asset Value" and "Description of Special
Net Asset Value Purchases" under "How to Buy Shares of the Fund" in the
Prospectus for a discussion of when shares may be purchased 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 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 amounts below $1 million. Any
purchases of $1 million or more will automatically be invested in Class I
shares, since that is more beneficial to investors. Such purchases, however, may
be subject to a contingent deferred sales charge. Investors may exceed $1
million in Class II shares by cumulative purchases over a period of time.
Investors who intend to make investments exceeding $1 million, however, should
consider purchasing Class I shares through a Letter of Intent instead of
purchasing Class II shares. See "How to Buy Shares of the Fund" in the
Prospectus for more information.
Differences Between Class I and Class II. The differences between Class I and
Class II shares are primarily their front-end sales charges, Rule 12b-1 fees and
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 will vote
separately on matters affecting its class.
A separate Plan of Distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively) pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended ("1940 Act"). The Rule 12b-1 fees
charged to each class will be based solely on the distribution and servicing
fees attributable to that particular class. Any portion of fees remaining from
the Class I Plan after distribution to securities dealers of up to the maximum
amount permitted may be used by the class to reimburse Franklin Templeton
Distributors, Inc. ("Distributors") for routine ongoing promotion and
distribution expenses incurred with respect to that class, whereas the Class II
Plan is a compensation plan. See "Plan of Distribution" in the Prospectus for a
description of such expenses.
Class I. Class I shares are generally subject to a variable sales charge upon
purchase and not subject to any sales charge upon redemption. Class I shares are
subject to Rule 12b-1 fees of up to a maximum of 0.25% per annum of average
daily net assets of the class.
Plan of Distribution. Under the Class I Plan, the Fund will reimburse
Distributors or other securities dealers for expenses incurred in the promotion,
servicing, and distribution of Class I Fund shares. (See "Plan of Distribution"
in the Prospectus and "Distribution Plans" in the Statement of Additional
Information ("SAI")).
Quantity Discounts and Purchases At Net Asset Value. Class I shares may be
purchased at a reduced front-end sales charge or at net asset value if certain
conditions are met. See "How to Buy Shares of the Fund."
Contingent Deferred Sales Charge. In most circumstances, a contingent deferred
sales charge will not be assessed against redemptions of Class I shares. A
contingent deferred sales charge will be imposed on Class I shares only if
shares valued at $1 million or more are purchased after February 1, 1995 without
a sales charge and are subsequently redeemed within 12 months of the calendar
month of their purchase. See "Contingent Deferred Sales Charge" under "How to
Sell Shares of the Fund" in this Supplement.
Class II. The current public offering price of Class II shares is equal to the
net asset value, plus a front-end sales charge of 1% of the amount invested.
Class II shares are also subject to 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% of average daily net assets of such shares. Class II shares have lower
front-end sales charges than Class I shares and comparatively higher Rule 12b-1
fees.
Plan of Distribution. Class II's operating expenses will generally be higher
under the Class II Plan. During the first year following a purchase of Class II
shares, Distributors will keep a portion of the Plan fees attributable to those
shares to partially recoup fees Distributors pays to securities dealers.
Distributors, or its affiliates, may pay, from its own resources, a commission
of up to 1% of the amount invested to securities dealers who initiate and are
responsible for purchases of Class II shares.
Contingent Deferred Sales Charge. Unless a waiver applies, a contingent deferred
sales charge of 1% will be imposed on Class II shares redeemed within 18 months
of their purchase. See "Contingent Deferred Sales Charges" under "How to Sell
Shares of the Fund" in this Supplement.
MANAGEMENT OF THE FUND
The Board of Trustees has carefully reviewed the multiclass structure to ensure
that no material conflicts exist 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 later 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.
For more information regarding the responsibilities of the Board of Trustees and
the management of the Fund, please see "Management of the Fund" in the
Prospectus.
Class II Plan of Distribution
Under the Class II Plan, the Fund pays to Distributors for distribution expenses
up to 0.75% per annum of Class II shares' 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.
The Class II 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 Class II 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 Class II of the Fund.
During the first year following the purchase of Class II shares, Distributors
will retain a portion of Class II's Rule 12b-1 fees equal to 0.75% per annum of
Class II's average daily net assets to partially recoup fees Distributors pays
to securities dealers. Distributors or its affiliates may pay, from its own
resources, a commission of up to 1% of the amount invested to securities dealers
who initiate and are responsible for purchases of Class II shares.
See the "Plan of Distribution" discussion in the "Management of the Fund"
section in the Prospectus and "Distribution Plans" in the SAI for more
information about both Class I and Class II Plans.
DISTRIBUTIONS TO SHAREHOLDERS
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.
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a front-end
sales charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value into the
same class of another fund in the Franklin Templeton Funds or to a Class I
Franklin Templeton Fund. See "Distributions to Shareholders" in the Prospectus
and the SAI for more information.
By completing the "Special Payment Instructions for Distributions" section of
the Shareholder Application included with this Prospectus, a shareholder may
direct the selected distributions to the same class of another fund in the
Franklin Templeton Funds, to a Class I Franklin Templeton Fund, to another
person, or directly into a checking account.
HOW TO BUY SHARES OF THE FUND
The following discussion supplements the one included in the Prospectus under
"How to Buy Shares of the Fund." The subsections entitled "Quantity Discounts in
Sales Charges," "Group Purchases" and "Description of Special Net Asset Value
Purchases" in the Prospectus only apply to Class I shares. Although sales
charges on Class II shares may not be reduced through a Letter of Intent or
Rights of Accumulation as described under "Quantity Discounts in Sales Charges,"
the value of Class II shares owned by an investor may be included in determining
the appropriate sales charges for Class I shares. THE APPLICATION FORM INCLUDED
WITH THIS SUPPLEMENT MUST ACCOMPANY ANY PURCHASE OF SHARES.
DO NOT USE THE APPLICATION INCLUDED IN THE PROSPECTUS.
The section to these changes regarding the new multiclass structure, the section
entitled "Quantity Discounts in Sales Charges" has been revised to state that,
in determining whether a purchase qualifies for a discount, an investment in any
of the Franklin Templeton Investments may be combined with those of the
investor's spouse, children under the age of 21 and grandchildren under the age
of 21.
Purchase Price of Fund 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 the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund,
or (2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
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. See "How to
Buy Shares of the Fund - Purchase Price of Fund Shares" in the Prospectus.
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
As a As a Dealer Concession
Size of Transaction Percentage of Percentage of Net as a Percentage
at Offering Price Offering Price Amount Invested of Offering Price*
<S> <C> <C> <C>
Any amount (less than $1 million)......... 1.00% 1.01% 1.00%
</TABLE>
* Distributors, or one of its affiliates, may make additional payments to
securities dealers, from 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 eighteen 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 to Sell Shares
of the Fund - Contingent Deferred Sales Charge."
Purchases at Net Asset Value
The section in the Prospectus titled "Purchases at Net Asset Value" only applies
to Class I shares, with the exception of the second and third paragraphs, which
are replaced with the following:
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. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Matured shares 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
"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 the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of the Prospectus and 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 in cash 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 invest such distributions 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
"Distributions in Cash" under "Distributions to Shareholders" in the Prospectus.
In addition, the following paragraph should replace the fourth paragraph of this
section:
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 a part of the
Franklin Templeton Funds, 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.
For a complete understanding of how to buy shares of the Fund, this Supplement
must be read in conjunction with the Prospectus. Refer to the SAI for further
information regarding net asset value purchases of Class I shares.
Purchasing Class I and Class II Shares
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares. Purchases of $1 million or
more in a single payment will be invested in Class I shares.
There are no conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset value should
purchase Class I rather than Class II shares. See the sections "Purchases at Net
Asset Value" and "Description of Special Net Asset Value Purchases" above and in
the Prospectus for a discussion of when shares may be purchased at net asset
value.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
With the exception of Systematic Withdrawal Plans, all programs and privileges
detailed under the discussion of "Other Programs and Privileges Available to
Fund Shareholders" will remain in effect as described in the Prospectus for the
new multiclass structure. For a complete discussion of these programs, see the
Prospectus.
Systematic Withdrawal Plans. Subject to the requirements outlined in the
Prospectus, a shareholder may establish a Systematic Withdrawal Plan for his or
her account. With respect to Class I shares, the contingent deferred sales
charge is waived for redemptions through a Systematic Withdrawal Plan set up
prior to February 1, 1995. With respect to Systematic Withdrawal Plans set up on
or after February 1, 1995, the applicable contingent deferred sales charge is
waived for Class I and Class II share redemptions of up to 1% monthly of an
account's net asset value (12% annually, 6% semi-annually, 3% quarterly). 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.
EXCHANGE PRIVILEGE
Shareholders are entitled to exchange their shares for the same class of shares
of other Franklin Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
Franklin Templeton Funds. Class II shares may be exchanged for Class II shares
of any 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 12 months (Class I shares) or 18 months (Class II shares) of the
calendar month of the original purchase date, a contingent deferred sales charge
will be imposed. Before making an exchange, investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges.
Exchanges of Class I Shares
The contingency period of Class I shares will be tolled (or stopped) for the
period such shares are exchanged into and held in a Franklin or Templeton 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 also "How to Sell Shares of the Fund -
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 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 a
shareholder has $1,000 in free shares, $2,000 in matured shares, and $3,000 in
CDSC liable shares, and the shareholder exchanges $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, a shareholder holds $1,000 in shares bought 3
months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into a 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 shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds are available for Class II shareholders
for exchange purposes. 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 CDSC. 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.
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. Like exchanges, Class II shares will be
moved proportionately from each type of shares in the original account.
Conversion Rights
It is not presently anticipated that Class II shares will be converted to Class
I shares. A shareholder may, however, sell his Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
See "Exchange Privilege" in the Prospectus for more information.
HOW TO SELL SHARES OF THE FUND
For a discussion regarding the sale of either class of Fund shares, refer to the
section in the Prospectus titled "How to Sell Shares of the Fund." In addition,
the charges described in this Supplement will also apply to the sale of all Fund
shares. The subsection titled "Contingent Deferred Sales Charge" in the
Prospectus is replaced with the following:
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers on Class I
investments of $1 million or more and any Class II investments redeemed within
the contingency period of 12 months (Class I) or 18 months (Class II) of the
calendar month of their purchase 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 net asset 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. See below and
"Purchases at Net Asset Value" under "How To Buy Shares of the Fund."
In determining if 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 of those shares held less than the
contingency period (12 months in the case of Class I shares and 18 months in the
case of Class II shares); (ii) shares purchased with reinvested dividends and
capital gain distributions; and (iii) other shares held longer than the
contingency period; and followed by any shares held less than the contingency
period, 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 to participants or
their beneficiaries in Trust Company individual retirement plan accounts due to
death, disability or attainment of age 591/2; tax-free returns of excess
contributions from employee benefit plans; distributions from employee benefit
plans, including those due to termination or plan transfer; 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); redemptions initiated by the Fund due to a shareholder's account
falling below the minimum specified account size; and redemptions following the
death of the shareholder or the beneficial owner.
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.
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.
TELEPHONE TRANSACTIONS
The second paragraph of this section is revised to reflect the fact that
shareholders will also be able to request the issuance of certificates by
telephone (to be sent to the address of record only).
The paragraph under the subsection "Verification Procedures" is revised to
include the following sentence:
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.
VALUATION OF FUND SHARES
The following sentence replaces the first sentence of the first paragraph in
this section; the subsequent paragraph is added to the end of this section.
The net asset value per share of each class of the Fund is determined as of the
scheduled closing time of the New York Stock Exchange ("Exchange") (generally
1:00 p.m. Pacific time) each day that the Exchange is open for trading.
Each of the Fund's classes will bear, pro rata, all of the common expenses of
the Fund. The net asset value of all outstanding shares of each class of the
Fund will be computed on a pro rata basis for each outstanding share based on
the proportionate participation in the Fund represented by the value of shares
of such classes, except that the Class I and Class II shares will bear the Rule
12b-1 expenses payable under their respective plans. 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 TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Replace the second and third paragraphs in this section with the following
language:
From a touch tone phone, Franklin and Templeton shareholders 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 shareholders 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, Franklin 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, money fund
checks, if applicable, and deposit slips.
Franklin 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 the caller with easy to follow step-by-step instructions
from the main menu. Other features may be added in the future.
PERFORMANCE (CLASS II)
Because Class II shares were not offered prior to October 2, 1995, no
performance data is available for these shares. After a sufficient period of
time has passed, Class II performance data as described in the "Performance"
section of the Prospectus will be available.
GENERAL INFORMATION
With the exception of Voting Rights, all rights and privileges detailed under
the discussion of "General Information" will remain in effect as described in
the Prospectus for the new multiclass structure. For a complete discussion of
these rights and privileges, see "General Information" in the Prospectus.
Voting Rights. 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 each class by the state business
trust law, or (3) required to be voted on separately by each 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 changes 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 shareholder 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, this affects all shareholders, regardless of which class
of shares they hold, and therefore, each share has the same voting rights. For
more information regarding voting rights, see the "Voting Rights" discussion in
the Prospectus under the heading "General Information."
FRANKLIN CONVERTIBLE SECURITIES FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1995
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.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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
"RISK CONSIDERATIONS - HIGH YIELD SECURITIES."
A Statement of Additional Information ("SAI") concerning the Fund and other
series of the Trust, dated March 1, 1995, as may be amended from time to time,
provides a further discussion of certain areas in this Prospectus and other
matters which may be of interest to some investors. It has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. A copy is available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address or telephone number 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
About the Trust
Investment Objective and
Policies of the Fund
Risk Considerations
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
and Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information
Regarding an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
Appendix
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. These figures are based on aggregate
operating expenses of the Fund, before fee waivers and expense reductions, for
the fiscal year ended October 31, 1994.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50%
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.63%***
12b-1 Fees 0.20%+
Other Expenses:
Reports to Shareholders 0.05%
Shareholder Servicing Costs 0.05%
Other 0.10%
----
Total Other Expenses 0.20%
----
Total Fund Operating Expenses 1.03%***,+
====
* Investments of $1 million or more are not subject to a front- end sales
charge; however, a contingent deferred sales charge of 1% is imposed on certain
redemptions within 12 months of the calendar month following such investments.
See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
** $5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
*** Represents the amount that would have been payable to the investment manager
absent a fee reduction by the investment manager. The investment manager,
however, agreed in advance to waive a portion of its management fees and to
assume responsibility for making payments to offset certain operating expenses
otherwise payable by the Fund. With this reduction, management fees and total
operating expenses represented 0.55% and 0.95%, respectively, of the average net
assets of the Fund.
+ Represents the initial rate as discussed in "Plan of Distribution" under
"Management of the Fund." Actual Rule 12b-1 fees incurred by the Fund for the
six months ended October 31, 1994 were 0.09%, which represents an annualized
rate of 0.19%. Consistent with National Association of Securities Dealers,
Inc.'s rules, it is possible that the combination of front-end sales charges and
Rule 12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same
rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the 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
$55 $76 $99 $165
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, 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
shareholders as a result of their investment in the Fund. See "Management of the
Fund" for a description of the Fund's expenses. In addition, federal regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund from the effective date of the registration statement through each of
the fiscal years ended January 31, 1993, the nine months ended October 31, 1993
and the fiscal year ended October 31, 1994. The information for each of the five
fiscal years in the period ended October 31, 1994 has been audited by Coopers &
Lybrand L.L.P., independent auditors, whose audit report appears in the
financial statements in the Trust's SAI. The remaining figures, which are also
audited, are not covered by the auditors' current report. See the discussion
"Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
- -------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END TOTAL
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR RETURN++
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $.58 $(1.168) $(.588) $(.312) $ -- $(.312) $9.10 (4.80)%
1989 9.10 .78 .404 1.184 (.684) -- (.684) 9.60 13.08
1990 9.60 .80 (.395) .405 (.695) -- (.695) 9.31 3.85
1991 9.31 .78 (.729) .051 (.831) -- (.831) 8.53 .37
1992 8.53 .44 2.194 2.634 (.684) -- (.684) 10.48 31.50
1993 10.48 .61 1.034 1.644 (.684) -- (.684) 11.44 16.12
1993(2) 11.44 .45 1.413 1.863 (.513) -- (.513) 12.79 16.50
1994(3) 12.79 .59 (.327) (.263) (.594) (0.119) (.713) 12.34 2.07
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
AT END EXPENSES INCOME PORTFOLIO
PERIOD OF YEAR TO AVERAGE TO AVERAGE TURNOVER
ENDED (IN 000'S) NET ASSETS NET ASSETS RATE
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1988(1) $14,734 .15%* 6.82%* 148.67%
1989 17,290 .25 8.27 70.75
1990 14,774 .24 8.25 30.87
1991 15,843 .25 8.90 45.42
1992 20,282 .26 6.84 64.90
1993 28,307 .25 6.01 60.00
1993(2) 47,440 .25* 5.25* 31.05
1994(3) 66,869 .84* 4.84* 68.39
</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.
(3) For the year ended October 31, 1994
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value.
During the periods indicated, Franklin Advisers, Inc., the investment manager,
reduced its management fees and reimbursed other expenses incurred by the Funds
in the Trust. Had such action not been taken, the ratios of operating expenses
to average net assets would have been as follows:
1988(1)....................94%*
1989.......................90
1990.......................89
1991.......................84
1992.......................94
1993.......................81
1993(2)....................86*
ABOUT THE TRUST
The Trust, which was organized as a Massachusetts business trust on December 16,
1986, is an open-end management investment company, or mutual fund, and is
registered with the SEC under the Investment Company Act of 1940 (the "1940
Act"). The Trust currently consists of six series, each of which issues a
separate series of the Trust's shares and maintains a totally separate
investment portfolio.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge not
exceeding 4.5% of the offering price. See "How to Buy Shares of the Fund."
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Fund seeks to maximize total return, consistent with reasonable risk, by
seeking to optimize capital appreciation and high current income under varying
market conditions. The Fund pursues this investment objective by investing at
least 65% of its net assets (except when maintaining a temporary defensive
position) in convertible securities as described below, and common stock
received upon conversion or exchange of such securities and retained in the
Fund's portfolio to permit their orderly disposition. This investment objective
has been adopted as a fundamental policy of the Fund and may not be changed
without shareholder approval.
The balance of the Fund's net assets may be invested in other securities
(nonconvertible equity securities and corporate bonds, covered call options and
put options, securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, repurchase agreements collateralized by U.S.
government securities, money market securities and securities of foreign
issuers), which, in the aggregate, are considered to be consistent with the
Fund's investment objective. In addition, the Fund may invest up to 10% of its
total assets in illiquid securities. As the value of the Fund's portfolio
securities fluctuates, its net asset value per share will also fluctuate. When
investing in convertible securities and in nonconvertible fixed-income debt
securities, the Fund may purchase both rated and unrated securities depending
upon prevailing market and economic conditions. (See the Appendix for a
description of these ratings.) These ratings, which represent the opinions of
the rating services with respect to the securities and are not absolute
standards of quality, will be considered in connection with the 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 lowerrated 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, 1994, approximately
65.47% 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 "Risk Considerations - 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. Convertible securities include preferred stock, bonds or
debentures, stock purchase warrants and other fixed-income securities which may
be exchanged or converted into a prescribed number of shares of the issuer's
underlying common stock at a specific price during a specified time period.
Until they mature or are converted or exchanged, convertible securities retain
investment characteristics similar to those of nonconvertible fixed income
securities. Thus, the interest income and dividends from convertible bonds and
preferred stocks will generally provide a fixed stream of income with generally
higher yields than common stocks, but lower than nonconvertible securities of
similar quality. Such convertible bonds and preferred stocks are generally
senior securities and, therefore, have a claim to assets of the corporation
prior to the holders of common stock in the case of liquidation. Convertible
securities, however, are generally subordinate in their claim on assets to
similar nonconvertible securities of the same company.
Since a substantial portion of the Fund's portfolio may at any time consist of
convertible and other fixed-income securities, changes in the level of interest
rates, among other things, will likely affect the market value of the Fund's
holdings and thus the value of a shareholder's investment. As the level of
interest rates increases, the market value of convertible securities may decline
and, conversely, as interest rates decline, the market value of convertible
securities may increase. The unique investment characteristic of convertible
securities, i.e., the right to be exchanged for the issuer's common stock,
generally causes the market value of convertible securities to increase when the
market value of the underlying common stock increases. Since securities prices
fluctuate, however, there can be no assurance of capital appreciation and most
convertible securities will not reflect the same level of capital appreciation
as their underlying common stocks. When the underlying common stock is
experiencing a decline, the value of the convertible security tends to decline
to a level approximating the yield-to-maturity basis of straight nonconvertible
debt of similar quality, often called "investment value," and may not experience
the same decline as the underlying common stock.
Many convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a
fixed-income security with a possibility of capital appreciation due to the
conversion privilege. If this appreciation potential is not realized, the
premium may not be recovered. Such securities tend to have a lesser income
element than other convertibles which trade closer to their investment value.
Warrants. A warrant is an instrument issued by a corporation which gives the
holder the right to subscribe to a specified amount of the corporation's capital
stock at a set price for a specified period of time.
The Fund limits its investments in warrants, valued at the lower of cost or
market, to 5% of the Fund's net assets or to warrants attached to securities.
Options on Equity Securities. In seeking to achieve its investment objective of
maximizing total return, the Fund may write covered call options on securities
it actually owns which are listed for trading on a national securities exchange
and it may also purchase listed call options provided that the value of call
options purchased will not exceed 5% of the Fund's net assets.
Call options are short-term contracts (generally having a duration of nine
months or less) which give the purchaser of the option the right to buy and
obligates the writer to sell the underlying security at the exercise price at
any time during the option period, regardless of the market price of the
underlying security. The purchaser of an option pays a cash premium, which
typically reflects, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the remaining
term of the option, supply and demand factors and interest rates.
Call options written by the Fund give the holder the right to buy the underlying
security from the Fund at a stated exercise price upon exercising the option at
any time prior to its expiration. A call option written by the Fund is "covered"
if the Fund owns or has an absolute right (such as by conversion) to the
underlying security covered by the call. A call option is also covered if the
Fund holds a call on the same security and in the same principal amount as the
call written and the exercise price of the call held (a) is equal to or less
than the exercise price of the call written or (b) is greater than the exercise
price of the call written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations in a segregated
account with its custodian.
When the Fund sells covered call options, it will receive the cash premium which
can be used in whatever way is felt to be most beneficial to the Fund. The 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.
OTHER INVESTMENT POLICIES OF THE FUND
The Fund's policies permit investment in convertible and fixedincome 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 thenprevailing 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.
RISK CONSIDERATIONS
HIGH YIELDING, FIXED-INCOME SECURITIES
The Fund may invest a substantial portion of its assets in lower rated,
fixed-income securities and unrated securities of comparable quality. The market
values of such securities tend to reflect individual corporate developments to a
greater extent than do higher rated securities, which react primarily to
fluctuations in the general level of interest rates. Such lower rated securities
also tend to be more sensitive to economic conditions than higher rated
securities. These lower rated fixedincome securities are considered by S&P and
Moody's, on balance, to be predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation and will generally involve more credit risk than
securities in the higher rating categories. Even securities rated BBB or Baa by
S&P and Moody's, ratings which are considered investment grade, possess some
speculative characteristics.
Companies that issue high yielding, fixed-income securities are often highly
leveraged and may not have more traditional methods of financing available to
them. Therefore, the risk associated with acquiring the securities of such
issuers is generally greater than is the case with higher-rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of high yielding securities may experience
financial stress. During these periods, such issuers may not have sufficient
cash flow to meet their interest payment obligations. The issuer's ability to
service its debt obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet specific projected
business forecasts, or the unavailability of additional financing. The risk of
loss due to default by the issuer may be significantly greater for the holders
of high yielding securities, because such securities are generally unsecured and
are often subordinated to other creditors of the issuer. The default by an
issuer of securities held by the Fund will adversely affect the Fund by lowering
its net asset value (as the fair value of a security generally declines prior to
and at default) and by decreasing the amount of income available to the Fund
from which dividends may be paid. In addition, if an issuer defaults after the
Fund has paid out dividends based upon accrued income, reversal of such accrual
may result in the Fund having a return of capital to its shareholders.
On October 31, 1994, no securities in the Fund's portfolio were in default on
their contractual provisions.
The Fund may be required under the Code and Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the security from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called security with a lower yielding security, thus decreasing the net
investment income to the Fund and dividends to shareholders. The premature
disposition of a high yielding security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications. Further information is included under "Taxation of
the Fund and Its Shareholders."
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower-rated fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals.
To the extent a secondary trading market for high yielding, fixedincome
securities does exist, it is generally not as liquid as the secondary market for
higher-rated securities. Reduced liquidity in the secondary market may have an
adverse impact on market price and the Fund's ability to dispose of particular
issues, when necessary, to meet the Fund's liquidity needs or in response to a
specific economic event, such as a deterioration in the creditworthiness 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. Current values for
these high yield issues are obtained from pricing services and/or a limited
number of dealers and may be based upon factors other than actual sales. (See
"Valuation of Fund Shares.")
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many recent high yielding securities have
been sold with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. Such 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.
Factors adversely impacting the market value of high yielding securities will
adversely impact the Fund's net asset value. For example, adverse publicity
regarding lowerrated bonds, which appeared during 1989 and 1990, along with
highly publicized defaults of some high yield issuers, and concerns regarding a
sluggish economy which continued in 1993, depressed the market for such
securities. The Fund may also incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings. The Fund will rely on the investment manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the investment manager will take into consideration,
among other things, the issuer's financial resources, its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
ASSET COMPOSITION TABLE
For the fiscal year ended October 31, 1994, the Fund's portfolio contained
65.47% in convertible bonds and convertible preferred stocks which had been
rated below investment grade (Ba or lower) by Moody's and in bonds which had not
been rated by any NRSRO but which were considered by the investment manager to
have comparable credit characteristics. A credit rating by an NRSRO evaluates
only the safety of principal and interest of the security, and does not consider
the market value risk associated with an investment in such a bond. It should be
noted that current ratings are not necessarily indicative of the ratings of
bonds at the time of purchase. The table below shows the percentage invested in
each of the specific rating categories by Moody's and those that are not rated
by any NRSRO. The information was prepared based on a dollar weighted average of
the Fund's portfolio composition based on month-end assets for each of the 12
months in the fiscal year ended October 31, 1994. The Appendix to this
Prospectus includes a description of each rating category.
PERCENTAGE OF BONDS PERCENTAGE OF
STOCKS RATINGS BY MOODY'S IN PORTFOLIO IN PORTFOLIO
Aaa 0.00% 0.00%
Aa 0.00% 0.00%
A 5.32% 4.29%
Baa 7.48% 9.44%
Ba 12.47% 5.09%
B 16.42% 15.79%
Caa 0.43% 0.00%
Ca 0.00% 0.00%
C 0.00% 0.00%
N/R* 12.64% 2.63%
*Bonds to which no specific equivalent rating have been assigned by Moody's
and/or S&P but which have been determined by the investment manager to be
consistent with the Fund's objective without exposing the Fund to excessive
risk.
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 SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets, as well.
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.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson 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 various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 33 U.S. registered investment
companies (111 separate series) with aggregate assets of over $73 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended October 31, 1994, fees totaling 0.63% of the
average monthly net assets of the Fund would have accrued to Advisers. Total
operating expenses, including management fees, would have represented 1.03% of
the average net assets of the Fund. Pursuant to an agreement by Advisers to
limit its fees, the Fund paid management fees totaling 0.55% of the average net
assets of the Fund and operating expenses totaling 0.95%. This arrangement may
be terminated by Advisers at any time.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Trust's Policies Regarding Brokers Used on Portfolio Transactions" 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.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date"), the Fund adopted a distribution
plan (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 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.
In implementing the Plan, the Board of Trustees has determined that the annual
fees payable thereunder will be equal to the sum of: (i) the amount obtained by
multiplying 0.25% by the average daily net assets represented by shares of the
Fund that were acquired by investors on or after the Effective Date ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average daily
net assets represented by shares of the Fund that were acquired before the
Effective Date ("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 to Distributors under the Plan. The payments to be made to Distributors
will be used by Distributors to defray other marketing expenses that have been
incurred in accordance with the Plan, such as advertising.
The fee is a Fund expense so that all shareholders regardless of when they
purchased their shares will bear Rule 12b-1 expenses at the same rate. That rate
initially will be at least 0.20% (0.15% plus 0.05%) of such average daily net
assets and, as Fund shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Fund shares purchased on or after
the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.25% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Plan, the Plan permits the
Fund's trustees to allow the Fund to pay a full 0.25% on all assets at any time.
The approval of the Trust's Board of Trustees would be required to change the
method of calculation of the payments to be made under the Plan.
For more information, please see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make to its
shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) 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, its fiscal year end. 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 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
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 of Trustees. Fund
shares are quoted exdividend 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, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares, valued
at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the SAI for
more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(Registered Trademark) or the
Templeton Funds, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days for
initial processing. Dividends which may be paid in the interim will be sent to
the address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Funds at net asset value. See
"Purchases at Net Asset Value" under "How to Buy Shares of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations which affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the 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, 43.42% 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 TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares.
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.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. On
orders for 100,000 shares or more, the offering price will be calculated to four
decimal places. On orders for less than 100,000 shares, the offering price will
be calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or
underwriting commissions and dealer concessions.
TOTAL SALES CHARGE
AS A AS A DEALER
PERCENTAGE PERCENTAGE CONCESSION AS
OF OF NET A PERCENTAGE
SIZE OF TRANSACTION OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*,***
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less 3.75% 3.90% 3.25%
than $250,000
$250,000 but less 2.75% 2.83% 2.50%
than $500,000
$500,000 but less 2.25% 2.30% 2.00%
than $1,000,000
$1,000,000 or more none none (see
below)**
* Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
** The following commissions will be paid by Distributors, from its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 1.00% on sales of $1 million but less than $2 million,
plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
*** At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within 12 months of the
calendar month following such investments ("contingency period"). See "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(Registered Trademark) and the Templeton Group of Funds. Included
for these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction) and (c)
the U.S. mutual funds in the Templeton Group of Funds except Templeton American
Trust, Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund (the "Templeton
Funds"). (Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Funds".) Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment qualifies
for a discount.
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 definitions under "Description of Special Net Asset
Value Purchases" and as set forth in the SAI.
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 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. Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned additional compensation is
paid for by the Fund or its shareholders.
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included in the 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, the
investor or the dealer should notify Distributors at the time of each purchase
of shares which qualifies for the reduction. In determining whether a purchase
qualifies for any of the discounts, investments in any Franklin Templeton
Investments may be combined with those of the investor's spouse and children
under the age of 21. In addition, the aggregate investments of a trustee or
other fiduciary account (for an account under exclusive investment authority)
may be considered in determining whether a reduced sales charge is available,
even though there may be a number of beneficiaries of the account. In addition,
an investment in the Fund may qualify for a reduction in the sales charge under
the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which if made at one time would qualify for a
reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter of
Intent will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made.
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH ARE LISTED UNDER
"DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES") ACKNOWLEDGES AND AGREES TO
THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of the total intended
purchase will be reserved in shares of the Fund, registered in the investor's
name, to assure that the full applicable sales charge will be paid if the
intended purchase is not completed. The reserved shares will be included in the
total shares owned as reflected on periodic statements; income and capital gain
distributions on the reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by the investor until the
Letter of Intent has been completed or the higher sales charge paid. For more
information, see "Additional Information Regarding Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current purchase.
For example, if members of the group had previously invested and still held
$80,000 of Fund shares and now were investing $25,000, the sales charge would be
3.75%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a front-end
sales charge ("net asset value") or a contingent deferred sales charge by (1)
officers, directors, trustees and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer; (3) insurance
company separate accounts for pension plan contracts; (4) accounts managed by
the Franklin Templeton Group; (5) shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund, under an employee benefit
plan qualified under section 401 of the Code, in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers and
their affiliates, for their investment account only; and (8) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another of
the Franklin Templeton Funds which were purchased with a front-end sales charge
or assessed a contingent deferred sales charge on redemption. An investor may
reinvest an amount not exceeding the redemption proceeds. While credit will be
given for any contingent deferred sales charge paid on the shares redeemed and
subsequently repurchased, a new contingency period will begin. Shares of the
Fund redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the Fund
must be received by the Fund or the Fund's Shareholder Services Agent within 120
days after the redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be used
to purchase shares of the Fund or another of the Franklin Templeton Funds at net
asset value and without the imposition of a contingent deferred sales charge
within 120 days of the payment date of such distribution. To exercise this
privilege, a written request to reinvest the distribution must accompany the
purchase order. Additional information may be obtained from Shareholder Services
at 1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in an unaffiliated mutual fund which
charged the investor a contingent deferred sales charge upon redemption and
which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers who have
entered into a supplemental agreement with Distributors, or by registered
investment advisers 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 120 days after the plan distribution. A prospectus
outlining the investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll free at 1-800/DIAL
BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13 month period in the Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases" which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in 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.
Refer to the SAI for further information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND
IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for 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 the Trust company may provide the
plan documents and serve as custodian or trustee. A plan document must be
adopted for a plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for retirement plans. Brochures for the 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 the Trust Company. To obtain a retirement plan brochure or
application, call toll free 1800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" 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 advisers concerning investment decisions within their plans.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested in writing by the shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealers or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject to mandatory
distribution requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis. If the
shareholder establishes a plan, any capital gain distributions and income
dividends paid by the Fund will be reinvested for the shareholder's account in
additional shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction (which is
generally the first business day of the month in which the payment is scheduled)
with payment generally received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to another of the
Franklin Templeton Funds, to another person, or directly to a checking account.
If the bank at which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Withdrawals which may be paid in the
interim will be sent to the address of record. Liquidation of shares may reduce
or possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's actual yield
or income, part of the payment may be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments, or suspend one such
payment, by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin 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 shareholder's investment
objective or outlook for the securities markets changes, the Fund shares may be
exchanged for shares of other Franklin Templeton Funds which are eligible for
sale in the shareholder's state of residence and in conformity with such fund's
stated eligibility requirements and investment minimums. Investors should review
the prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE
SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT 1-800/632-2301
OR THE AUTOMATED FRANKLIN TELEFACTS(REGISTERED TRADEMARK) SYSTEM (DAY OR NIGHT)
AT 1800/247-1753. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
Franklin Templeton Funds. The Telephone Exchange Privilege is available only for
uncertificated shares or those which have previously been deposited in the
shareholder's account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please refer to "Telephone Transactions Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the
TeleFACTS(Registered Trademark) option may not be available. In this event,
shareholders should follow the other exchange procedures discussed in this
section, including the procedures for processing exchanges through securities
dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales charge
in the original fund purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be imposed. The
contingency period will be tolled (or stopped) for the period such shares are
exchanged into and held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income
dividends and capital gain distributions will be transferred to the fund being
exchanged into and will be invested at net asset value.
Because the exchange is considered a redemption and purchase of shares, the
shareholder may realize a gain or loss for federal income tax purposes. Backup
withholding and information reporting may also apply. Information regarding the
possible tax consequences of such an exchange is included in the tax section in
this Prospectus and in the SAI.
There are differences among the Franklin Templeton Funds. Before making an
exchange, a shareholder should obtain and review a current prospectus of the
fund into which the shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (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 reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (1:00 p.m. Pacific time) each day that the New York Stock
Exchange (the "Exchange") is open for business will receive the price calculated
on the following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions Restricted Accounts." INFORMATION
MAY BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT THE ADDRESS SHOWN
ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL
EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE
GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN CASES AS
DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time on
any business day will be processed that same day. The redemption check will be
sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of electronic
transmission from securities dealers who have entered into a dealer or similar
agreement with Distributors. This is known as a repurchase. The only difference
between a normal redemption and a repurchase is that if the shareholder redeems
shares through a dealer, the redemption price will be the net asset value next
calculated after the shareholder's securities dealer receives the order which is
promptly transmitted to the Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These documents, as described in
the preceding section, are required even if the shareholder's securities dealer
has placed the repurchase order. After receipt of a repurchase order from the
securities dealer, the Fund will still require a signed letter of instruction
and all other documents set forth above. A shareholder's letter should reference
the Fund, the account number, the fact that the repurchase was ordered by a
securities dealer and the securities dealer's name. Details of the dealer
ordered trade, such as trade date, confirmation number, and the amount of shares
or dollars, will help speed processing of the redemption. The seven-day period
within which the proceeds of the shareholder's redemption will be sent will
begin when the Fund receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn dividends or
interest during the time between receipt of the securities dealer's repurchase
order and the date the redemption is processed upon receipt of all documents
necessary to settle the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to the Fund as soon
as possible. The shareholder's securities dealer may charge a fee for handling
the order. The SAI contains more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on investments of $1
million or more, a contingent deferred sales charge of 1% applies to redemptions
of those investments within the contingency period of 12 months of the calendar
month following their purchase. The charge is 1% of the lesser of the value of
the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the total cost of such shares, and is retained by
Distributors. In determining if a charge applies, shares not subject to a
contingent deferred sales charge are deemed to be redeemed first, in the
following order: (i) shares representing amounts attributable to capital
appreciation of those shares held less than 12 months; (ii) shares purchased
with reinvested dividends and capital gain distributions; and (iii) other shares
held longer than 12 months; and followed by any shares held less than 12 months,
on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; account fees;
distributions to participants in Trust Company retirement plan accounts due to
death, disability or attainment of age 59 1/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and, for
Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly
of an account's net asset value (3% quarterly, 6% semiannually or 12% annually);
and redemptions initiated by the Fund due to a shareholder's account falling
below the minimum specified account size. In addition to the waiver referred to
above, shares of participants in Trust Company retirement plan accounts will, in
the event of death, disability or attainment of age 59 1/2, no longer be subject
to the contingent deferred sales charge.
Requests for redemptions for a specified dollar amount, unless otherwise
specified by the shareholder, 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. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with Internal Revenue Service ("IRS")
regulations. To liquidate a retirement plan account, a shareholder or 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
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632 2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, and (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Agreement as described under "How to Sell
Shares of the Fund - Redemptions by Telephone" will be able to redeem shares of
the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone are
genuine, the requested transaction will not be executed, and neither the Fund
nor Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any distribution, redemption, or
dividend payment. While the telephone exchange privilege is extended to Franklin
Templeton IRA and 403(b) retirement accounts, certain restrictions may apply to
other types of retirement plans. Changes to dividend options must also be made
in writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2" when prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and "ask"
(offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, including, without limitation, the current
market value of any outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their realizable amounts.
Interest is recorded as accrued and dividends are recorded on the ex-dividend
date. Portfolio securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily available are
valued at the last quoted sale price of the day or, if there is no such reported
sale, within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager. Portfolio securities underlying actively traded call
options are valued at their market price as determined above. The current market
value of any option held by the Fund is its last 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 of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Funds by calling the
automated Franklin TeleFACTS(Registered Trademark) system (day or night) at 1
800/247-1753. Information about the Fund may be accessed by entering Fund Code
37 followed by the # sign, when requested to do so by the automated operator.
The TeleFACTS system is also available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. 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 6:00 a.m. to 5:00
p.m. Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m.to 8:00 p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to 5:00 p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods, or based on
investments at various sales charge levels or at net asset value. For such
purposes total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield, which is calculated according to a formula prescribed by the SEC (see the
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
are reflected in the current distribution rate, which may be quoted to
shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. Under certain circumstances, such as when there
has been a change in the amount of dividend payout or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
during the period such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing and short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, distribution rate or total return may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. 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 Fund's Annual
Report to Shareholders and the SAI.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share, in various series. All shares have
one vote and, when issued, are fully paid, nonassessable and redeemable.
Shares have no preemptive or subscription rights, and are fully transferable.
There are no conversion rights; however, holders of shares of the Fund may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in "Exchange Privilege."
All shares have equal voting, dividend and liquidation rights.
VOTING RIGHTS
Shares of the Fund have noncumulative voting rights which means that in all
elections of trustees, the holders of more than 50% of the shares voting can
elect 100% of the trustees if they choose to do so and, in such event, the
holders of the remaining shares voting will not be able to elect any person or
persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of trustees such as that
provided in Section 16(c) of the 1940 Act. The Board of Trustees may from time
to time establish other funds of the Trust, the assets and liabilities of which
will be separate and distinct from any other fund. Shares of each fund vote
separately as to issues affecting that fund, or the Trust, unless otherwise
permitted by the 1940 Act.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near future,
include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Fund that the number furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day- today management of
the Fund's portfolio: Edward Jamieson since inception and Mitchell Cone since
January 1994.
Edward Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Bachelor of Arts degree in sociology from Bucknell
University and a master's degree in accounting and finance from the University
of Chicago Graduate School of Business. He has been with Advisers since 1987 and
for the two years prior thereto, he was treasurer of Beatrice Consumer Products,
Inc. and an executive with Pepsico, Inc.'s Corporate Treasury where he served as
Director of International Treasury. He is a member of several securities
industry-related committees and associations.
Mitchell Cone
Portfolio Manager of Advisers
Mr. Cone holds a Bachelor of Arts degree in economics/sociology from the
University of California, Berkeley. He has been with Advisers since 1988. He has
been in the securities industry since 1985 and is a member of several securities
industry-related committees and associations.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have predominantly speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
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.
SUPPLEMENT DATED OCTOBER 2, 1995
TO THE PROSPECTUS FOR
FRANKLIN EQUITY INCOME FUND
Franklin Investors Securities Trust
dated March 1, 1995
Introduction. As of October 2, 1995, the Franklin Equity Income Fund (the
"Fund") offers two classes of shares to its investors: Franklin Equity Income
Fund - Class I ("Class I") and Franklin Equity Income Fund - Class II ("Class
II"). Investors 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. Investors 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 their anticipated
investment amount and time horizon. See "Differences Between Class I and Class
II" below.
This Supplement must be read in conjunction with the Prospectus for this Fund.
All investment objectives and policies described in the Prospectus apply equally
to both classes of shares in the new multiclass structure. Further, all
operational procedures apply equally to both classes, unless otherwise specified
in the following discussion. See "Deciding Which Class to Purchase" below.
THE NEW APPLICATION FORM INCLUDED WITH THIS SUPPLEMENT MUST BE USED FOR ALL
PURCHASES. DO NOT USE THE APPLICATION FORM INCLUDED IN THE PROSPECTUS.
Multiclass Fund Structure. The Fund has two classes of shares available for
investment: Class I and Class II. 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. Voting rights of
each class will be the same on matters affecting the Fund as a whole, but each
will vote separately on matters affecting its class. See the Prospectus for more
details about Class I shares. Class II shares are explained in detail in the
following discussion. Except as described below, shares of both classes
represent identical interests in the Fund's investment portfolio.
EXPENSE TABLE
The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly in
connection with an investment in the Fund. The figures are based on aggregate
operating expenses of the Class I shares (before fee waivers and expense
reductions) for the fiscal year ended October 31, 1994.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Class I Class II
Maximum Sales Charge Imposed on Purchases
<S> <C> <C>
(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........................................................... 0.63%* 0.63%*
Rule 12b-1 Fees........................................................... 0.21%** 1.00%**
Other Expenses:
Shareholder Servicing Costs.............................................. 0.06% 0.06%
Reports to Shareholders.................................................. 0.08% 0.08%
Other.................................................................... 0.08% 0.08%
Total Other Expenses...................................................... 0.22% 0.22%
Total Fund Operating Expenses............................................. 1.06%* 1.85%*
</TABLE>
++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.
*Represents the amount that would have been payable to the investment manager
before any fee waiver by the investment manager. The investment manager has
agreed in advance, however, to waive a portion of its management fees and to
make certain payments to reduce expenses. With this waiver and expense
reduction, management fees represented 0.45% and total operating expenses for
Class I and Class II represented 0.88% and 1.67%, respectively, of the average
net assets of the Fund.
**Rule 12b-1 fees for Class I are annualized. Actual Rule 12b-1 fees incurred by
Class I for the six months ended October 31, 1994 were 0.11%. See "Plan of
Distribution" under "Management of the Fund" in the Prospectus. Consistent with
National Association of Securities Dealers, Inc.'s rules, it is possible that
the combination of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic equivalent of the maximum
front-end sales charges permitted under those same rules.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather, the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of the Prospectus and this Supplement.
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
Class I.......................... $55* $77 $101 $169
Class II......................... $39 $68 $109 $225
*assumes that a contingent deferred sales charge will not apply to Class I
shares
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
$29 $68 $109 $225
This example is based on the aggregate operating expenses, 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 shareholders as
a result of their investment in the Fund. (See "Management of the Fund" in the
Prospectus for a description of the Fund's expenses.) 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 unaudited financial highlights for a
Class I share of the Fund for the six months ended April 30, 1995. This table
supplements the information under "Financial Highlights" in the Prospectus.
Information regarding Class II shares will be included in the "Financial
Highlights" section of the Prospectus after they have been offered to the public
for a reasonable period of time.
Six Months Ended
April 30 ,1995
(Unaudited)
Per Share Operating Performance
Net asset value at beginning of period $14.14
Net investment income $0.32
Net realized and unrealized gains (losses) on securities $0.492
Total from investment operations $0.812
Distributions from net investment income $(0.309)
Distributions from capital gains $(0.243)
Total Distributions $(0.552)
Net asset value at end of period $14.40
Total Return+ 6.01%
Net assets at end of period (in 000's) $117,564
Ratio of expenses to average net assets** 0.98*%
Ratio of net investment income to average net assets 4.65*%
Portfolio turnover rate 11.45%
+Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge and assumes
reinvestment of dividends at the offering price.
*Annualized.
**During the period indicated above, Franklin Advisers, Inc., the investment
manager, agreed to waive in advance a portion of its management fees and made
payments of other expenses incurred by the Fund. Had such action not been taken,
the ratio of expenses to average net assets for the six month period stated
above would have been an annualized rate of 1.01%.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The discussion of fixed-income debt securities under "Other Investment Policies
of the Fund" is revised to reflect that the Fund does not intend to invest more
than 5% of its net assets in fixed-income debt securities rated below Baa by
Moody's or BBB by S&P.
Deciding Which Class To Purchase. Investors should carefully evaluate their
anticipated investment amount and time horizon prior to determining which class
of shares to purchase. Generally, an investor who expects to invest less than
$100,000 in the Franklin Templeton Funds and who expects to make substantial
redemptions within approximately six years or less of investment 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 long-term investors even if no sales charge reductions are
available to them.
Investors who qualify to purchase Class I shares at reduced sales charges should
seriously consider purchasing Class I shares, especially if they intend to hold
their shares for approximately six years or more. Investors who qualify to
purchase Class I shares at reduced sales charges but who intend to hold their
shares less than approximately six years 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. Investors
investing $1 million or more in a single payment and other investors who qualify
to purchase Class I shares at net asset value will be precluded from purchasing
Class II shares. See "Purchases at Net Asset Value" and "Description of Special
Net Asset Value Purchases" under "How to Buy Shares of the Fund" in the
Prospectus for a discussion of when shares may be purchased 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 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 amounts below $1 million. Any
purchases of $1 million or more will automatically be invested in Class I
shares, since that is more beneficial to investors. Such purchases, however, may
be subject to a contingent deferred sales charge. Investors may exceed $1
million in Class II shares by cumulative purchases over a period of time.
Investors who intend to make investments exceeding $1 million, however, should
consider purchasing Class I shares through a Letter of Intent instead of
purchasing Class II shares. See "How to Buy Shares of the Fund" in the
Prospectus for more information.
Differences Between Class I and Class II. The differences between Class I and
Class II shares are primarily their front-end sales charges, Rule 12b-1 fees,
and 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 will vote
separately on matters affecting its class.
A separate Plan of Distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively) pursuant to Rule 12b-1 under
the Investment Company Act of 1940, as amended ("1940 Act"). The Rule 12b-1 fees
charged to each class will be based solely on the distribution and servicing
fees attributable to that particular class. Any portion of fees remaining from
the Class I Plan after distribution to securities dealers of up to the maximum
amount permitted may be used by the class to reimburse Franklin Templeton
Distributors, Inc. ("Distributors") for routine ongoing promotion and
distribution expenses incurred with respect to that class, whereas the Class II
Plan is a compensation plan. See "Plan of Distribution" in the Prospectus for a
description of such expenses.
Class I. Class I shares are generally subject to a variable sales charge upon
purchase and not subject to any sales charge upon redemption. Class I shares are
subject to Rule 12b-1 fees of up to an maximum of .25% per annum of average
daily net assets of the class.
Plan of Distribution. Under the Class I Plan, the Fund will reimburse
Distributors or other securities dealers for expenses incurred in the promotion,
servicing, and distribution of Class I Fund shares. (See "Plan of Distribution"
in the Prospectus and "Distribution Plans" in the Statement of Additional
Information ("SAI")).
Quantity Discounts and Purchases At Net Asset Value. Class I shares may be
purchased at a reduced front-end sales charge or at net asset value if certain
conditions are met. See "How to Buy Shares of the Fund."
Contingent Deferred Sales Charge. In most circumstances, a contingent deferred
sales charge will not be assessed against redemptions of Class I shares. A
contingent deferred sales charge will be imposed on Class I shares only if
shares valued at $1 million or more are purchased after February 1, 1995 without
a sales charge and are subsequently redeemed within 12 months of the calendar
month of their purchase. See "Contingent Deferred Sales Charge" under "How to
Sell Shares of the Fund" in this Supplement.
Class II. The current public offering price of Class II shares is equal to the
net asset value, plus a front-end sales charge of 1% of the amount invested.
Class II shares are also subject to 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% of average daily net assets of such shares. Class II shares have lower
front-end sales charges than Class I shares and comparatively higher Rule 12b-1
fees.
Plan of Distribution. Class II's operating expenses will generally be higher
under the Class II Plan. During the first year following a purchase of Class II
shares, Distributors will keep a portion of the Plan fees attributable to those
shares to partially recoup fees Distributors pays to securities dealers.
Distributors, or its affiliates, may pay, from its own resources, a commission
of up to 1% of the amount invested to securities dealers who initiate and are
responsible for purchases of Class II shares.
Contingent Deferred Sales Charge. Unless a waiver applies, a contingent deferred
sales charge of 1% will be imposed on Class II shares redeemed within 18 months
of their purchase. See "Contingent Deferred Sales Charges" under "How to Sell
Shares of the Fund" in this Supplement.
MANAGEMENT OF THE FUND
The Board of Trustees has carefully reviewed the multiclass structure to ensure
that no material conflicts exist 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 later 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.
For more information regarding the responsibilities of the Board of Trustees and
the management of the Fund, please see "Management of the Fund" in the
Prospectus.
Class II Plan of Distribution
Under the Class II Plan, the Fund is permitted to pay to Distributors or others
for distribution expenses and related expenses up to 0.75% per annum of Class II
shares' 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.
The Class II 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 Class II 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 Class II of the Fund.
During the first year following the purchase of Class II shares, Distributors
will retain a portion of Class II's Rule 12b-1 fees equal to 0.75% per annum of
Class II's average daily net assets to partially recoup fees Distributors pays
to securities dealers. Distributors or its affiliates may pay, from its own
resources, a commission of up to 1% of the amount invested to securities dealers
who initiate and are responsible for purchases of Class II shares.
See the "Plan of Distribution" discussion in the "Management of the Fund"
section in the Prospectus and "Distribution Plans" in the SAI for more
information about both Class I and Class II Plans.
DISTRIBUTIONS TO SHAREHOLDERS
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.
Unless otherwise requested, income dividends and capital gain distributions, if
any, will be automatically reinvested in the shareholder's account in the form
of additional shares, valued at the closing net asset value (without a front-end
sales charge) on the dividend reinvestment date. Dividend and capital gain
distributions are only eligible for reinvestment at net asset value into the
same Class I Franklin Templeton Fund. See "Distributions to Shareholders" in the
Prospectus and the SAI for more information.
By completing the "Special Payment Instructions for Distributions" section of
the Shareholder Application included with this Prospectus, a shareholder may
direct the selected distributions to the same class of another fund in the
Franklin Templeton Funds, to a Class I Franklin Templeton Fund, to another
person, or directly into a checking account.
HOW TO BUY SHARES OF THE FUND
The following discussion supplements the one included in the Prospectus under
"How to Buy Shares of the Fund." The subsections entitled "Quantity Discounts in
Sales Charges," "Group Purchases" and "Description of Special Net Asset Value
Purchases" in the Prospectus only apply to Class I shares. Although sales
charges on Class II shares may not be reduced through a Letter of Intent or
Rights of Accumulation as described under "Quantity Discounts in Sales Charges,"
the value of Class II shares owned by an investor may be included in determining
the appropriate sales charges for Class I shares. THE APPLICATION FORM INCLUDED
WITH THIS SUPPLEMENT MUST ACCOMPANY ANY PURCHASE OF SHARES.
DO NOT USE THE APPLICATION INCLUDED IN THE PROSPECTUS.
The section to these changes regarding the new multiclass structure, the section
entitled "Quantity Discounts in Sales Charges" has been revised to state that,
in determining whether a purchase qualifies for a discount, an investment in any
of the Franklin Templeton Investments may be combined with those of the
investor's spouse, children under the age of 21 and grandchildren under the age
of 21.
Purchase Price of Fund 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 the shareholder's
securities dealer receives the order which is promptly transmitted to the Fund,
or (2) after receipt of an order by mail from the shareholder directly in proper
form (which generally means a completed Shareholder Application accompanied by a
negotiable check).
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. See "How to
Buy Shares of the Fund - Purchase Price of Fund Shares" in the Prospectus.
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
As a As a Dealer Concession
Size of Transaction Percentage of Percentage of Net as a Percentage
at Offering Price Offering Price Amount Invested of Offering Price*
<S> <C> <C> <C>
Any amount (less than $1 million)......... 1.00% 1.01% 1.00%
</TABLE>
* Distributors, or one of its affiliates, may make additional payments to
securities dealers, from 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 eighteen 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 to Sell Shares
of the Fund - Contingent Deferred Sales Charge."
Purchases at Net Asset Value
The section in the Prospectus titled "Purchases at Net Asset Value" only applies
to Class I shares, with the exception of the second and third paragraphs, which
are replaced with the following:
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. An investor may reinvest an amount not exceeding the
redemption proceeds. While credit will be given for any contingent deferred
sales charge paid on the shares redeemed and subsequently repurchased, a new
contingency period will begin. Matured shares 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
"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 the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of the Prospectus and 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 in cash 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 invest such distributions 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
"Distributions in Cash" under "Distributions to Shareholders" in the Prospectus.
In addition, the following paragraph should replace the fourth paragraph of this
section:
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 a part of the
Franklin Templeton Funds, 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.
For a complete understanding of how to buy shares of the Fund, this Supplement
must be read in conjunction with the Prospectus. Refer to the SAI for further
information regarding net asset value purchases of Class I shares.
Purchasing Class I and Class II Shares
When placing purchase orders, investors should clearly indicate which class of
shares they intend to purchase. A purchase order that fails to specify a class
will automatically be invested in Class I shares. Purchases of $1 million or
more in a single payment will be invested in Class I shares.
There are no conversion features attached to either class of shares.
Investors who qualify to purchase Class I shares at net asset value should
purchase Class I rather than Class II shares. See the sections "Purchases at Net
Asset Value" and "Description of Special Net Asset Value Purchases" above and in
the Prospectus for a discussion of when shares may be purchased at net asset
value.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
With the exception of Systematic Withdrawal Plans, all programs and privileges
detailed under the discussion of "Other Programs and Privileges Available to
Fund Shareholders" will remain in effect as described in the Prospectus for the
new multiclass structure. For a complete discussion of these programs, see the
Prospectus.
Systematic Withdrawal Plans. Subject to the requirements outlined in the
Prospectus, a shareholder may establish a Systematic Withdrawal Plan for his or
her account. With respect to Class I shares, the contingent deferred sales
charge is waived for redemptions through a Systematic Withdrawal Plan set up
prior to February 1, 1995. With respect to Systematic Withdrawal Plans set up on
or after February 1, 1995, the applicable contingent deferred sales charge is
waived for Class I and Class II share redemptions of up to 1% monthly of an
account's net asset value (12% annually, 6% semi-annually, 3% quarterly). 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.
EXCHANGE PRIVILEGE
Shareholders are entitled to exchange their shares for the same class of shares
of other Franklin Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
Franklin Templeton Funds. Class II shares may be exchanged for Class II shares
of any 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 12 months (Class I shares) or 18 months (Class II shares) of the
calendar month of the original purchase date, a contingent deferred sales charge
will be imposed. Before making an exchange, investors should review the
prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges.
Exchanges of Class I Shares
The contingency period of Class I shares will be tolled (or stopped) for the
period such shares are exchanged into and held in a Franklin or Templeton 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 also "How to Sell Shares of the Fund -
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 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 a
shareholder has $1,000 in free shares, $2,000 in matured shares, and $3,000 in
CDSC liable shares, and the shareholder exchanges $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, a shareholder holds $1,000 in shares bought 3
months ago, $1,000 bought 6 months ago, and $1,000 bought 9 months ago, and the
shareholder exchanges $1,500 into a 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 shareholders purchase shares of Money Fund II directly. Class
II shares exchanged for shares of Money Fund II will continue to age and a
contingent deferred sales charge will be assessed if CDSC liable shares are
redeemed. No other money market funds are available for Class II shareholders
for exchange purposes. 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 CDSC. 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.
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. Like exchanges, Class II shares will be
moved proportionately from each type of shares in the original account.
Conversion Rights
It is not presently anticipated that Class II shares will be converted to Class
I shares. A shareholder may, however, sell his Class II shares and use the
proceeds to purchase Class I shares, subject to all applicable sales charges.
See "Exchange Privilege" in the Prospectus for more information.
HOW TO SELL SHARES OF THE FUND
For a discussion regarding the sale of either class of Fund shares, refer to the
section in the Prospectus titled "How to Sell Shares of the Fund." In addition,
the charges described in this Supplement will also apply to the sale of all Fund
shares. The subsection titled "Contingent Deferred Sales Charge" in the
Prospectus is replaced with the following:
Contingent Deferred Sales Charge
In order to recover commissions paid to securities dealers on Class I
investments of $1 million or more and any Class II investments redeemed within
the contingency period of 12 months (Class I) or 18 months (Class II) of the
calendar month of their purchase 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 net asset 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. See below and
"Purchases at Net Asset Value" under "How To Buy Shares of the Fund."
In determining if 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 of those shares held less than the
contingency period (12 months in the case of Class I shares and 18 months in the
case of Class II shares); (ii) shares purchased with reinvested dividends and
capital gain distributions; and (iii) other shares held longer than the
contingency period; and followed by any shares held less than the contingency
period, 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 to participants or
their beneficiaries in Trust Company individual retirement plan accounts due to
death, disability or attainment of age 591/2; tax-free returns of excess
contributions from employee benefit plans; distributions from employee benefit
plans, including those due to termination or plan transfer; 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); redemptions initiated by the Fund due to a shareholder's account
falling below the minimum specified account size; and redemptions following the
death of the shareholder or the beneficial owner.
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.
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.
TELEPHONE TRANSACTIONS
The second paragraph of this section is revised to reflect the fact that
shareholders will also be able to request the issuance of certificates by
telephone (to be sent to the address of record only).
The paragraph under the subsection "Verification Procedures" is revised to
include the following sentence:
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.
VALUATION OF FUND SHARES
The following sentence replaces the first sentence of the first paragraph in
this section; the subsequent paragraph is added to the end of this section.
The net asset value per share of each class of the Fund is determined as of the
scheduled closing time of the New York Stock Exchange ("Exchange") (generally
1:00 p.m. Pacific time) each day that the Exchange is open for trading.
Each of the Fund's classes will bear, pro rata, all of the common expenses of
the Fund. The net asset value of all outstanding shares of each class of the
Fund will be computed on a pro rata basis for each outstanding share based on
the proportionate participation in the Fund represented by the value of shares
of such classes, except that the Class I and Class II shares will bear the Rule
12b-1 expenses payable under their respective plans. 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 TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Replace the second and third paragraphs in this section with the following
language:
From a touch tone phone, Franklin and Templeton shareholders 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 shareholders 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, Franklin 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, money fund
checks, if applicable, and deposit slips.
Franklin 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 the caller with easy to follow step-by-step instructions
from the main menu. Other features may be added in the future.
PERFORMANCE (CLASS II)
Because Class II shares were not offered prior to October 2, 1995, no
performance data is available for these shares. After a sufficient period of
time has passed, Class II performance data as described in the "Performance"
section of the Prospectus will be available.
GENERAL INFORMATION
With the exception of Voting Rights, all rights and privileges detailed under
the discussion of "General Information" will remain in effect as described in
the Prospectus for the new multiclass structure. For a complete discussion of
these rights and privileges, see "General Information" in the Prospectus.
Voting Rights. 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 each class by the state business
trust law, or (3) required to be voted on separately by each 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 changes 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 shareholder 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, this affects all shareholders, regardless of which class
of shares they hold, and therefore, each share has the same voting rights. For
more information regarding voting rights, see the "Voting Rights" discussion in
the Prospectus under the heading "General Information."
FRANKLIN EQUITY INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1995
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.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that a prospective investor should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which a prospective investor will find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
A Statement of Additional Information ("SAI") concerning the Fund and other
series of the Trust, dated March 1, 1995, as may be amended from time to time,
provides a further discussion of certain areas in this Prospectus and other
matters which may be of interest to some investors. It has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. A copy is available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address or telephone number 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
Expense Table
Financial Highlights
About the Trust
Investment Objective and
Policies of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
and Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments
Other Programs and Privileges EAvailable
to Fund Shareholders Exchange Privilege
How to Sell Shares of the Fund Telephone
Transactions
Valuation of Fund Shares
How to Get Information
Regarding an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a
shareholder will bear directly or indirectly in connection
with an investment in the Fund. These figures are based on
aggregate operating expenses of the Fund (before fee waivers
and expense reductions) for the fiscal year ended October
31, 1994.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
E(as a percentage of offering price) 4.50%
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.63%***
12b-1 Fees 0.21%+
Other Expenses:
Shareholder Servicing Costs 0.06%
Reports to Shareholders 0.08%
Other 0.08%
----
Total Other Expenses 0.22%
----
Total Fund Operating Expenses 1.06%***
====
* Investments of $1 million or more are not subject to a frontend sales charge;
however, a contingent deferred sales charge of 1% is imposed on certain
redemptions within 12 months of the calendar month following such investments.
See "How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
** $5.00 fee imposed only on Timing Accounts as described under "Exchange
Privilege." All other exchanges are processed without a fee.
*** Represents the amount that would have been payable to the investment manager
absent a fee reduction by the investment manager. The investment manager,
however, agreed in advance to waive a portion of its management fees and to
assume responsibility for making payments to offset certain operating expenses
otherwise payable by the Fund. With this reduction, management fees and total
operating expenses represented 0.45% and 0.88%, respectively, of the average net
assets of the Fund.
+ Annualized. Actual Rule 12b-1 fees incurred by the Fund for the six months
ended October 31, 1994 were .11%. Consistent with National Association of
Securities Dealers, Inc.'s rules, it is possible that the combination of
front-end sales charges and Rule 12b-1 fees could cause long-term shareholders
to pay more than the economic equivalent of the maximum front-end sales charges
permitted under those same rules. See "Plan of Distribution" under "Management
of the Fund" in this Prospectus.
Investors should be aware that the above table is not intended to reflect in
precise detail the fees and expenses associated with an individual's own
investment in the Fund. Rather the table has been provided only to assist
investors in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters, investors should
refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the 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
$55 $77 $101 $169
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES, 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
shareholders as a result of their investment in the Fund. See "Management of the
Fund" for a description of the Fund's expenses. In addition, federal regulations
require the example to assume an annual return of 5%, but the Fund's actual
return may be more or less than 5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial highlights for a share of
the Fund throughout the periods from the effective date of registration (March
15, 1988) to January 31, 1993, for the nine-month period ended October 31, 1993
and for the fiscal year ended October 31, 1994. The information for each of the
five fiscal years in the period ended October 31, 1994 has been audited by
Coopers & Lybrand L.L.P., independent auditors, whose audit report appears in
the financial statements in the Fund's SAI. The remaining figures, which are
also audited, are not covered by the auditors' current report. See the
discussion "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
- ----------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSETS
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS(LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAIN DISTRIBUTIONS OF YEAR
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989(1) $10.00 $.56 $ .887 $1.447 $(.370) $(.077) $(.447) $11.00
1990 11.00 .75 .527 1.277 (.655) (.092) (.747) 11.53
1991 11.53 .72 (.803) (.083) (.736) (.071) (.807) 10.64
1992 10.64 .42 1.967 2.387 (.660) (.057) (.717) 12.31
1993 12.31 .66 1.307 1.967 (.682) (.135) (.817) 13.46
1993(2) 13.46 .60 1.435 2.035 (.495) (.090) (.585) 14.91
1994(3) 14.91 .62 (0.358) .262 (.725) (.307) (1.032) 14.14
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
AT END TO AVERAGE INCOME PORTFOLIO
PERIOD TOTAL OF YEAR NET ASSETS TO AVERAGE TURNOVER
ENDED RETURN++ (IN 000'S) (SEE NOTE 6)** NET ASSETS RATE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1989(1) 14.61% $ 2,527 --% 5.78%* 11.34%
1990 11.43 7,221 -- 6.23 33.11
1991 (.92) 10,808 .18 6.60 26.99
1992 22.76 16,144 .25 5.77 40.59
1993 16.23 26,092 .25 5.18 31.05
1993(2) 15.27 42,177 .25* 5.86* 19.33
1994(3) 1.83 92,763 .77 4.53 39.51
</TABLE>
(1) For the period March 15, 1988 (effective date of registration) to January
31, 1989.
(2) For the nine months ended October 31, resulting from a change in fiscal
year from January 31.
(3) For the year ended October 31, 1994.
* 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, and assumes
reinvestment of dividends at the maximum offering price and capital gains,
if any, at net asset value. Effective May 1, 1994, with the implementation of
the Rule 12b-1 distribution plan, as discussed in this Prospectus, the sales
charge on reinvested dividends was eliminated.
** 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:
1989(1)................ .73%*
1990................... .83
1991................... .83
1992................... .84
1993................... .81
1993(2)................ .87*
1994(3)................ .95*
ABOUT THE TRUST
The Trust is an open-end management investment company, or mutual fund,
organized as a Massachusetts business trust on December 16, 1986 and registered
with the SEC under the Investment Company Act of 1940 (the "1940 Act"). The
Trust currently consists of six series, each of which issues a separate series
of the Trust's shares and maintains a totally separate investment portfolio.
Shares of the Fund may be purchased (minimum investment of $100 initially and
$25 thereafter) at the current public offering price which is equal to the
Fund's net asset value (see "Valuation of Fund Shares") plus a sales charge not
exceeding 4.5% of the offering price. See "How to Buy Shares of the Fund."
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective of the Fund is to maximize its total return through
emphasis on high current income and long-term capital appreciation, consistent
with reasonable risk. The objective is a fundamental policy of the Fund and may
not be changed without shareholder approval.
The Fund pursues its investment objective by investing at least 65% of its total
assets (except when maintaining a temporary defensive position) in a broadly
diversified portfolio of common and preferred stocks, including convertibles,
offering current dividend yields above the average of the market defined by the
Standard & Poor's 400 and 500 Indices. The balance of the Fund's net assets may
be invested in other securities which, in the aggregate, are considered to be
consistent with the Fund's investment objective. Such other investments may
include fixedincome 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 400 and 500 Indices. This results in a unique
relative yield range for each company which in turn provides a discipline for
determining whether a stock is attractive for purchase or sale.
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.
OTHER INVESTMENT POLICIES OF THE FUND
Convertible Securities. The Fund may invest in securities including corporate
bonds, notes and preferred stocks that are convertible into common stock or
other securities which provide an opportunity for equity participation. These
securities are convertible at a stated price within a specified period of time
and are generally senior to common stocks in a corporation's capital structure,
although they are usually subordinated to similar nonconvertible securities.
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. As with a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to 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. As a
result of the Fund's investment in convertible securities and other equity
securities, the value of the Fund's shares and the dividends per share paid by
the Fund may fluctuate.
The Fund may also 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 exchangeable for the issuer's common stock or cash, at the option of the
issuer. 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. Some PERCS provide that they can be called immediately if the issuer's
common stock is trading at or above a specified level.
An investment in PERCS or other similar convertible securities may involve
additional risks. The Fund may have difficulty disposing of such securities
because there may be a thin trading market for a particular security at any
given time. Reduced liquidity may have an adverse impact on market price and the
Fund's ability to dispose of particular securities, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as a
deterioration in the creditworthiness 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 securities believed
by the investment manager to be liquid although, as with any investment, there
are no assurances that this will be achieved.
There are other convertible securities, including, but not limited to, Dividend
Enhancement Convertible Stock, Perpetual Equity Participation Shares and
Automatically Convertible Equity Securities in which the Fund invests, which are
similar to the foregoing described convertible securities. There may be
additional types of convertible securities which are also similar to the
foregoing described convertible securities, in which the Fund may invest in the
future to the extent such investments are consistent with the Fund's investment
objective and policies.
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.
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 SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the shareholder owns will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the securities owned by
the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, a shareholder may anticipate that the value
of Fund shares will fluctuate with movements in the broader equity and bond
markets, as well.
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.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the overall management
of the Trust and for electing the officers of the Trust who are responsible for
administering its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson 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 various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 33 U.S. registered investment
companies (111 separate series) with aggregate assets of over $73 billion.
Pursuant to the management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended October 31, 1994, fees totaling 0.63% of the
average monthly net assets of the Fund would have accrued to Advisers. Total
operating expenses, including management fees, would have represented 1.06% of
the average net assets of the Fund. Pursuant to an agreement by Advisers to
limit its fees, the Fund paid management fees totaling 0.45% of the average net
assets of the Fund and operating expenses totaling 0.88%. This arrangement may
be terminated by the investment manager at any time.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "The
Trust's Policies Regarding Brokers Used on Portfolio Transactions" 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.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date"), the Fund adopted a distribution
plan (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 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.
In implementing the Plan, the Board of Trustees has determined that the annual
fees payable thereunder will be equal to the sum of: (i) the amount obtained by
multiplying 0.25% by the average daily net assets represented by shares of the
Fund that were acquired by investors on or after the Effective Date ("New
Assets"), and (ii) the amount obtained by multiplying 0.15% by the average daily
net assets represented by shares of the Fund that were acquired before the
Effective Date ("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 to Distributors under the Plan. The payments to be made to Distributors
will be used by Distributors to defray other marketing expenses that have been
incurred in accordance with the Plan, such as advertising.
The fee is a Fund expense so that all shareholders regardless of when they
purchased their shares will bear Rule 12b-1 expenses at the same rate. That rate
initially will be at least 0.20% (0.15% plus 0.05%) of such average daily net
assets and, as Fund shares are sold on or after the Effective Date, will
increase over time. Thus, as the proportion of Fund shares purchased on or after
the Effective Date increases in relation to outstanding Fund shares, the
expenses attributable to payments under the Plan will also increase (but will
not exceed 0.25% of average daily net assets). While this is the currently
anticipated calculation for fees payable under the Plan, the Plan permits the
Trust's trustees to allow the Fund to pay a full 0.25% on all assets at any
time. The approval of the Trust's Board of Trustees would be required to change
the method of calculation of the payments to be made under the Plan.
For more information, please see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make
to its shareholders:
1. Income dividends. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) 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, its fiscal year end. 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 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
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 of Trustees. Fund
shares are quoted exdividend 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, an investor must have acquired Fund
shares prior to the close of business on the record date. An investor
considering purchasing Fund shares shortly before the record date of a
distribution should be aware that because the value of the Fund's shares is
based directly on the amount of its net assets, rather than on the principle of
supply and demand, any distribution of income or capital gain will result in a
decrease in the value of the Fund's shares equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of the
shareholder's investment, it may be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder Application, income
dividends and capital gain distributions, if any, will be automatically
reinvested in the shareholder's account in the form of additional shares, valued
at the closing net asset value (without sales charge) on the dividend
reinvestment date. Shareholders have the right to change their election with
respect to the receipt of distributions by notifying the Fund, but any such
change will be effective only as to distributions for which the record date is
seven or more business days after the Fund has been notified. See the SAI for
more information.
Many of the Fund's shareholders receive their distributions in the form of
additional shares. This is a convenient way to accumulate additional shares and
maintain or increase the shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both income dividends
and capital gain distributions, in cash. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder Application included
with this Prospectus, a shareholder may direct the selected distributions to
another fund in the Franklin Group of Funds(Registered Trademark) or the
Templeton Funds, to another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
this last option is requested, the shareholder should allow at least 15 days for
initial processing. Dividends which may be paid in the interim will be sent to
the address of record. Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in another fund in the
Franklin Group of Funds or the Templeton Funds at net asset value. See
"Purchases at Net Asset Value" under "How to Buy Shares of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax considerations which affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the 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 dividendsreceived 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 TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall include other financial
institutions which, pursuant to an agreement with Distributors (directly or
through affiliates), handle customer orders and accounts with the Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be waived when the shares
are purchased through plans established by the Franklin Templeton Group. The
Fund and Distributors reserve the right to refuse any order for the purchase of
shares.
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.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price, which is the net
asset value per share plus a sales charge, next computed (1) after the
shareholder's securities dealer receives the order which is promptly transmitted
to the Fund or (2) after receipt of an order by mail from the shareholder
directly in proper form (which generally means a completed Shareholder
Application accompanied by a negotiable check). The sales charge is a variable
percentage of the offering price depending upon the amount of the sale. On
orders for 100,000 shares or more, the offering price will be calculated to four
decimal places. On orders for less than 100,000 shares, the offering price will
be calculated to two decimal places using standard rounding criteria. A
description of the method of calculating net asset value per share is included
under the caption "Valuation of Fund Shares."
Set forth below is a table of total sales charges or underwriting commissions
and dealer concessions.
TOTAL SALES CHARGE
DEALER SIZE
OF AS A AS A CONCESSION
TRANSACTION PERCENTAGE PERCENTAGE AS A
PERCENTAGE OF OFFERING OF NET AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*,***
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.75% 2.83% 2.50%
$500,000 but less
than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more none none (see
below)**
* Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above.
** The following commissions will be paid by Distributors, from its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 1.00% on sales of $1 million but less than $2 million,
plus 0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
*** At the discretion of Distributors, all sales charges may at times be allowed
to the securities dealer. If 90% or more of the sales commission is allowed,
such securities dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investments of $1 million or more within 12 months of the
calendar month following such investments ("contingency period"). See "How to
Sell Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Fund shares is determined by adding the amount of the shareholder's
current purchase plus the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds in the Franklin
Group of Funds(Registered Trademark) and the Templeton Group of Funds. Included
for these aggregation purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government Securities Trust
(the "Franklin Funds"), (b) other investment products underwritten by
Distributors or its affiliates (although certain investments may not have the
same schedule of sales charges and/or may not be subject to reduction) and (c)
the U.S. mutual funds in the Templeton Group of Funds except Templeton American
Trust, Inc., Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund (the "Templeton
Funds"). (Franklin Funds and Templeton Funds are collectively referred to as the
"Franklin Templeton Funds".) Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton Investments") may be
effective only after notification to Distributors that the investment qualifies
for a discount.
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 definitions under "Description of Special Net Asset
Value Purchases" and as set forth in the SAI.
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 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. Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned additional compensation is
paid for by the Fund or its shareholders.
Certain officers and trustees of the Fund are also affiliated with Distributors.
A detailed description is included in the 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, the
investor or the 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 any of the discounts, investments in any of the Franklin
Templeton Investments may be combined with those of the investor's spouse and
children under the age of 21. In addition, the aggregate investments of a
trustee or other fiduciary account (for an account under exclusive investment
authority) may be considered in determining whether a reduced sales charge is
available, even though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a reduction in the sales
charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined with
the amount of the current purchase in determining the sales charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for a reduced sales
charge on a purchase of shares of the Fund by completing the Letter of Intent
section of the Shareholder Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to invest during the
next 13 months a specified amount which, if made at one time, would qualify for
a reduced sales charge and grants to Distributors a security interest in the
reserved shares and irrevocably appoints Distributors as attorney-in-fact with
full power of substitution to surrender for redemption any or all shares for the
purpose of paying any additional sales charge due. Purchases under the Letter of
Intent will conform with the requirements of Rule 22d-1 under the 1940 Act. The
investor or the investor's securities dealer must inform Investor Services or
Distributors that this Letter is in effect each time a purchase is made
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH ARE LISTED UNDER
"DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES") ACKNOWLEDGES AND AGREES TO
THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of the total intended
purchase will be reserved in shares of the Fund, registered in the investor's
name, to assure that the full applicable sales charge will be paid if the
intended purchase is not completed. The reserved shares will be included in the
total shares owned as reflected on periodic statements; income and capital gain
distributions on the reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by the investor until the
Letter of Intent has been completed or the higher sales charge paid. For more
information, see "Additional Information Regarding Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also purchase shares of
the Fund at the reduced sales charge applicable to the group as a whole. The
sales charge is based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of the current purchase.
For example, if members of the group had previously invested and still held
$80,000 of Fund shares and now were investing $25,000, the sales charge would be
3.75%. Information concerning the current sales charge applicable to a group may
be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent investments will be
automatic and will continue until such time as the investor notifies the Fund
and the investor's employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the payroll deduction
information to the Fund, there may be a delay between the time of the payroll
deduction and the time the money reaches the Fund. The investment in the Fund
will be made at the offering price per share determined on the day that both the
check and payroll deduction data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of either a front-end
sales charge ("net asset value") or a contingent deferred sales charge by (1)
officers, directors, trustees and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer; (3) insurance
company separate accounts for pension plan contracts; (4) accounts managed by
the Franklin Templeton Group; (5) shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund, under an employee benefit
plan qualified under section 401 of the Code, in shares of the Fund; (6) certain
unit investment trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered securities dealers and
their affiliates, for their investment account only; and (8) registered
personnel and employees of securities dealers and by their spouses and family
members, in accordance with the internal policies and procedures of the
employing securities dealer.
Shares of the Fund may be purchased at net asset value by persons who have
redeemed, within the previous 120 days, their shares of the Fund or another of
the Franklin Templeton Funds which were purchased with a front-end sales charge
or assessed a contingent deferred sales charge on redemption. An investor may
reinvest an amount not exceeding the redemption proceeds. While credit will be
given for any contingent deferred sales charge paid on the shares redeemed and
subsequently repurchased, a new contingency period will begin. Shares of the
Fund redeemed in connection with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of shares of the Fund
must be received by the Fund or the Fund's Shareholder Services Agent within 120
days after the redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge the shareholder a fee for this
service. The redemption is a taxable transaction but reinvestment without a
sales charge may affect the amount of gain or loss recognized and the tax basis
of the shares reinvested. If there has been a loss on the redemption, the loss
may be disallowed if a reinvestment in the same fund is made within a 30-day
period. Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus and the SAI.
Dividends and capital gains received in cash by the shareholder may also be used
to purchase shares of the Fund or another of the Franklin Templeton Funds at net
asset value and without the imposition of a contingent deferred sales charge
within 120 days of the payment date of such distribution. To exercise this
privilege, a written request to reinvest the distribution must accompany the
purchase order. Additional information may be obtained from Shareholder Services
at 1-800/632-2301. See "Distributions in Cash" under "Distributions to
Shareholders."
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by investors who have, within
the past 60 days, redeemed an investment in an unaffiliated mutual fund which
charged the investor a contingent deferred sales charge upon redemption and
which has investment objectives similar to those of the Fund.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by broker-dealers who have
entered into a supplemental agreement with Distributors, or by registered
investment advisers 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 120 days after the plan distribution. A prospectus
outlining the investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll free at 1-800/DIAL
BEN (1-800/342 5236).
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company (an "eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. If an investment by an eligible governmental authority at net
asset value is made through a securities dealer who has executed a dealer
agreement with Distributors, Distributors or one of its affiliates may make a
payment, out of its own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin's Institutional Sales
Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13 month period in the Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases" which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value and without the
imposition of a contingent deferred sales charge by trust companies and bank
trust departments for funds over which they exercise exclusive discretionary
investment authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to minimum
requirements with respect to amount of purchase, which may be established by
Distributors. Currently, those criteria require that the amount invested or to
be invested during the subsequent 13-month period in 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.
Refer to the SAI for further information.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT PLANS INVOLVING
TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for 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 the Trust Company may provide the
plan documents and serve as custodian or trustee. A plan document must be
adopted for a retirement plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for retirement plans. Brochures for the 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 the Trust Company. To obtain a retirement plan brochure or
application, call toll free 1800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" 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 advisers concerning investment decisions within their plans.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND TO SHAREHOLDERS WHOSE SHARES ARE HELD, OF
RECORD, BY A FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED
ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE THE
SECTION CAPTIONED "ACCOUNT REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by the shareholder, can be 2% or more of the value of
the lost, stolen or destroyed certificate. A certificate will be issued if
requested in writing by the shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder quarterly to reflect
the dividends reinvested during that period and after each other transaction
which affects the shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the number of shares in
"plan balance" for the account of the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able to arrange to
make additional purchases of shares automatically on a monthly basis by
electronic funds transfer from a checking account, if the bank which maintains
the account is a member of the Automated Clearing House, or by preauthorized
checks drawn on the shareholder's bank account. A shareholder may, of course,
terminate the program at any time. The Shareholder Application included with
this Prospectus contains the requirements applicable to this program. In
addition, shareholders may obtain more information concerning this program from
their securities dealer or from Distributors.
The market value of the Fund's shares is subject to fluctuation. Before
undertaking any plan for systematic investment, the investor should keep in mind
that such a program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and receive regular
periodic payments from the account, provided that the net asset value of the
shares held by the shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal Plan. The minimum amount
which the shareholder may withdraw is $50 per withdrawal transaction, although
this is merely the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject to mandatory
distribution requirements are not subject to the $50 minimum. The plan may be
established on a monthly, quarterly, semiannual or annual basis. If the
shareholder establishes a plan, any capital gain distributions and income
dividends paid by the Fund will be reinvested for the shareholder's account in
additional shares at net asset value. Payments will then be made from the
liquidation of shares at net asset value on the day of the transaction (which is
generally the first business day of the month in which the payment is scheduled)
with payment generally received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application included with this
Prospectus, a shareholder may direct the selected withdrawals to another of the
Franklin Templeton Funds, to another person, or directly to a checking account.
If the bank at which the account is maintained is a member of the Automated
Clearing House, the payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder should allow at
least 15 days for initial processing. Withdrawals which may be paid in the
interim will be sent to the address of record. Liquidation of shares may reduce
or possibly exhaust the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and distributions,
particularly in the event of a market decline. If the withdrawal amount exceeds
the total plan balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a liquidation to
make a withdrawal payment is a sale for federal income tax purposes. Because the
amount withdrawn under the plan may be more than the shareholder's actual yield
or income, part of the payment may be a return of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently with purchases of
additional shares of the Fund would be disadvantageous because of the sales
charge on the additional purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the annual withdrawals
under the plan during the time such a plan is in effect. A Systematic Withdrawal
Plan may be terminated on written notice by the shareholder or the Fund, and it
will terminate automatically if all shares are liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the death or incapacity
of the shareholder. Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments, or suspend one such
payment, by giving written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled payment. Share
certificates may not be issued while a Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares of
the Fund available to institutional accounts. For further information, contact
Franklin's Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin 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 shareholder's investment
objective or outlook for the securities markets changes, Fund shares may be
exchanged for shares of other Franklin Templeton Funds which are eligible for
sale in the shareholder's state of residence and in conformity with such fund's
stated eligibility requirements and investment minimums. Investors should review
the prospectus of the fund they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations on exercising the
exchange privilege, for example, minimum holding periods or applicable sales
charges. Exchanges may be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE
SHARES OF THE FUND BY TELEPHONE BY CALLING INVESTOR SERVICES AT 1-800/632-2301
OR THE AUTOMATED FRANKLIN TELEFACTS(REGISTERED TRADEMARK) SYSTEM (DAY OR NIGHT)
AT 1800/247-1753. IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to effect exchanges from
the Fund into an identically registered account in one of the other available
Franklin Templeton Funds. The Telephone Exchange Privilege is available only for
uncertificated shares or those which have previously been deposited in the
shareholder's account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please refer to "Telephone Transactions Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
Telephone Exchange Privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the procedures for
processing exchanges through securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders by telephone or by other means of
electronic transmission from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By Telephone" above. Such a
dealer-ordered exchange will be effective only for uncertificated shares on
deposit in the shareholder's account or for which certificates have previously
been deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on exchanges. If,
however, the exchanged shares were subject to a contingent deferred sales charge
in the original fund purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be imposed. The
contingency period will be tolled (or stopped) for the period such shares are
exchanged into and held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the funds involved,
except as set forth below. Exchanges of shares of the Fund which were purchased
without a sales charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless the investment on
which no sales charge was paid was transferred in from a fund on which the
investor paid a sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a higher sales charge
will be charged the difference, unless the shares were held in the Fund for at
least six months prior to executing the exchange. When an investor requests the
exchange of the total value of the Fund account, declared but unpaid income
dividends and capital gain distributions will be transferred to the fund being
exchanged into and will be invested at net asset value. Because the exchange is
considered a redemption and purchase of shares, the shareholder may realize a
gain or loss for federal income tax purposes. Backup withholding and information
reporting may also apply. Information regarding the possible tax consequences of
such an exchange is included in the tax section in this Prospectus and in the
SAI.
There are differences among the Franklin Templeton Funds. Before making an
exchange, a shareholder should obtain and review a current prospectus of the
fund into which the shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment 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.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may accomplish exchanges
directly. Certain restrictions may apply, however, to other types of retirement
plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
purchase or redeem shares based on predetermined market indicators ("Timing
Accounts") will be charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, or (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 reserves the right to refuse the purchase side of exchange requests by
any Timing Account, person, or group if, in the Manager's judgment, the Fund
would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and therefore may be
refused.
The Fund and Distributors also, as indicated in "How to Buy Shares of the Fund,"
reserve the right to refuse any order for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and receive from the Fund
the value of the shares. Shares may be redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value per share next
computed after the written request in proper form is received by Investor
Services. Redemption requests received after the time at which the net asset
value is calculated (1:00 p.m. Pacific time) each day that the New York Stock
Exchange (the "Exchange") is open for business will receive the price calculated
on the following business day. Shareholders are requested to provide a telephone
number(s) where they may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a shareholder promptly when
necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE GUARANTEED IF THE
REDEMPTION REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
shareholder's address of record, preauthorized bank account or brokerage
firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000; or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor institution" as
defined under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced above. Shareholders
are advised, for their own protection, to send the share certificate and
assignment form in separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officer(s) of the corporation and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustee(s) and
(2) a copy of the pertinent pages of the trust document listing the trustee(s)
or a Certification for Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to the shareholder within seven days
after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone Redemption
Authorization Agreement (the "Agreement"), included with this Prospectus, may
redeem shares of the Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions - Restricted Accounts."
INFORMATION MAY BE OBTAINED BY WRITING TO THE FUND OR INVESTOR SERVICES AT THE
ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE FUND AND INVESTOR
SERVICES WILL EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY
TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE RISK OF LOSS IN CERTAIN
CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with the completed Agreement on file, redemptions of
uncertificated shares or shares which have previously been deposited with the
Fund or Investor Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00 p.m. Pacific time on
any business day will be processed that same day. The redemption check will be
sent within seven days, made payable to all the registered owners on the
account, and will be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an address change by
telephone. In that case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional accounts (certain
corporations, bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department by telephoning
1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other means of electronic
transmission from securities dealers who have entered into a dealer or similar
agreement with Distributors. This is known as a repurchase. The only difference
between a normal redemption and a repurchase is that if the shareholder redeems
shares through a securities dealer, the redemption price will be the net asset
value next calculated after the shareholder's securities dealer receives the
order which is promptly transmitted to the Fund, rather than on the day the Fund
receives the shareholder's written request in proper form. These documents, as
described in the preceding section, are required even if the shareholder's
securities dealer has placed the repurchase order. After receipt of a repurchase
order from the securities dealer, the Fund will still require a signed letter of
instruction and all other documents set forth above. A shareholder's letter
should reference the Fund, the account number, the fact that the repurchase was
ordered by a securities dealer and the securities dealer's name. Details of the
dealerordered trade, such as trade date, confirmation number, and the amount of
shares or dollars, will help speed processing of the redemption. The seven-day
period within which the proceeds of the shareholder's redemption will be sent
will begin when the Fund receives all documents required to complete ("settle")
the repurchase in proper form. The redemption proceeds will not earn dividends
or interest during the time between receipt of the securities dealer's
repurchase order and the date the redemption is processed upon receipt of all
documents necessary to settle the repurchase. Thus, it is in a shareholder's
best interest to have the required documentation completed and forwarded to the
Fund as soon as possible. The shareholder's securities dealer may charge a fee
for handling the order. The SAI contains more information on the redemption of
shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on investments of $1
million or more, a contingent deferred sales charge of 1% applies to redemptions
of those investments within the contingency period of 12 months of the calendar
month following their purchase. The charge is 1% of the lesser of the value of
the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the total cost of such shares, and is retained by
Distributors. In determining if a charge applies, shares not subject to a
contingent deferred sales charge are deemed to be redeemed first, in the
following order: (i) shares representing amounts attributable to capital
appreciation of those shares held less than 12 months; (ii) shares purchased
with reinvested dividends and capital gain distributions; and (iii) other shares
held longer than 12 months; and followed by any shares held less than 12 months,
on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges; account fees;
distributions to participants in Trust Company retirement plan accounts due to
death, disability or attainment of age 59 1/2; tax-free returns of excess
contributions to employee benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to February 1, 1995 and, for
Systematic Withdrawal Plans set up thereafter, redemptions of up to 1% monthly
of an account's net asset value (3% quarterly, 6% semiannually or 12% annually);
and redemptions initiated by the Fund due to a shareholder's account falling
below the minimum specified account size. In addition to the waiver referred to
above, shares of participants in Trust Company retirement plan accounts will, in
the event of death, disability or attainment of age 59 1/2, no longer be subject
to the contingent deferred sales charge.
Requests for redemptions for a specified dollar amount, unless otherwise
specified by the shareholder, 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. In addition, the right of redemption may be suspended or
the date of payment postponed if the Exchange is closed (other than customary
closing) or upon the determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it, by order, for the
protection of shareholders. Of course, the amount received may be more or less
than the amount invested by the shareholder, depending on fluctuations in the
market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with Internal Revenue Service ("IRS")
regulations. To liquidate a retirement plan account, a shareholder or 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
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative of record, if any,
may be able to execute various transactions by calling Investor Services at
1-800/632-2301.
All shareholders will be able to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, and (iv)
exchange Fund shares as described in this Prospectus by telephone. In addition,
shareholders who complete and file an Agreement as described under "How to Sell
Shares of the Fund - Redemptions By Telephone" will be able to redeem shares of
the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to the shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to apply for or accept
telephone transaction privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions received by telephone are
genuine, the requested transaction will not be executed, and neither the Fund
nor Investor Services will be liable for any losses which may occur because of a
delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any distribution, redemption, or
dividend payment. While the telephone exchange privilege is extended to Franklin
Templeton IRA and 403(b) retirement accounts, certain restrictions may apply to
other types of retirement plans. Changes to dividend options must also be made
in writing.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020 for Franklin accounts or
1-800/354-9191 (press "2" when prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privileges will be difficult to execute because of heavy
telephone volume. In such situations, shareholders may wish to contact their
investment representative for assistance, or to send written instructions to the
Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from the inability of a shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or discontinued by the Fund
at any time upon 60 days' written notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of 1:00 p.m. Pacific
time each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and "ask"
(offering price, which includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in the following manner:
The aggregate of all liabilities, including, without limitation, the current
market value of any outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves is deducted from the aggregate gross value
of all assets, and the difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their realizable amounts.
Interest is recorded as accrued and dividends are recorded on the ex-dividend
date. Portfolio securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily available are
valued at the last quoted sale price of the day or, if there is no such reported
sale, within the range of the most recent quoted bid and ask prices.
Over-the-counter portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most representative market as
determined by the Manager. Portfolio securities underlying actively traded call
options are valued at their market price as determined above. The current market
value of any option held by the Fund is its last 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 of Trustees. With the approval of trustees, the Fund may
utilize a pricing service, bank or securities dealer to perform any of the above
described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's account should be
directed to Investor Services at the address shown on the back cover of this
Prospectus.
From a touch-tone phone, shareholders may obtain current price, yield or
performance information specific to a fund in the Franklin Funds by calling the
automated Franklin TeleFACTS system (day or night) at 1-800/247-1753.
Information about the Fund may be accessed by entering Fund Code 39 followed by
the # sign, when requested to do so by the automated operator. The TeleFACTS
system is also available for processing exchanges. See "Exchange Privilege."
To assist shareholders and securities dealers wishing to speak directly with a
representative, the following is a list of the various Franklin departments,
telephone numbers and hours of operation to call. 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 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to shareholders may contain
various measures of the Fund's performance, including current yield, various
expressions of total return and current distribution rate. They may occasionally
cite statistics to reflect its volatility or risk.
Average annual total return figures, as prescribed by the SEC, represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for other periods or based on
investments at various sales charge levels or at net asset value. For such
purposes total return equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the Fund's portfolio
investments; it is calculated by dividing the Fund's net investment income per
share during a recent 30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield, which is calculated according to a formula prescribed by the SEC (see the
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
are reflected in the current distribution rate, which may be quoted to
shareholders. The current distribution rate is computed by dividing the total
amount of dividends per share paid by the Fund during the past 12 months by a
current maximum offering price. Under certain circumstances, such as when there
has been a change in the amount of dividend payout or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
during the period such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing and short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against Fund income and will assume the payment of the maximum
sales charge on the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures will be restated to
reflect the new rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn in the future or what
the Fund's yield, distribution rate or total return may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports containing audited
financial statements of the Trust, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. 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 Fund's Annual
Report to Shareholders and the SAI.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on December 16, 1986.
The Trust is authorized to issue an unlimited number of shares of beneficial
interest, with a par value of $.01 per share, in various series. All shares have
one vote and, when issued, are fully paid, nonassessable and redeemable.
Shares have no preemptive or subscription rights and are fully transferable.
There are no conversion rights; however, holders of shares of the Fund may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in "Exchange Privilege."
All shares have equal voting, dividend and liquidation rights.
VOTING RIGHTS
Shares of the Fund have noncumulative voting rights which means that in all
elections of trustees, the holders of more than 50% of the shares voting can
elect 100% of the trustees if they choose to do so and, in such event, the
holders of the remaining shares voting will not be able to elect any person or
persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders' meetings. The Trust may,
however, hold a special meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares entitled to vote at the
meeting. Shareholders may receive assistance in communicating with other
shareholders in connection with the election or removal of trustees such as that
provided in Section 16(c) of the 1940 Act. The Board of Trustees may from time
to time establish other funds of the Trust, the assets and liabilities of which
will be separate and distinct from any other fund. Shares of each fund vote
separately as to issues affecting that fund, or the Trust, unless otherwise
permitted by the 1940 Act.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, shares of any
shareholder whose account has a value of less than $50, but only where the value
of such account has been reduced by the shareholder's prior voluntary redemption
of shares and has been inactive (except for the reinvestment of distributions)
for a period of at least six months, provided advance notice is given to the
shareholder. More information is included in the SAI.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do not earn interest or
any other income during the time such checks remain uncashed and neither the
Fund nor its affiliates will be liable for any loss to the shareholder caused by
the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's intentions as to
ownership. Where there are two co-owners on the account, the account will be
registered as "Owner 1" and "Owner 2"; the "or" designation is not used except
for money market fund accounts. If co-owners wish to have the ability to redeem
or convert on the signature of only one owner, a limited power of attorney may
be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, a shareholder may transfer an account in the Fund carried
in "street" or "nominee" name by the shareholder's securities dealer to a
comparably registered Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have executed dealer
agreements on file with Distributors. Unless a dealer agreement has been
executed and is on file with Distributors, the Fund will not process the
transfer and will so inform the shareholder's delivering securities dealer. To
effect the transfer, a shareholder should instruct the securities dealer to
transfer the account to a receiving securities dealer and sign any documents
required by the securities dealer(s) to evidence consent to the transfer. Under
current procedures the account transfer may be processed by the delivering
securities dealer and the Fund after the Fund receives authorization in proper
form from the shareholder's delivering securities dealer. In the future it may
be possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from an owner or the owner's
nominee listed in publicly available nominee lists, regardless of whether the
account was initially registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of record on an
investor's account, the investor will be deemed to have authorized the use of
electronic instructions on the account, including, without limitation, those
initiated through the services of the NSCC, to have adopted as instruction and
signature any such electronic instructions received by the Fund and the
Shareholder Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time, such services which
are available, or which are anticipated to be made available in the near future,
include the NSCC's "Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the IRS or a securities
dealer notifies the Fund that the number furnished by the shareholder is
incorrect or that the shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a shareholder who has
completed an "awaiting TIN" certification to provide the Fund with a certified
TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day today management of
the Fund's portfolio; Frank Felicelli and Howard M. McEldowney since its
inception and Doug Barton since July 1991.
Doug Barton
Portfolio Manager
Franklin Advisers, Inc.
Mr. Barton, a Chartered Financial Analyst, has a Master in Business
Administration from California State University in Hayward and a Bachelor of
Science degree from California State University in Chico. Mr. Barton joined
Franklin in July 1988.
Frank Felicelli
Executive Vice President
Franklin Management, Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Felicelli, a Chartered Financial Analyst, has a Master in Business
Administration from Golden Gate University and a Bachelor of Arts in economics
from the University of Illinois. Mr. Felicelli has been in the industry since
1980 and with Franklin since 1986. He is a member of several securities
industry-related committees and associations.
Howard M. McEldowney
President
Franklin Management Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. McEldowney has a Master in Business Administration from Columbia University
School of Business and a Bachelor of Arts degree from Harvard University. Mr.
McEldowney has been in the industry since 1964 and with Franklin since April
1984.
SUPPLEMENT DATED OCTOBER 2, 1995
TO THE STATEMENT OF ADDITIONAL INFORMATION OF
FRANKLIN INVESTORS SECURITIES TRUST
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
dated March 1, 1995
As described in the Prospectuses of the Franklin Equity Income Fund (the "Equity
Income Fund") and the Franklin Convertible Securities Fund ("Convertible Fund"),
the Equity Income Fund and the Convertible Fund now offer two classes of shares
to their investors. This new structure allows investors to consider, among other
features, the impact of sales charges and distribution fees ("Rule 12b-1 fees")
on their investments in the Equity Income Fund and the Convertible Fund.
ADD THE FOLLOWING AS THE LAST SENTENCE OF THE PARAGRAPH DESCRIBING FEES PAID TO
THE MANAGER UNDER "INVESTMENT ADVISORY AND OTHER SERVICES":
Each class of the Equity Income and Convertible Funds will pay its respective
share of the fee as determined by the proportion of the Equity Income Fund and
Convertible Fund that it represents.
EACH NEW CLASS OF SHARES HAS A SEPARATE DISTRIBUTION PLAN. FOR THIS REASON, THE
FIRST PARAGRAPH OF THE SECTION "THE FUNDS' UNDERWRITER - DISTRIBUTION PLANS" HAS
BEEN REPLACED WITH THE FOLLOWING PARAGRAPH:
Distribution Plans
Each class of the Equity Income Fund and the Convertible Fund has adopted a
distribution plan ("Class I Plan" and "Class II Plan," respectively) pursuant
to Rule 12b-1 under the 1940 Act. The Short-Intermediate Fund has also adopted
a distribution plan pursuant to Rule 12b-1 (the "Short-Intermediate Fund
Plan"). The distribution plans for each Fund and class may be collectively
referred to as the "Plans."
THE FOLLOWING SENTENCE SHOULD BE ADDED AS THE FIRST SENTENCE IN THE NEXT
PARAGRAPH:
Pursuant to the Class I Plan, the Equity Income Fund and the Convertible Fund
may pay up to a maximum of 0.25% per annum (0.25 of 1%) of their average daily
net assets for expenses incurred in the promotion and distribution of their
shares. The Plan for the Short-Intermediate Fund allows that fund to pay up to
a maximum of 0.10% per annum (0.10 of 1%) of its average daily net assets for
expenses incurred in the promotion and distribution of its shares.
THE PARAGRAPH DESCRIBED ABOVE ONLY CONCERNS THE CLASS I PLAN FOR BOTH THE EQUITY
INCOME AND THE CONVERTIBLE FUNDS AND THE PLAN FOR THE SHORT-INTERMEDIATE FUND.
THE FOLLOWING PARAGRAPH HAS BEEN ADDED TO THIS SECTION AFTER THE DISCUSSION OF
THE CLASS I PLAN AND THE SHORT-INTERMEDIATE FUND PLAN TO DESCRIBE THE CLASS II
FOR THE EQUITY INCOME AND CONVERTIBLE FUNDS:
The Class II Plan
Under the Class II Plan, the Equity Income and Convertible Funds are each
permitted to pay to Distributors or others annual distribution fees, payable
quarterly, of .75% 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 Equity Income Fund
or the Convertible Fund. In addition to this amount, under the Class II Plan,
the Equity Income and Convertible Funds shall each pay .25% per annum, payable
quarterly, of Class II's 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 Equity Income and the Convertible 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.
THE SUBSEQUENT PARAGRAPHS IN THE SECTION "DISTRIBUTION PLANS" APPLY EQUALLY TO
THE PLANS, WITH THE EXCEPTION THAT (1) THE SENTENCE REGARDING UNREIMBURSED
EXPENSES DOES NOT REFER TO THE CLASS II PLAN, AND (2) THE CLASS II PLAN WAS
APPROVED BY THE BOARD OF TRUSTEES AND THE SOLE INITIAL SHAREHOLDER PRIOR TO
OCTOBER 2, 1995 AND IS EFFECTIVE FROM OCTOBER 2, 1995.
THE "TRUSTEES AND OFFICERS" SECTION IS REVISED TO READ AS FOLLOWS:
Trustees and Officers
The Board of Trustees has the responsibility for the overall management of the
Trust, including general supervision and review of its investment activities.
The trustees, in turn, elect the officers of the Trust, who are responsible
for administering the day-to-day operations of the Trust. The affiliations of
the officers and trustees and their principal occupations for the past five
years are listed below. Trustees who are deemed to be "interested persons" of
the Trust, as defined in the 1940 Act, are indicated by an asterisk (*).
Positions and Offices Principal Occupations During
Name, Address and Age with the Fund Past Five Years
Frank H. Abbott, III (74) Trustee
1045 Sansome St.
San Francisco, CA 94111
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) Trustee
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 55 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63) Trustee
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 57 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano (80) Trustee
111 New Montgomery St., #402
San Francisco, CA 94105
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, 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 (47) President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
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 (62) Chairman
777 Mariners Island Blvd. of the Board
San Mateo, CA 94404 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 56 of the investment companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (54) Vice President
777 Mariners Island Blvd. and Trustee
San Mateo, CA 94404
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
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 (66) Trustee
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck 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) Trustee
8212 Burning Tree Road
Bethesda, MD 20817
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 52 of the investment companies in the Franklin Templeton Group of Funds;
formerly Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare
Investors; and formerly President, National Association of Securities Dealers,
Inc.
Harmon E. Burns (50) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
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 42 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (62) Vice President -
777 Mariners Island Blvd. Financial
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd. and Chief
San Mateo, CA 94404 Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, 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 (46) Vice President
777 Mariners Island Blvd. and Secretary
San Mateo, CA 94404
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) Vice President
777 Mariners Island Blvd.
San Mateo CA 94404
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 24 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (56) Treasurer and
777 Mariners Island Blvd. Principal
San Mateo, CA 94404 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) Vice President
777 Mariners Island Blvd.
San Mateo, CA 94404
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 32 of the investment companies in the Franklin Group of
Funds.
Trustees not affiliated with the investment manager ("non affiliated
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>
Total Fees Number of
Received from Boards in the
Total Fees the Franklin Franklin Templeton
Received Templeton Group Group of Funds on
Name From Trust* of Funds** which Each Serves***
<S> <C> <C> <C>
Mr. Abbott.............................$23,125 $176,870 31
Mr. Ashton.............................$22,200 $319,925 55
Mr. Fortunato..........................$22,200 $336,065 57
Mr. Garbellano.........................$22,200 $153,300 30
Mr. LaHaye.............................$22,200 $150,817 26
Mr. Macklin............................$22,200 $303,685 52
</TABLE>
* For the fiscal year ended October 31, 1994.
** 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 Funds currently includes 61
registered investment companies, consisting of more than 162 U.S. based mutual
funds or series.
Nonaffiliated trustees are also reimbursed for expenses incurred in connection
with attending Board meetings, paid pro rata by each Franklin Templeton Fund
for which they serve as directors, trustees or managing general partners. 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 director compensation and expenses, please see the
Fund's Annual Report to Shareholders.
As of July 28, 1995, the trustees and officers, as a group, owned of record and
beneficially approximately 1,530 shares of the Equity Income Fund, or less than
1% of the total outstanding shares of such Fund, and did not own any shares of
the Convertible 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 FIRST SENTENCE OF THE SIXTH PARAGRAPH UNDER "INVESTMENT ADVISORY AND OTHER
SERVICES" IS REVISED TO REFLECT THAT THE MANAGMENT AGREEMENT FOR THE FUNDS IS IN
EFFECT UNTIL FEBRUARY 29, 1996.
THE FOLLOWING PARAGRAPHS ARE ADDED TO "ADDITIONAL INFORMATION REGARDING FUND
SHARES":
Each 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 a Fund.
Reports to Shareholders
The Trust sends annual and semi-annual reports to its shareholders regarding
each Fund's performance and portfolio holdings. Shareholders who would like to
receive an interim quarterly report may phone Fund Information at 1-800 DIAL
BEN.
THE "PURCHASES AND REDEMPTIONS THROUGH SECURITIES DEALERS" AND "CALCULATION OF
NET ASSET VALUE" SUBSECTIONS ARE MODIFIED TO REFLECT THAT THE NET ASSET VALUE
FOR EACH CLASS OF THE EQUITY INCOME FUND AND CONVERTIBLE FUND IS CALCULATED
SEPARATELY FOR EACH CLASS AND THAT THE NET ASSET VALUE FOR EACH CLASS OR FUND IS
CALCULATED AS OF THE SCHEDULED CLOSING OF THE NEW YORK STOCK EXCHANGE (GENERALLY
1:00 P.M. PACIFIC TIME).
THE SUBSECTION TITLED "ADDITIONAL INFORMATION REGARDING PURCHASES" DOES NOT
APPLY TO CLASS II.
THE PARAGRAPH REGARDING PRINCIPAL SHAREHOLDERS UNDER "GENERAL INFORMATION -
MISCELLANEOUS INFORMATION" IS REVISED TO READ AS FOLLOWS:
As of July 28, 1995, to the best knowledge of the Equity Income and
Convertible Funds, no other person holds beneficially or of record more than
5% of either Fund's outstanding shares.
FINANCIAL STATEMENTS
The unaudited financial statements for the six months ended April 30, 1995,
contained in the Semi-Annual Report to Shareholders dated April 30, 1995, are
incorporated herein by reference.
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, 1995
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.
The Short-Intermediate Fund, 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, 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, 1995, each as may be amended
from time to time, provide the basic information an investor 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 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
INVESTORS 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
About the Trust
The Investment Objective
and Policies of Each Fund
Trustees and Officers
Investment Advisory
and Other Services
The Trust's Policies Regarding
Brokers Used on Portfolio Transactions
Additional Information
Regarding Fund Shares
Additional Information
Regarding Taxation
The Funds' Underwriter
General Information
Appendix
Financial Statements
ABOUT THE TRUST
The Trust is an open-end management investment company, commonly called a mutual
fund, organized as a Massachusetts business trust on December 16, 1986. The
Trust issues its shares of beneficial interest, with a par value of $.01 per
share, in six series, each of which maintains a totally separate investment
portfolio.
THE INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND
As noted in the Prospectuses, each Fund has its own investment objective and
follows policies designed to achieve that objective. In addition, the following
restrictions have been adopted as fundamental policies for each Fund, which
means that, as to each Fund, they may not be changed without the approval of a
majority of the shares of such Fund. Each Fund MAY NOT:
1. Borrow money or mortgage or pledge any of the assets of the Trust, except
that borrowings (and a pledge of assets therefor) for temporary or emergency
purposes may be made from banks in an amount up to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short," except that
the Convertible Fund may sell securities "short against the box" on the terms
and conditions as described in its Prospectus.
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes or other debt securities and except that
securities of each Fund may be loaned to securities dealers or other
institutional investors if at least 102% cash collateral is pledged and
maintained by the borrower, provided such loans may not be made if, as a result,
the aggregate of such loans exceeds 10% of the value of that Fund's total assets
at the time of the most recent loan. The entry into repurchase agreements is not
considered a loan for purposes of this restriction.
4. Act as underwriter of securities issued by other persons, except insofar as a
Fund may be technically deemed an underwriter under the federal securities laws
in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of a Fund in the
securities of any one issuer, but this limitation does not apply to
investments in securities issued or guaranteed by the U.S. government or its
agencies or instrumentalities.
6. Purchase the securities of any issuer which would result in owning more than
10% of any class of the outstanding voting securities of such issuer. To the
extent permitted by exemptions granted under the Investment Company Act of 1940,
the Funds may invest in shares of money market funds managed by Franklin
Advisers, Inc. or its affiliates.
7. Purchase from or sell to its officers and trustees, or any firm of which any
officer or trustee is a member, as principal, any securities, but may deal with
such persons or firms as brokers and pay a customary brokerage commission; or
retain securities of any issuer if, to the knowledge of the Trust, one or more
of its officers, trustees or investment adviser own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
trustees together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs; however, the Convertible Fund and the
Equity Income Fund may write call options which are listed for trading on a
national securities exchange and purchase put options on securities in their
portfolios (see "Investment Objective and Policies of the Fund" in each
Prospectus). The Convertible Fund and the Equity Income Fund may also purchase
call options to the extent necessary to cancel call options previously written
and may purchase listed call options provided that the value of the call options
purchased will not exceed 5% of the Fund's net assets. Such Funds may also
purchase call and put options on stock indices for defensive hedging purposes.
(The Equity Income Fund will comply with the California Corporate Securities
Rules as they pertain to prohibited investments.) At present, there are no
options listed for trading on a national securities exchange covering the types
of securities which are appropriate for investment by the Short-Intermediate
Fund and, therefore, there are no option transactions available for that Fund.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies, except in connection with
a merger, consolidation, acquisition or reorganization; or except to the extent
the Funds invest their uninvested daily cash balances in shares of the Franklin
Money Fund and other money market funds in the Franklin Group of Funds provided
i) their purchases and redemptions of such money fund shares may not be subject
to any purchase or redemption fees, ii) their investments may not be subject to
duplication of management fees, nor to any charge related to the expense of
distributing the Fund's shares (as determined under Rule 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.
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.
TRUSTEES AND OFFICERS
The Board of Trustees has the responsibility for the overall management of the
Trust, including general supervision and review of its investment activities.
The trustees, in turn, elect the officers of the Trust who are responsible for
administering day-to-day operations of the Trust. The affiliations of the
officers and trustees and their principal occupations for the past five years
are listed below. Trustees who are deemed to be "interested persons" of the
Trust, as defined in the Investment Company Act of 1940 (the "1940 Act"), are
indicated by an asterisk (*).
POSITIONS AND
OFFICES WITH PRINCIPAL OCCUPATIONS
NAME AND ADDRESS THE TRUST DURING PAST FIVE YEARS
Frank H. Abbott, III
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company); Director,
Mother Lode Gold Mines Consolidated; and director, trustee or managing general
partner, as the case may be, of 30 of the investment companies in the Franklin
Group of Funds.
Harris J. Ashton
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 54 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 56 of the investment companies in the Franklin Templeton Group of Funds.
David W. Garbellano
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director, Berkeley Science
Corporation (a venture capital company); and director, trustee or managing
general partner, as the case may be, of 29 of the investment companies in the
Franklin Group of Funds.
*Edward B. Jamieson
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
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 55 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr.
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; 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 42 of the investment companies
in the Franklin Templeton Group of Funds.
Frank W. T. LaHaye
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are General
Partners of Peregrine Ventures and Peregrine Ventures II (venture capital
firms); Chairman of the Board and Director, Quarterdeck Office Systems, Inc.;
Director, FischerImaging Corporation; and director or trustee, as the case may
be, of 25 of the investment companies in the Franklin Group of Funds.
Gordon S. Macklin
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Corporation, Martin Marietta 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 51 of the investment companies in the Franklin Templeton Group of Funds;
formerly, Chairman, Hambrecht and Quist Group; Director, H & Q Healthcare
Investors; and President, National Association of Securities Dealers, Inc.
Harmon E. Burns
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 41 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues
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 36 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan
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 60 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and
officer of 36 of the investment companies in the Franklin Group of Funds.
Charles E. Johnson
777 Mariners Island Blvd.
San Mateo CA 94404
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior Vice
President, Franklin Templeton Distributors, Inc.; President and Director,
Templeton Worldwide, Inc. and Franklin Institutional Services Corporation;
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 24 of the investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 36 of the investment
companies in the Franklin Group of Funds.
Edward V. McVey
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton Distributors,
Inc.; and officer of 31 of the investment companies in the Franklin Group of
Funds.
As indicated above, certain of the trustees and officers hold positions with
other companies in the Franklin Group of Funds(Registered Trademark) and the
Templeton Group of Funds. Trustees not affiliated with the investment manager
are currently paid fees of $925 per month, plus $925 per meeting attended and
are reimbursed for expenses incurred in connection with attending such meetings.
During the fiscal year ended October 31, 1994, fees and expenses totaling
$20,881 (Short-Intermediate Fund), $4,920 (Convertible Fund) and $5,658 (Equity
Income Fund) were paid to trustees of the Trust who are not affiliated with the
investment manager. No officer or trustee received any other compensation
directly from the Trust. As of December 6, 1994, the trustees and officers, as a
group, owned of record and beneficially approximately 1,460 shares of the Equity
Income Fund, or less than 1% of the total outstanding shares of such Fund, and
did not own any shares of the Convertible Fund or the Short-Intermediate Fund.
In addition, many of the trustees own shares in various of the other funds in
the Franklin Group of Funds and the Templeton Group of Funds. Certain officers
or trustees who are shareholders of Franklin Resources, Inc. may be deemed to
receive indirect remuneration by virtue of their participation, if any, in the
fees paid to its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers and the father and uncle, respectively, of Charles E. Johnson.
INVESTMENT ADVISORY AND OTHER SERVICES
The investment manager of each Fund is Franklin Advisers, Inc. ("Advisers" or
"Manager"). Advisers is a wholly-owned subsidiary of Franklin Resources, Inc.
("Resources"), a publicly owned holding company whose shares are listed on the
New York Stock Exchange ("Exchange"). Resources owns several other subsidiaries
which are involved in investment management and shareholder services. The
Manager and other subsidiary companies of Resources currently manage over $114
billion in assets for more than 3.7 million shareholders. The preceding table
indicates those officers and trustees who are also affiliated persons of
Distributors and Advisers.
Pursuant to the management agreement for the Funds, the Manager provides
investment research and portfolio management services, including the selection
of securities for each Fund to purchase, hold or sell and the selection of
brokers through whom each Fund's portfolio transactions are executed. The
Manager's activities are subject to the review and supervision of the Trust's
Board of Trustees to whom the Manager renders periodic reports of each Fund's
investment activities. The Manager, at its own expense, furnishes each Fund with
office space and office furnishings, facilities and equipment required for
managing the business affairs of each Fund; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. The Manager is covered by
fidelity insurance on its officers, directors and employees for the protection
of each Fund. Each Fund bears all of its expenses not assumed by the Manager.
See the Statement of Operations in the financial statements at the end of this
SAI for additional details of these expenses.
Pursuant to the management agreement, each Fund is obligated to pay the Manager
a fee computed at the close of business on the last business day of each month
equal to a monthly rate of 5/96 of 1% (approximately 5/8 of 1% per year) for the
first $100 million of net assets of the Fund; 1/24 of 1% (approximately 1/2 of
1% per year) on net assets of the Fund in excess of $100 million up to $250
million; and 9/240 of 1% (approximately 45/100 of 1% per year) of net assets of
the Fund in excess of $250 million.
The Manager has agreed to waive in advance a portion of its management fees and
has assumed responsibility for making payments, if necessary, to offset certain
operating expenses otherwise payable by certain of the Funds. This action by the
Manager to limit its management fees and to assume responsibility for payment of
the expenses related to the operations of certain Funds may be terminated by the
Manager at any time. The management agreement specifies that the management fee
will be reduced to the extent necessary to comply with the most stringent limits
on the expenses which may be borne by a Fund as prescribed by any state in which
a Fund's shares are offered for sale. The most stringent current limit requires
the Manager to reduce or eliminate its fee to the extent that aggregate
operating expenses of a Fund (excluding interest, taxes, brokerage commissions
and extraordinary expenses such as litigation costs) would otherwise exceed in
any fiscal year 2.5% of the first $30 million of average net assets of a Fund,
2% of the next $70 million of average net assets of a Fund and 1.5% of average
net assets of a Fund in excess of $100 million. Expense reductions have not been
necessary based on state requirements.
The table below sets forth on a per Fund basis the management fees each Fund was
contractually obligated to pay the Manager and the management fees actually paid
during the fiscal year ended October 31, 1994, the nine month period ended
October 31, 1993 and the fiscal year ended January 31, 1993.
FISCAL YEAR ENDED OCTOBER 31, 1994
CONTRACTUAL MANAGEMENT FEES
FUND MANAGEMENT FEES PAID
Short-Intermediate
Fund $1,370,071 $1,308,206
Convertible Fund $ 373,354 $ 327,355
Equity Income Fund $ 437,330 $ 312,644
NINE MONTH PERIOD ENDED OCTOBER 31, 1993
CONTRACTUAL MANAGEMENT FEES
FUND MANAGEMENT FEES PAID
- ---- ---------------- ----
Short-Intermediate $1,058,133 $897,620
Fund
Convertible Fund $ 170,607 $ 8,346
Equity Income Fund $ 159,572 $ 5,146
FISCAL YEAR ENDED JANUARY 31, 1993
CONTRACTUAL MANAGEMENT FEES
FUND MANAGEMENT FEES PAID
Short-Intermediate
Fund $1,133,312 $947,587
Convertible Fund $ 141,863 $ 15,487
Equity Income Fund $ 127,083 $ 15,127
The management agreement for the Funds is in effect until April 30, 1995.
Thereafter, it may continue in effect for successive annual periods providing
such continuance is specifically approved at least annually by a vote of the
Trust's Board of Trustees or by a vote of the holders of a majority of each
Fund's outstanding voting securities, and in either event by a majority vote of
the Trust's trustees who are not parties to the management agreement or
interested persons of any such party (other than as trustees of the Trust), cast
in person at a meeting called for that purpose. The management agreement may be
terminated as to each Fund without penalty at any time by the Trust or by the
Manager on 30 days' written notice and will automatically terminate in the event
of its assignment, as defined in the 1940 Act.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Trust and acts as the Trust's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of each
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Trust's independent auditors. During the fiscal year ended October 31,
1994, their auditing services consisted of rendering an opinion on the financial
statements of the Trust included in the Trust's Annual Report and this SAI.
THE TRUST'S POLICIES REGARDING
BROKERS USED ON PORTFOLIO TRANSACTIONS
Under the current management agreement with Advisers, the selection of brokers
and dealers to execute transactions in each Fund's portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Trust's Board of Trustees may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by a Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Manager, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. As a general rule, the
Funds do not purchase bonds in underwritings where they are not given any
choice, or only limited choice, in the designation of dealers to receive the
commission. The Trust 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 Trust's
best interests, the Manager may place portfolio transactions with brokers who
provide the types of services described below, even if it means the Trust will
have to pay a higher commission than would be the case if no weight were given
to the broker's furnishing of these services. This will be done only if, in the
opinion of the Manager, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Trust or assist the Manager in carrying out its responsibilities
to the Trust, or when it is otherwise in the best interest of the Trust to do
so, whether or not such data may also be useful to the Manager in advising other
clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Trust, specifically
including the quotations necessary to determine the value of a Fund's net
assets, in such amount of total brokerage as may reasonably be required in light
of such services, and through brokers who supply research, statistical and other
data to the Trust and Manager in such amount of total brokerage as may
reasonably be required.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research 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 Trust shares may also be considered as a factor in the selection of
broker-dealers to execute the Trust's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when a Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of each Fund, any portfolio securities
tendered by such Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.
If purchases or sales of securities of each Fund 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 fiscal year ended January 31, 1993, the nine month period ended
October 31, 1993, and the fiscal year ended October 31, 1994, the Convertible
Fund paid total brokerage commissions of $12,171, $5,226 and $13,958,
respectively, the Equity Income Fund paid $25,918, $32,855 and $113,782,
respectively, and the Short-Intermediate Fund paid no brokerage commissions. As
of October 31, 1994, the Funds did not own securities of their regular
broker-dealers.
ADDITIONAL INFORMATION REGARDING FUND SHARES
All checks, drafts, wires and other payment mediums used for purchasing or
redeeming shares of each Fund must be denominated in U.S. dollars. Each Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) 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 the Prospectuses "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 Funds' 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 a Fund to complete an exchange
for shares of any of the investment companies 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.
Shares of the Short-Intermediate Fund are eligible to receive dividends
beginning on the first business day following settlement of the purchase
transaction, through the date on which the Fund writes a check or sends a wire
on redemption transactions.
Dividend checks which are returned to a Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.
A Fund may deduct from a shareholder's account the costs of its efforts to
locate a shareholder if mail is returned as undeliverable or such Fund is
otherwise unable to locate the shareholder or verify the current mailing
address. These costs may include a percentage of the account when a search
company charges a percentage fee in exchange for 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 an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of each Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of each Fund will be
offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE - 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 a Fund received in proper form prior to
1:00 p.m. Pacific time any business day that the Exchange is open for trading
and promptly transmitted to the Fund will be based upon the public offering
price determined that day. Purchase orders received by securities dealers or
other financial institutions after 1:00 p.m. Pacific time will be effected at
each Fund's public offering price on the day it is next calculated. The use of
the term "securities dealer" herein shall include other financial institutions
which, pursuant to an agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with a 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.
ADDITIONAL INFORMATION REGARDING PURCHASES
SPECIAL NET ASSET VALUE PURCHASES. As discussed in each Fund's Prospectus under
"How to Buy Shares of the Fund - Description of Special Net Asset Value
Purchases," certain categories of investors may purchase shares of a Fund
without a front-end sales charge ("net asset value") or a contingent deferred
sales charge. Distributors, or one of its affiliates, may make payments, out of
its own resources, to securities dealers who initiate and are responsible for
such purchases, as indicated below. As a condition for these payments,
Distributors or its affiliates may require reimbursement from the securities
dealers with respect to certain redemptions made within 12 months of the
calendar month following purchase, as well as other conditions, all of which may
be imposed by an agreement between Distributors, or its affiliates, and the
securities dealer.
The following amounts may be paid by Distributors or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and taxable income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
taxable income Franklin Templeton Funds made at net asset value by
non-designated retirement plans: 0.75% on sales of $1 million but less than $2
million, plus 0.60% on sales of $2 million but less than $3 million, plus 0.50%
on sales of $3 million but less than $50 million, plus 0.25% on sales of $50
million but less than $100 million, plus 0.15% on sales of $100 million or more.
These payment breakpoints are reset every 12 months for purposes of additional
purchases. With respect to purchases made at net asset value by certain trust
companies and trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more,
Distributors, or one of its affiliates, out of its own resources, may pay up to
1% of the amount invested.
LETTER OF INTENT. An investor may qualify for a reduced sales charge on the
purchase of shares of a Fund, as described in the Prospectuses. At any time
within 90 days after the first investment which the investor wants to qualify
for the reduced sales charge, a signed Shareholder Application, with the Letter
of Intent section completed, may be filed with a Fund. After the Letter of
Intent is filed, each additional investment will be entitled to the sales charge
applicable to the level of investment indicated on the Letter. Sales charge
reductions based upon purchases in more than one of the Franklin Templeton Funds
will be effective only after notification to Distributors that the investment
qualifies for a discount. The shareholder's holdings in the Franklin Templeton
Funds acquired more than 90 days before the Letter of Intent is filed will be
counted towards completion of the Letter of Intent but will not be entitled to a
retroactive downward adjustment in the sales charge. Any redemptions made by the
shareholder, other than by a designated benefit plan, during the 13-month period
will be subtracted from the amount of the purchases for purposes of determining
whether the terms of the Letter of Intent have been completed. If the Letter of
Intent is not completed within the 13-month period, there will be an upward
adjustment of the sales charge, depending upon the amount actually purchased
(less redemptions) during the period. The upward adjustment does not apply to
designated benefit plans. An investor who executes a Letter of Intent prior to a
change in the sales charge structure for a Fund will be entitled to complete the
Letter of Intent at the lower of (i) the new sales charge structure; or (ii) the
sales charge structure in effect at the time the Letter of Intent was filed with
the Fund.
As mentioned in the Prospectuses, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of a Fund registered in the
investor's name, unless the investor is a designated benefit plan. If the total
purchases, less redemptions, equal the amount specified under the Letter, the
reserved shares will be deposited to an account in the name of the investor or
delivered to the investor or the investor's order. If the total purchases, less
redemptions, exceed the amount specified under the Letter of Intent and is an
amount which would qualify for a further quantity discount, a retroactive price
adjustment will be made by Distributors and the securities dealer through whom
purchases were made pursuant to the Letter of Intent (to reflect such further
quantity discount) on purchases made within 90 days before and on those made
after filing the Letter. The resulting difference in offering price will be
applied to the purchase of additional shares at the offering price applicable to
a single purchase or the dollar amount of the total purchases. If the total
purchases, less redemptions, are less than the amount specified under the
Letter, the investor will remit to Distributors an amount equal to the
difference in the dollar amount of sales charge actually paid and the amount of
sales charge which would have applied to the aggregate purchases if the total of
such purchases had been made at a single time. Upon such remittance the reserved
shares held for the investor's account will be deposited to an account in the
name of the investor or delivered to the investor or to the investor's order. If
within 20 days after written request such difference in sales charge is not
paid, the redemption of an appropriate number of reserved shares to realize such
difference will be made. In the event of a total redemption of the account prior
to fulfillment of the Letter of Intent, the additional sales charge due will be
deducted from the proceeds of the redemption, and the balance will be forwarded
to the investor.
If a Letter of Intent is executed on behalf of a benefit plan (such plans are
described under "Purchases at Net Asset Value" in the Prospectuses), the level
and any reduction in sales charge for these designated benefit plans will be
based on actual plan participation and the projected investments in the Franklin
Templeton Funds under the Letter of Intent. Benefit plans are not subject to the
requirement to reserve 5% of the total intended purchase, or to any penalty as a
result of the early termination of a plan, nor are benefit plans entitled to
receive retroactive adjustments in price for investments made before executing
the Letter of Intent.
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 a Fund's net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission. In the case of
requests for redemption in excess of such amounts, the trustees reserve the
right to make payments in whole or in part in securities or other assets of the
Fund from which the shareholder is redeeming, in case of an emergency, or if the
payment of such a redemption in cash would be detrimental to the existing
shareholders of the Fund. In such circumstances, the securities distributed
would be valued at the price used to compute the Fund's net assets. Should a
Fund do so, a shareholder may incur brokerage fees in converting the securities
to cash. The Funds do not intend to redeem illiquid securities in kind; however,
should it happen, shareholders may not be able to timely recover their
investment and may also incur brokerage costs in selling such securities.
REDEMPTIONS BY THE FUNDS
Due to the relatively high cost of handling small investments, each Fund
reserves the right to redeem, involuntarily, at net asset value, the shares of
any shareholder whose account has a value of less than one-half of the initial
minimum investment required for that shareholder, but only where the value of
such account has been reduced by the shareholder's prior voluntary redemption of
shares. Until further notice, it is the present policy of each Fund not to
exercise this right with respect to any shareholder whose account has a value of
$50 or more. In any event, before a Fund redeems such shares and sends the
proceeds to the shareholder, it will notify the shareholder that the value of
the shares in 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.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectuses, each Fund generally calculates net asset value as
of 1:00 p.m. Pacific time each day that the Exchange is open for trading. As of
the date of this 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.
Each Fund's portfolio securities are valued as stated in its Prospectus.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the close of the Exchange. The values of such securities used in computing the
net asset value of each Fund's shares are determined as of such times.
Occasionally, events affecting the values of such securities may occur between
the times at which they are determined and 1:00 p.m. Pacific time which will not
be reflected in the computation of a Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Board of Trustees.
REINVESTMENT DATE
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.
SPECIAL SERVICES
The Trust and Institutional Services Division of Distributors provides
specialized services, including recordkeeping, for institutional investors of
the Trust. The cost of these services is not borne by the Trust.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Trust on behalf of numerous beneficial owners for
recordkeeping operations performed with respect to such beneficial owners. For
each beneficial owner in the omnibus account, the Trust may reimburse Investor
Services an amount not to exceed the per account fee which the Trust normally
pays Investor Services. Such financial institutions may also charge a fee for
their services directly to their clients.
ADDITIONAL INFORMATION REGARDING TAXATION
The following information is a supplement to and should be read in conjunction
with the section in each Fund's Prospectus entitled "Taxation of the Fund and
Its Shareholders."
As stated in each Fund's Prospectus, each Fund has elected and qualified to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). The trustees reserve the right
not to maintain the qualification of any Fund as a regulated investment company
if they determine such course of action to be beneficial to the shareholders. In
such case, 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
Distributors acts as principal underwriter in a continuous public offering for
shares of the Funds, pursuant to an underwriting agreement in effect until April
30, 1995. The underwriting agreement will continue in effect for successive
annual periods provided that its continuance is specifically approved at least
annually by a vote of the Trust's Board of Trustees or by a vote of the holders
of a majority of each Fund's outstanding voting securities, and in either event
by a majority vote of the Trust's trustees who are not parties to the
underwriting agreement or interested persons of any such party (other than as
trustees of the Trust), cast in person at a meeting called for that purpose. The
underwriting agreement terminates automatically in the event of its assignment
and may be terminated by either party on 90 days' written notice.
Distributors pays the expenses of distribution of each Fund's shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Funds pay the expenses of preparing and
printing amendments to their registration statements and prospectuses (other
than those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
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 Funds' shares, aggregate underwriting
commissions and the amount retained by Distributors after allowances to dealers
for the fiscal year ended January 31, 1993, the nine month period ended October
31, 1993 and the fiscal year ended October 31, 1994 were as indicated below.
FISCAL YEAR ENDED JANUARY 31, 1993
TOTAL COMMISSIONS
FUND RECEIVED AMOUNT RETAINED
Short-Intermediate
Fund $1,537,189 $44,503
Convertible Fund $ 194,007 $15,964
Equity Income Fund $ 182,371 $ 9,470
NINE-MONTH PERIOD ENDED OCTOBER 31, 1993
TOTAL COMMISSIONS
FUND RECEIVED AMOUNT RETAINED
Short-Intermediate
Fund $891,309 $139,758
Convertible Fund $347,284 $ 16,986
Equity Income Fund $299,851 $ 11,325
FISCAL YEAR ENDED OCTOBER 31, 1994
TOTAL COMMISSIONS
FUND RECEIVED AMOUNT RETAINED
Short-Intermediate
Fund $641,082 $96,507
Convertible Fund $465,108 $18,675
Equity Income Fund $697,331 $36,015
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.
DISTRIBUTION PLANS
Each Fund has adopted a distribution plan pursuant to Rule 12b-1 under the 1940
Act (the "Plans") whereby the Funds may pay up to a maximum of 0.25%, with
respect to the Convertible and Equity Income Funds, and 0.10%, with respect to
the Short-Intermediate Fund, per annum of their average daily net assets for
expenses incurred in the promotion and distribution of their shares.
Pursuant to the Plans, Distributors or others will be entitled to be reimbursed
each quarter (up to the maximum as stated above) for actual expenses incurred in
the distribution and promotion of the Funds' shares, including, but not limited
to, the printing of prospectuses and reports used for sales purposes, expenses
of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to the distribution of
Fund shares, as well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a servicing agreement with
the Funds, Distributors or its affiliates.
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide that to the extent the Funds, the Manager or
Distributors or other parties on behalf of the Funds, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of shares of the Funds
within the context of Rule 12b-1 under the 1940 Act, then such payments shall be
deemed to have been made pursuant to the Plans.
In no event shall the aggregate asset-based sales charges which include payments
made under the Plans, plus any other payments deemed to be made pursuant to the
Plans, exceed the amount permitted to be paid pursuant to the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., Article III,
Section 26(d)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
the Plans for administrative servicing or for agency transactions. If a bank
were prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Funds, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Funds' shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Funds may be required to register
as dealers pursuant to state law.
The Plans were approved by shareholders on April 13, 1994 and by the trustees of
the Trust, including those trustees who are not interested persons as defined in
the 1940 Act. The Plans are effective through April 30, 1995 and are renewable
annually by a vote of the Trust's Board of Trustees, including a majority vote
of the trustees who are non-interested persons of the Trust and who have no
direct or indirect financial interest in the operation of the Plans, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such trustees be done by the non-interested
trustees. The Plans and any related agreements may be terminated at any time,
without any penalty, by vote of a majority of the non-interested trustees on not
more than 60 days' written notice, by Distributors on not more than 60 days'
written notice, by any act that constitutes an assignment of the management
agreement with the Manager or by vote of a majority of a Fund's outstanding
shares. Distributors or any dealer or other firm may also terminate their
respective distribution or service agreement at any time upon written notice.
The Plans and any related agreements may not be amended to increase materially
the amount to be spent for distribution expenses without approval by a majority
of a Fund's outstanding shares, and all material amendments to the Plans or any
related agreements shall be approved by a vote of the non-interested trustees,
cast in person at a meeting called for the purpose of voting on any such
amendment.
Distributors is required to report in writing to the Board of Trustees at least
quarterly on the amounts and purpose of any payment made under the Plans and any
related agreements, as well as to furnish the Board of Trustees with such other
information as may reasonably be requested in order to enable the Board of
Trustees to make an informed determination of whether the Plans should be
continued.
For the fiscal year ended October 31, 1994, the Funds paid $69,950
(Short-Intermediate Fund), $55,016 (Convertible Fund) and $71,129 (Equity Income
Fund), respectively, to Distributors or others pursuant to the Plans, which
amount was spent in the manner indicated below:
PRINTING AND MAILING
OF PROSPECTUSES
(OTHER THAN TO PAYMENTS TO
FUND ADVERTISING CURRENT SHAREHOLDERS) BROKER-DEALERS
Short-Intermediate $ 6,995 $ 9,093 $53,862
Fund
Convertible Fund $ 9,353 $19,256 $26,408
Equity Income Fund $ 31,297 $20,627 $19,205
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectuses, each Fund may from time to time quote various
performance figures to illustrate the Fund's past performance. Each Fund may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the Securities and Exchange Commission ("SEC"). These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a Fund be accompanied by
certain standardized performance information computed as required by the SEC.
Current yield and average annual compounded total return quotations used by a
Fund are based on the standardized methods of computing performance mandated by
the SEC. An explanation of those and other methods used by each Fund to compute
or express performance follows.
TOTAL RETURN
The average annual total return is determined by finding the average annual
compounded rates of return over one-, 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 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 sales charge in effect currently.
In considering the quotations of total return by a 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 a Fund. The actual performance
of an investment will be affected less by this charge the longer an investor
retains the investment in a Fund. The average annual compounded rates of return
for each Fund for the indicated periods ended on the date of the financial
statements included herein was as follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
Short-Intermediate Fund* -4.16% 6.51% 6.82%
Convertible Fund* -2.41% 11.80% 9.48%
Equity Income Fund** -2.62% 9.47% 11.44%
*Inception 4/15/87
**Inception 3/15/88
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 such quotations 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 the date of the financial
statements included herein was as follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
Short-Intermediate Fund* -4.16% 37.06% 64.62%
Convertible Fund* -2.41% 74.65% 98.20%
Equity Income Fund** -2.62% 57.23% 105.14%
*Inception 4/15/87
**Inception 3/15/88
YIELD
Current yield reflects the income per share earned by each Fund's portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield for each Fund for the 30-day period ended on the date of the financial
statements included herein was as follows:
FUND NAME 30-DAY YIELD
Short-Intermediate Fund 5.97%
Convertible Fund 4.88%
Equity Income Fund 4.38%
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,
1994, was as follows:
Short-Intermediate Fund 5.15%
Convertible Fund 4.27%
Equity Income Fund 4.05%
VOLATILITY
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare Fund net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market as represented by the
Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility
greater than the market, and a beta of less than 1.00 indicates volatility less
than the market. Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset value or total
return around an average, over a specified period of time. The premise is that
greater volatility connotes greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are permitted to purchase
shares of a Fund at net asset value, sales literature pertaining to a Fund may
quote a current distribution rate, yield, total return, average annual total
return and other measures of performance as described elsewhere in this SAI,
with the substitution of net asset value for the public offering price.
The current distribution rate for each Fund for the fiscal year ended October
31, 1994, based on each Fund's net asset value, was as follows:
Short-Intermediate Fund 5.26%
Convertible Fund 4.47%
Equity Income Fund 4.24%
The average annual total return for each Fund, based on net asset value, for the
indicated periods ended on the date of the financial statements included herein
was as follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
Short-Intermediate Fund* -1.94% 7.00% 7.14%
Convertible Fund* 2.17% 12.83% 10.16%
Equity Income Fund** 1.95% 10.49% 12.21%
*Inception 4/15/87
**Inception 3/15/88
The aggregate total return for each Fund, based on net asset value, for the
indicated periods ended on the date of the financial statements included herein
was as follows:
FROM
FUND NAME ONE-YEAR FIVE-YEAR INCEPTION
Short-Intermediate Fund* -1.94% 40.27% 68.39%
Convertible Fund* 2.17% 82.86% 107.64%
Equity Income Fund** 1.95% 64.70% 114.78%
*Inception 4/15/87
**Inception 3/15/88
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 Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisers and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help investors better evaluate how an investment in the Funds might satisfy
their investment objective, advertisements and other materials regarding the
Funds may discuss various measures of a Fund's performance as reported by
various financial publications. Materials may also compare performance (as
calculated above) to performance as reported by other investments, indices and
averages. Such comparisons may include, but are not limited to, the following
examples:
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis, 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 of the Trust are members of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 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 $114
billion in assets under management for more than 3.7 million shareholder
accounts and offers 111 U.S.-based mutual funds. A Fund may identify itself by
its NASDAQ 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, 1994, 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:
NUMBER
FUND OF SHARES PERCENTAGE
SHORT-INTERMEDIATE FUND
City of Scottsdale 2,969,967.495 13.3%
3939 Civic Center Blvd.
Scottsdale, AZ 85251
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.
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
such clearance; (2) 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 a 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 a 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, 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.
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
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees
of Franklin Investors Securities Trust:
We have audited the accompanying statements of assets and liabilities of the
various funds comprising Franklin Investors Securities Trust, including each
Fund's statement of investments in securities and net assets, as of October 31,
1994, and the related statements of operations for the year then ended, the
statements of changes in net assets for the periods indicated thereon, and the
financial highlights included under the caption "Financial Highlights" for the
periods indicated thereon. These financial statements and financial highlights
are the responsibility of the Trusts' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
various funds comprising Franklin Investors Securities Trust as of October 31,
1994, the results of their operations for the year then ended, the changes in
their net assets for the periods indicated thereon, and the financial
highlights for the periods indicated thereon in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 7, 1994
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
SHARES/ VALUE
COUNTRY* WARRANTS FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS .2%
FINANCIAL SERVICES .2%
US 16,200 bGrupo Financiero Bancomer, ADS .................... $ 370,591
-----------
HOME BUILDING
US 2,252 aNVR, Inc. ......................................... 12,949
-----------
TOTAL COMMON STOCKS (COST $489,481)........ 383,540
-----------
WARRANTS
HOME BUILDING
US 1,193 aNVR, Inc. ......................................... 1,118
-----------
RESTAURANTS/FOOD SERVICES
US 115 aFoodmaker, Inc. ................................... 1,534
-----------
TOTAL WARRANTS (COST $5,230)............... 2,652
-----------
PREFERRED STOCKS 2.3%
FINANCIAL SERVICES
US 386,780 Nortel Communications, Inc., pfd., Series A........ 3,461,681
US 30,000 Nortel Communications, Inc., pfd., Series B, ADR... 810,000
-----------
TOTAL PREFERRED STOCKS (COST $4,200,838)... 4,271,681
-----------
FACE
AMOUNT
--------
BONDS, NOTES, BILLS & DEBENTURES 76.9%
ARGENTINA 5.3%
US 2,500,000 bHidro Electrica Alicuras, 8.375%, 03/15/99........ 2,231,250
US 16,500,000 Republic of Argentina, 4.25%, 03/31/23............ 7,734,375
-----------
9,965,625
-----------
AUSTRALIA 13.0%
AU 18,500,000 Government of Australia, 13.00%, 07/15/00......... 15,388,320
AU 696,000 Fanmac Ltd., 13.95%, 05/15/06..................... 554,812
AU 8,360,000 Queensland Treasury Corp., 8.875%, 11/08/96....... 6,189,512
AU 3,000,000 Queensland Treasury Corp., 8.00%, 05/14/03........ 1,895,234
AU 450,000 dSnowy Mountain Hydro, (original accretion rate
14.00%), 0.00%, 02/01/97........................ 277,929
-----------
24,305,807
-----------
CANADA 17.3%
CA 16,000,000 cCanadian Strip, 0.00%, 12/01/08................... 3,180,682
CA 15,000,000 Government of Canada, 9.50%, 10/01/98............. 11,485,638
CA 5,000,000 Government of Canada, 9.50%, 06/01/10............. 3,778,049
CA 3,000,000 Ontario-Hydro, Eurobonds, 9.00%, 06/24/02......... 2,189,198
CA 3,500,000 Ontario-Hydro, Eurobonds, 8.90%, 08/18/22......... 2,367,750
</TABLE>
The accompanying notes are an integral part of these financial statements.
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS, NOTES, BILLS & DEBENTURES (CONT.)
CANADA (CONT.)
CA 12,000,000 Province of British Columbia, 8.00%, 09/08/23...... $ 7,488,077
CA 3,000,000 Rogers Cablesystems, Inc., 9.65%, 01/15/14......... 1,863,147
-----------
32,352,541
-----------
DENMARK 4.6%
DK 23,000,000 Government of Denmark, 9.00%, 11/15/95............. 3,976,298
DK 27,256,000 Nykredit, 11.00%, 10/01/10......................... 4,716,717
-----------
8,693,015
-----------
FRANCE .4%
FR 3,550,197 CB-2 Cetelem Asset Backed Securities, 9.50%,
11/20/96......................................... 692,387
-----------
GREAT BRITAIN 6.5%
GB 3,670,000 United Kingdom Treasury, 7.00%, 08/06/97........... 5,858,809
GB 3,500,000 United Kingdom Treasury, 12.00%, 11/20/98.......... 6,360,072
-----------
12,218,881
-----------
INDIA .5%
US 900,000 Essar Gujarat, Ltd., FRN, 8.025%, 07/15/99......... 901,125
-----------
ITALY 8.6%
IT 13,000,000,000 Certificati di Credito del Tesoro (CCTS), 8.138%,
01/01/00......................................... 8,431,747
EC 1,500,000 Government of Italy, 9.25%, 03/07/11............... 1,818,532
GB 1,200,000 Government of Italy, 10.50%, 04/28/14.............. 2,048,142
DD 5,580,000 Republic of Italy, FRN, 5.00%, 07/26/99............ 3,694,775
-----------
15,993,196
-----------
MEXICO 1.1%
US 600,000 United Mexican States, FRN, 5.813%, 12/31/19....... 513,789
US 2,400,000 United Mexican States, Series B, 6.25%, 12/31/19... 1,524,757
-----------
2,038,546
-----------
NEW ZEALAND 6.8%
NZ 4,400,000 Government of New Zealand, 8.00%, 11/15/95......... 2,690,237
NZ 15,500,000 Government of New Zealand, 10.00%, 03/15/02........ 9,999,585
-----------
12,689,822
-----------
PORTUGAL .8%
DD 2,330,000 Portugal (Rep), FRN, 5.069%, 07/15/99.............. 1,545,898
-----------
SOUTH AFRICA 4.9%
ZA 52,975,000 ESCOM, E168, utility deb., 11.00%, 06/01/08........ 9,215,761
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
COUNTRY* AMOUNT FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS, NOTES, BILLS & DEBENTURES (CONT.)
SPAIN 2.7%
SP 240,000,000 Government of Spain, 13.45%, 04/15/96.............. $ 2,007,318
SP 365,000,000 Government of Spain, 11.60%, 01/15/97.............. 2,977,121
------------
4,984,439
------------
SWEDEN 3.0%
SE 58,000,000 Government of Sweden, 6.00%, 02/09/05.............. 5,690,779
------------
UNITED STATES 1.4%
US 2,150,000 IBM Credit Corp., 10.75%, 12/04/95................. 612,750
US 2,000,000 Tele-Communications, Inc., cvt. sub. deb., 9.80%,
02/01/12.......................................... 2,025,961
------------
2,638,711
------------
TOTAL BONDS, NOTES, BILLS & DEBENTURES (COST
$157,049,188)................................. 143,926,533
------------
TOTAL COMMON STOCKS, WARRANTS, PREFERRED STOCKS,
AND BONDS, NOTES, BILLS & DEBENTURES
(COST $161,744,737) .......................... 148,584,406
------------
SHORT TERM SECURITIES
BONDS 16.8 %
AU 8,360,000 Australian Treasury Bills, 5.55%, 11/02/94 ........ 6,207,004
SP 600,000,000 Government of Spain, 11.40%, 07/15/95.............. 4,874,716
GR 1,495,400,000 Greek Treasury Bills, 18.15%, 02/14/95............. 6,140,233
IT 1,710,000,000 Deutschebank Finance, NV, 12.375%, 11/07/94........ 1,114,323
MX 3,500,000 Mexican Federal Treasury Certificates (CETES),
13.37%, 11/10/94.................................. 1,020,732
MX 19,442,000 Mexican Federal Treasury Certificates (CETES), 14.33%,
04/27/95.......................................... 5,278,247
NZ 5,530,000 New Zealand Treasury Bills, 11/24/94 .............. 3,389,734
SE 10,000,000 Staten Bostadsfinansier, 13.00%, 09/20/95 ......... 1,420,889
TH 50,000,000 Thailand Military Bank Notes, 6.875%, 06/01/95..... 1,977,088
------------
TOTAL SHORT TERM SECURITIES (COST $31,703,036).. 31,422,966
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $193,447,773)............................ 180,007,372
------------
g,hRECEIVABLES FROM REPURCHASE AGREEMENTS 3.3%
US 6,365,229 Joint Repurchase Agreement, 4.824%, 11/01/94
(Maturity Value: $6,221,865) (COST $6,221,031)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%,
11/15/94 - 07/31/99............................... 6,221,031
------------
TOTAL INVESTMENTS (COST $199,668,804) 99.5%. 186,228,403
OTHER ASSETS AND LIABILITIES, NET .5%...... 975,440
------------
NET ASSETS 100.0% ......................... $187,203,843
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
FRANKLIN GLOBAL GOVERNMENT INCOME FUND (NOTE 1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
At October 31, 1994, the net unrealized depreciation
based on the cost of investments for income tax purposes
of $199,702,051 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there was an excess of value over
tax cost.............................................. $ 3,090,732
Aggregate gross unrealized depreciation for all
investments in which there was an excess of tax cost
over value ........................................... (16,564,380)
------------
Net unrealized depreciation ........................... $(13,473,648)
============
PORTFOLIO ABBREVIATIONS:
FRN - Floating Rate Notes
COUNTRY LEGEND:
AU - Australia
CA - Canada
DD - Germany
DK - Denmark
EC - European Community
FR - France
GB - Great Britain
GR - Greece
IT - Italy
MX - Mexico
NZ - New Zealand
SE - Sweden
SP - Spain
TH - Thailand
US - United States
ZA - South Africa
</TABLE>
*Securities traded in currency of country indicated.
aNon-income producing.
bSee Note 8 regarding Rule 144A securities.
cZero coupon bonds. Accretion rate may vary.
dZero coupon bonds. The current effective yield may vary. The original
accretion date by security will remain constant.
gFace amount for repurchase agreements is for the underlying collateral.
hSee Note 1(h) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
5
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
FACE FRANKLIN SHORT-INTERMEDIATE VALUE
AMOUNT U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT SECURITIES 99.8%
$25,000,000 U.S. Treasury Notes, 7.50%, 11/15/01 ....................... $ 24,820,300
12,000,000 U.S. Treasury Notes, 6.375%, 01/15/99 ...................... 11,572,500
4,000,000 U.S. Treasury Notes, 5.125%, 11/30/98 ...................... 3,688,748
6,700,000 U.S. Treasury Notes, 4.75%, 08/31/98 ....................... 6,132,590
2,000,000 U.S. Treasury Notes, 5.125%, 06/30/98 ...................... 1,863,124
10,000,000 U.S. Treasury Notes, 5.125%, 03/31/98 ...................... 9,368,750
6,000,000 U.S. Treasury Notes, 5.50%, 09/30/97 ....................... 5,756,250
6,500,000 U.S. Treasury Notes, 6.75%, 02/28/97 ....................... 6,475,625
80,000,000 cU.S. Treasury Strips, 0.00%, 02/15/97....................... 68,483,840
5,000,000 U.S. Treasury Notes, 6.25%, 01/31/97 ....................... 4,932,810
4,000,000 U.S. Treasury Notes, 6.125%, 12/31/96 ...................... 3,946,248
22,300,000 U.S. Treasury Notes, 6.25%, 08/31/96 ....................... 22,125,770
56,695,000 U.S. Treasury Notes, 5.125%, 03/31/96 ...................... 55,682,428
------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $231,271,813). 224,848,983
------------
g,hRECEIVABLES FROM REPURCHASE AGREEMENTS
12,679 Joint Repurchase Agreement, 4.824%, 11/01/94 (Maturity Value
$12,055)
(COST $12,053)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%, 11/15/94 -
07/31/99................................................... 12,053
------------
TOTAL INVESTMENTS (COST $231,283,866) 99.8%.......... 224,861,036
OTHER ASSETS AND LIABILITIES, NET .2%................ 490,695
------------
NET ASSETS 100.0% ................................... $225,351,731
============
At October 31, 1994, the net unrealized depreciation based
on the cost of investment for income tax purposes of
$231,283,866 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost ..... $ --
Aggregate gross unrealized depreciation for all investments
in which there was an excess of tax cost over value ..... (6,422,830)
------------
Net unrealized depreciation .............................. $ (6,422,830)
============
</TABLE>
cZero coupon bonds. Accretion rate may vary.
gFace amount for repurchase agreements is for the underlying collateral.
hSee Note 1(h) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
6
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
WARRANTS
HOME BUILDERS
3,872 aNVR L.P., warrants (COST $16,456) ................................ $ 3,630
----------
CONVERTIBLE PREFERRED STOCKS 37.2%
AUTOMOTIVE .6%
4,400 Ford Motor Co., $4.20 cum. cvt. pfd., Series A ................... 425,700
----------
BANKING 3.2%
15,070 Bank of America Corp., $3.25 cvt. pfd., Series G ................. 798,710
14,000 Chemical Banking Corp., $5.00 cvt. pfd. .......................... 1,015,000
2,300 Citicorp, $5.375 cvt. pfd. ....................................... 301,588
----------
2,115,298
----------
BROADCAST/MEDIA .8%
11,800 Evergreen Media Corp., $3.00 cvt. pfd., Series A ................. 531,000
----------
BUILDING MATERIALS .4%
6,600 Southdown, Inc., $2.875 cvt. pfd., Series D ...................... 245,850
----------
CONGLOMERATES 1.1%
50,000 bWestinghouse Electric Co., $1.30 cvt. pfd., Series C ............. 762,500
----------
CONSTRUCTION 1.0%
15,700 bMcDermott International, Inc., $2.875 cum. cvt. pfd., Series C ... 679,025
----------
ENERGY 2.9%
22,500 Occidental Petroleum Corp., $3.00 cvt. pfd. ...................... 1,130,625
14,500 bOccidental Petroleum Corp., $3.875 cvt. pfd. ..................... 772,125
----------
1,902,750
----------
ENTERTAINMENT .7%
20,000 AMC Entertainment, Inc., $1.75 cvt. pfd. ......................... 472,500
----------
FINANCIAL SERVICES 2.4%
20,000 Integon Corp., $3.875 cvt. pfd. .................................. 995,000
11,300 Travelers Corp., 2.75% cvt. pfd., Series B ....................... 624,325
----------
1,619,325
----------
GOLD 1.8%
19,000 AMAX Gold, Inc., $3.75 cvt. pfd., Series B ....................... 1,007,000
2,600 Battle Mountain Gold Co., $3.25 cvt. pfd. ........................ 164,125
----------
1,171,125
----------
METAL & RESOURCES 3.9%
19,200 Armco, Inc., $3.625 cvt. pfd., Series A .......................... 1,036,800
6,000 bBethlehem Steel Corp., $3.50 cvt. pfd. ........................... 329,250
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
METAL & RESOURCES (CONT.)
10,000 Cyprus/AMAX Minerals Co., $4.00 cvt. pfd., Series A ............. $ 621,250
12,000 WHX Corp., 6.50% cvt. pfd., Series A ............................ 649,500
----------
2,636,800
----------
OIL & GAS 7.2%
18,700 bDiamond Shamrock, $2.50 cvt. pfd. ............................... 1,117,325
48,500 Gerrity Oil & Gas, $1.50 cvt. pfd. .............................. 679,000
27,600 Noble Drilling Corp., $2.25 cvt. exch. pfd. ..................... 1,090,200
18,000 bParker & Parsley Petroleum Co., 6.25% cvt. pfd. ................. 929,250
43,475 Snyder Oil Corp., $1.50 cvt. pfd. ............................... 1,005,359
-----------
4,821,134
-----------
LONG DISTANCE/TELECOMMUNICATIONS .5%
10,000 LCI International, Inc., 5.00% cvt. pfd. ........................ 332,500
-----------
REAL ESTATE .5%
6,250 Catellus Development Corp., $3.75 cvt. pfd., Series A............ 322,656
-----------
REAL ESTATE INVESTMENT TRUSTS 3.1%
50,100 Merry Land & Investment Co., $1.75 cvt. pfd., Series A........... 1,202,400
40,000 Property Trust of America, 1.75% cvt. pfd., Series A............. 865,000
-----------
2,067,400
-----------
RESTAURANT .9%
31,100 Flagstar Cos., Inc., $2.25 cvt. pfd., Series A .................. 618,113
-----------
SAVINGS & LOANS 2.2%
9,700 Great Western Financial Corp., $4.375 cvt. pfd. ................. 527,437
15,900 Roosevelt Financial Group, $3.25 cvt. pfd. ...................... 938,100
-----------
1,465,537
-----------
SEMICONDUCTORS 1.7%
16,300 National Semiconductor Corp., $3.25 cvt. pfd. ................... 1,124,700
-----------
TEXTILES 1.2%
15,500 Fieldcrest Cannon, Inc., $3.00 cvt. pfd., Series A .............. 815,688
-----------
TRANSPORTATION 1.1%
16,500 bAmerican Airlines, Inc., $3.00 cvt. pfd. ........................ 715,688
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $24,598,003)....... 24,845,289
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS 54.8%
ADVERTISING 1.6%
$1,000,000 bOmnicom Group, cvt. deb., 4.50%, 09/01/00........................ $ 1,062,500
-----------
BROADCAST/MEDIA 1.6%
850,000 bAll American Communications, Inc., cvt. deb., 6.50%, 10/01/03.... 697,000
1,000,000 cTime Warner, Inc., cvt., LYONs, (original accretion rate 5.00%),
0.00%, 06/22/13................................................. 362,500
----------
1,059,500
----------
BUILDING MATERIALS .3%
175,000 Owens Corning Fiberglass Corp., cvt. junior sub. deb., 8.00%,
12/30/05........................................................ 195,781
----------
CABLE 3.5%
2,300,000 Comcast Corp., cvt. notes, 1.125%, 04/15/07 ..................... 971,750
3,705,000 cRogers Communication, Inc., cvt. sub. notes, LYONs, (original
accretion rate 5.50%), 0.00%, 05/20/13.......................... 1,352,325
----------
2,324,075
----------
CONGLOMERATES 3.5%
1,750,000 bHanson America, Inc., cvt. notes, 2.39%, 03/01/01................ 1,274,219
1,000,000 bThermo Electron Corp., cvt. deb., 5.00%, 04/15/01 ............... 1,095,000
----------
2,369,219
----------
CONSUMER PRODUCTS 2.0 %
975,000 American Brands, Inc., cvt. deb., 7.625%, 03/05/01............... 989,625
500,000 Bell Sports Corp., cvt. sub. deb., 4.125%, 11/15/00 ............. 361,250
----------
1,350,875
----------
CONSUMER SERVICES .9%
750,000 CTII Overseas Finance, cvt. guaranteed, 4.25%, 11/18/98.......... 596,250
----------
CONSTRUCTION .6%
500,000 bKumagai Gumi HK Finance Co., cvt. guaranteed, 4.875%, 12/08/98... 428,750
----------
FINANCIAL SERVICES 3.3%
750,000 bIndustrial Credit & Investment, cvt. deb., 2.50%, 04/03/00....... 667,500
1,100,000 bPeregrine Investment Finance, cvt. guaranteed, 4.50%, 12/01/00... 860,750
1,400,000 cUSF & G Corp., cvt. sub. notes, (original accretion rate 4.50%),
0.00%, 03/03/09................................................. 663,250
----------
2,191,500
----------
GROCERY/FOOD 2.0%
1,150,000 Chock Full O'Nuts, cvt. deb., 7.00%, 04/01/12 ................... 954,500
250,000 Kroger Co., cvt. junior sub. deb., 6.375%, 12/01/99 ............. 347,187
----------
1,301,687
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.) 54.8%
HEALTH CARE 5.5%
$ 600,000 bAbbey Healthcare Group, Inc., cvt. sub. notes, 6.50%, 12/01/12... $ 705,000
450,000 GranCare, Inc., cvt. sub. deb., 6.50%, 01/15/03 ................. 392,624
1,200,000 bMedical Care International, Inc., cvt. sub. deb., 6.75%,
10/01/06........................................................ 1,044,000
1,200,000 Pacific Physician Services, cvt. sub. deb., 5.50%, 12/15/03...... 996,000
500,000 Summit Health, cvt. sub. notes, 7.50%, 04/01/03 ................. 562,500
----------
3,700,124
----------
INDEPENDENT POWER PRODUCER 1.7%
1,145,000 AES Corp., cvt. deb., 6.50%, 03/15/02 ........................... 1,134,981
----------
INDUSTRIAL EQUIPMENT 1.8%
200,000 Raymond Corp., cvt. sub. deb., 6.50%, 12/15/03 .................. 240,000
950,000 Varlen Corp., cvt. sub. deb., 6.50%, 06/01/03 ................... 963,063
----------
1,203,063
----------
INSURANCE COMPANIES 2.1%
2,050,000 Fidelity National Financial, cvt. sub. notes, LYONs, (original
accretion rate 5.50%), 0.00%, 02/15/09.......................... 709,812
750,000 Leucadia National Corp., cvt. deb., 5.25%, 02/01/03 ............. 662,813
----------
1,372,625
----------
LONG DISTANCE/TELECOMMUNICATIONS 1.4%
500,000 b,cCellular Communications, Inc., cvt. sub. notes, (original
accretion rate 7.50%), 0.00%, 07/27/99.......................... 414,375
495,000 Cellular, Inc., cvt. sub. deb., 6.75%, 07/15/09................. 533,363
----------
947,738
----------
METAL & RESOURCES 2.5%
500,000 bHomestake Mining Co., cvt. sub. deb., 5.50%, 06/23/00 ........... 504,375
350,000 Inco, Ltd., cvt. deb., 5.75%, 07/01/04 .......................... 409,062
800,000 Teck Corp., cvt. sub. deb., 3.75%, 07/15/06 ..................... 776,000
----------
1,689,437
----------
OIL & GAS 3.2%
725,000 Noble Affiliates, cvt. sub. notes, 4.25%, 11/01/03 .............. 715,937
550,000 Pennzoil Co., cvt. sub. deb., 6.50%, 01/15/03.................... 633,876
550,000 Presidio Oil Co., cvt. sub. deb., 9.00%, 03/15/15................ 286,000
500,000 bSeacor Holdings, Inc., cvt. sub. deb., 6.00%, 07/01/03........... 510,000
----------
2,145,813
----------
POLLUTION CONTROL .4%
400,000 Air & Water Technology Corp., cvt. sub. deb., 8.00%, 05/15/15.... 262,000
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE BONDS (CONT.)
PUBLISHING/NEWSPAPERS .9%
$2,100,000 cHollinger, Inc., cvt. sub. notes, (original accretion rate
6.00%), 0.00%, 10/05/13.................................... $ 624,750
-----------
REAL ESTATE 2.1%
500,000 bHenderson Capital International, cvt. deb., 4.00%,
10/27/96................................................... 490,625
1,400,000 U.S. Home Corp., cvt. sub. notes, 4.875%, 11/01/05 ......... 927,500
-----------
1,418,125
-----------
REAL ESTATE INVESTMENT TRUSTS 2.6%
1,000,000 bHealth Care Properties Investment, Inc., cvt. sub.,
6.00%, 11/01/00............................................ 882,500
900,000 Liberty Property Trust, cvt. sub. deb., 8.00%, 07/01/01..... 858,375
-----------
1,740,875
-----------
RETAIL 1.8%
550,000 Carter Hawley Hale Stores, cvt. senior sub. notes,
6.25%, 12/31/00............................................ 602,250
200,000 Home Depot, Inc., cvt. sub. notes, 4.50%, 02/15/97.......... 241,250
500,000 Proffitt's, Inc., cvt. sub. deb. 4.75%, 11/01/03 ........... 363,750
-----------
1,207,250
-----------
SEMICONDUCTORS 2.1%
1,230,000 cMotorola, Inc., cvt. sub. notes, LYONs, (original accretion
rate 6.00%), 0.00%, 09/07/09............................... 1,329,938
-----------
SOFTWARE .5%
290,000 Sterling Software, Inc., cvt. sub. deb., 5.75%, 02/01/03.... 350,900
-----------
TECHNOLOGY 2.2%
700,000 Conner Peripherals, Inc., cvt. deb., 6.50%, 03/01/02........ 552,125
1,750,000 b,cSilicon Graphics, Inc., cvt. sub. deb., (original accretion
rate 4.15%), 0.00%, 11/02/13............................... 931,875
-----------
1,484,000
-----------
TELECOMMUNICATIONS 1.6%
475,000 bAspect Telecommunications Corp., cvt. sub. deb.,
5.00%, 10/15/03............................................ 486,281
500,000 California Microwave, cvt. sub. notes, 5.25%, 12/15/03...... 596,250
-----------
1,082,531
-----------
TRANSPORTATION 2.9%
1,315,000 Air Express International Corp., cvt. sub. deb., 6.00%,
01/15/03................................................... 1,298,562
700,000 Airborne Freight Corp., cvt. deb., 6.75%, 08/15/01 ......... 642,250
-----------
1,940,812
-----------
TOTAL CONVERTIBLE BONDS (COST $36,404,312) ............... 36,515,099
-----------
GOVERNMENT SECURITIES 4.4%
3,000,000 U.S. Treasury Notes, 5.125%, 03/31/96 (COST $2,985,480)..... 2,946,420
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $64,004,251)....................................... 64,310,438
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN CONVERTIBLE SECURITIES FUND (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
g,hRECEIVABLES FROM REPURCHASE AGREEMENTS 2.2%
$1,539,884 Joint Repurchase Agreement, 4.824%, 11/01/94 (Maturity Value $1,504,507)
(COST $1,504,305)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%, 11/15/94 - 07/31/99....... $ 1,504,305
-----------
TOTAL INVESTMENTS (COST $65,508,556) 98.4% .................... 65,814,743
OTHER ASSETS AND LIABILITIES, NET 1.6% ........................ 1,054,283
-----------
NET ASSETS 100.0% .............................................. $66,869,026
===========
At October 31, 1994, the net unrealized appreciation based on the
cost of investments for income tax purposes of $65,508,556 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost .............................. $ 3,292,787
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value .............................. (2,986,600)
-----------
Net unrealized appreciation .............................................. $ 306,187
===========
</TABLE>
PORTFOLIO ABBREVIATION:
LYONS - Liquid Yield Option Notes
aNon-income producing.
bSee Note 8 regarding Rule 144A securities.
cZero coupon bonds. The current effective yield may vary. The original
accretion rate by security will remain constant.
gFace amount for repurchase agreements is for the underlying collateral.
hSee Note 1(h) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
12
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.8%
76,822,612 U.S. Government ARM Portfolio (Note 1)............................. $705,999,804
------------
TOTAL INVESTMENTS (COST $772,055,642) 100.8% ................ 705,999,804
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.8)% ............ (5,382,982)
------------
NET ASSETS 100.0% ........................................... $700,616,822
============
At October 31, 1994, the net unrealized depreciation based on the
cost of investments for income tax purposes of $772,055,642 was
as follows:
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost................ $ --
Aggregate gross unrealized depreciation for all investments in
which there was an excess of tax cost over value................ (66,055,838)
------------
Net unrealized depreciation...................................... $(66,055,838)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- ---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 56.3%
CHEMICALS 4.4%
29,800 Chemed Corp. .........................................$1,016,925
19,800 Dow Chemical Co. ..................................... 1,455,300
35,500 Goodrich (B.F.) Co. .................................. 1,593,063
----------
4,065,288
----------
CONGLOMERATES 3.3%
90,400 Hanson, Plc., Sponsored ADR .......................... 1,683,700
65,300 Ogden Corp. .......................................... 1,403,950
----------
3,087,650
----------
FINANCE 1.9%
26,100 Ahmanson (H.F.) & Co. ................................ 499,162
68,300 Great Western Financial Corp. ........................ 1,220,862
----------
1,720,024
----------
INSURANCE 2.4%
30,000 Aetna Life & Casualty Co. ............................ 1,383,750
13,400 CIGNA Corp. .......................................... 882,725
----------
2,266,475
----------
MEDICAL SUPPLIES 1.5%
52,900 Baxter International, Inc. ........................... 1,375,400
----------
OIL-INTEGRATED-INTERNATIONAL 9.5%
16,800 Atlantic Richfield Co. ............................... 1,820,700
27,400 Chevron Corp. ........................................ 1,233,000
27,400 Exxon Corp. .......................................... 1,722,775
11,800 Mobil Corp. .......................................... 1,014,800
29,900 Pennzoil Co. ......................................... 1,539,850
22,500 Texaco, Inc. ......................................... 1,470,937
----------
8,802,062
----------
PAPER & FOREST PRODUCTS 2.9%
48,300 Federal Paper Board Co. .............................. 1,449,000
33,100 Potlatch Corp. ....................................... 1,266,075
----------
2,715,075
----------
PHARMACEUTICAL 8.1%
30,700 American Home Products Corp. ......................... 1,949,450
30,000 Bristol-Myers Squibb Co. ............................. 1,751,250
39,400 Merck & Co., Inc. .................................... 1,408,550
</TABLE>
The accompanying notes are an integral part of these financial statements.
14
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
----------------------------------------------------------------------------
COMMON STOCKS (CONT.)
PHARMACEUTICAL (CONT.)
<S> <C> <C>
41,400 Upjohn Co. ...........................................$ 1,366,200
24,000 Zeneca Group, Plc., ADR .............................. 1,011,000
-----------
7,486,450
-----------
PUBLISHING 1.8%
28,300 Dun & Bradstreet Corp. ............................... 1,659,088
-----------
RETAIL STORES 1.7%
97,200 Kmart Corp. .......................................... 1,591,650
-----------
STEEL .8%
13,300 Carpenter Technology Corp. ........................... 751,450
-----------
TOBACCO 3.0%
35,600 American Brands, Inc. ................................ 1,237,100
25,500 Philip Morris Cos., Inc. ............................. 1,561,874
-----------
2,798,974
-----------
TRANSPORTATION 1.4%
65,000 Yellow Corp. ......................................... 1,267,500
-----------
UTILITIES - ELECTRIC 6.9%
34,500 American Electric Power Co. .......................... 1,104,000
52,300 Cinergy Corp. ........................................ 1,209,438
35,600 Dominion Resources, Inc. ............................. 1,321,650
52,500 Pacificorp ........................................... 925,313
31,300 SCEcorp .............................................. 434,288
43,000 Texas Utilities Co. .................................. 1,402,875
-----------
6,397,564
-----------
UTILITIES - TELEPHONE 6.7%
15,700 BellSouth Corp. ...................................... 836,025
51,200 GTE Corp. ............................................ 1,574,400
39,700 NYNEX Corp. .......................................... 1,558,225
41,300 Pacific Telesis Group ................................ 1,306,113
25,700 U.S. West, Inc. ...................................... 966,962
-----------
6,241,725
-----------
TOTAL COMMON STOCKS (COST $49,649,130) ......... 52,226,375
-----------
CONVERTIBLE PREFERRED STOCKS 21.9%
27,100 (b)American Airlines, Inc., $3.00 cvt. pfd. ............. 1,175,463
9,100 Battle Mountain Gold Co., $3.25 cvt. pfd. ............ 574,437
25,600 (b)Bethlehem Steel Corp., $3.50 cvt. pfd. ............... 1,404,800
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN EQUITY INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS (CONT.)
35,000 Boise Cascade Corp., $1.58 cvt. pfd., Series G ........................ $ 861,875
29,200 bCatellus Development Corp., $3.625 cvt. pfd., Series B................. 1,324,950
27,800 Chemical Banking Corp., $5.00 cvt. pfd. ............................... 2,015,500
15,900 Evergreen Media Corp., $3.00 cvt. pfd., Series A ...................... 715,500
16,200 General Motors Corp., $3.25 cvt. pfd., Series C ....................... 909,225
60,000 James River Corp., 9.00% cvt. pfd., Series P .......................... 1,320,000
77,000 Kaufman & Broad Homes Corp., $1.52 cvt. pfd., Series B................. 1,164,625
20,700 bOccidental Petroleum Corp., $3.875 cvt. pfd. .......................... 1,102,275
21,500 bParker & Parsley Petroleum Co., 6.25% cvt. pfd. ....................... 1,109,938
150,000 RJR Nabisco Holdings Corp., 9.25% cvt. pfd., Series C.................. 1,031,250
8,900 Roosevelt Financial Group, $3.25 cvt. pfd. ............................ 525,100
99,000 Santa Fe Energy Resources, Inc., $0.73 cvt. pfd., Series A............. 903,375
21,100 bTransco Energy Co., $3.50 cvt. pfd. ................................... 902,025
21,100 Travelers Corp., $2.75 cvt. pfd. ...................................... 1,165,775
83,000 bWestinghouse Electric Co., $1.30 cvt. pfd., Series C................... 1,265,750
18,000 WHX Corp., $3.75 cvt. pfd., Series B .................................. 891,000
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $20,327,724)............ 20,362,863
-----------
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT
- --------
<S> <C> <C>
SHORT TERM INVESTMENTS
GOVERNMENT SECURITIES 7.3%
$ 7,000,000 U.S. Treasury Notes, 4.43% - 5.54%, 01/05/95 - 09/21/95
(COST $6,761,268) ................................................... 6,761,224
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS
(COST $76,738,123)............................................. 79,350,462
-----------
g,hRECEIVABLES FROM REPURCHASE AGREEMENTS 14.6%
13,882,325 Joint Repurchase Agreement, 4.824%, 11/01/94 (Maturity Value $13,510,353)
(COST $13,508,543)
Collateral: U.S. Treasury Bills, 4.00% - 11.625%,
11/15/94 - 07/31/99................................................ 13,508,543
-----------
TOTAL INVESTMENTS (COST $90,246,666) 100.1%................. 92,859,005
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.1)% ........... (96,241)
-----------
NET ASSETS 100.0% .......................................... $92,762,764
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
VALUE
FRANKLIN EQUITY INCOME FUND (NOTE 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
At October 31, 1994, the net unrealized appreciation based on the
cost of investments for income tax purposes of $90,257,730
was as follows:
Aggregate gross unrealized appreciation for all investments in
which there was an excess of value over tax cost ................. $ 4,286,449
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ........................ (1,685,174)
-----------
Net unrealized appreciation ......................................... $ 2,601,275
===========
</TABLE>
bSee Note 8 regarding Rule 144A securities.
gFace amount for repurchase agreements is for the underlying collateral.
hSee Note 1(h) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
17
FRANKLIN INVESTORS SECURITIES TRUST
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
VALUE
SHARES FRANKLIN ADJUSTABLE RATE SECURITIES FUND (NOTE 1)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUTUAL FUNDS 100.3%
2,542,902 Adjustable Rate Securities Portfolio (Note 1) ................................ $24,640,724
-----------
TOTAL INVESTMENTS (COST $25,555,241) 100.3% ........................... 24,640,724
LIABILITIES IN EXCESS OF OTHER ASSETS, NET (.3)% ...................... (76,484)
-----------
NET ASSETS 100.0% ..................................................... $24,564,240
===========
At October 31, 1994, the net unrealized depreciation based on the cost of
investments for income tax purposes of $25,561,113 was as follows:
Aggregate gross unrealized appreciation for all investments in which
there was an excess of value over tax cost ........................... $ --
Aggregate gross unrealized depreciation for all investments in which
there was an excess of tax cost over value ........................... (920,389)
-----------
Net unrealized depreciation ............................................. $ (920,389)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE
INCOME FUND SECURITIES FUND SECURITIES FUND
--------------- ----------------- ---------------
<S> <C> <C> <C>
Assets:
Investments:
At identified cost....................... $193,447,773 $231,271,813 $64,004,251
============ ============ ===========
At value................................. 180,007,372 224,848,983 64,310,438
Receivables from repurchase agreements at
value and cost........................... 6,221,031 12,053 1,504,305
Cash...................................... 94,453 -- 83,669
Receivables:
Dividends and interest................... 5,151,956 2,072,949 704,901
Investment securities sold............... 2,130,473 -- 655,059
Capital shares sold...................... 60,735 362,730 148,095
Unrealized appreciation on forward
foreign currency contracts (Note 2)...... 107,435 -- --
------------ ------------ -----------
Total assets......................... 193,773,455 227,296,715 67,406,467
------------ ------------ -----------
Liabilities:
Payables:
Investment securities purchased ......... 6,198,638 -- 367,100
Capital shares repurchased............... 174,436 1,387,888 27,205
Dividends to shareholders................ -- 382,907 --
Distribution fees........................ 36,238 41,000 33,150
Management fees.......................... 88,462 104,139 97,189
Shareholder servicing costs.............. 7,000 5,150 3,000
Accrued expenses and other payables....... 64,838 23,900 9,797
------------ ------------ -----------
Total liabilities.................... 6,569,612 1,944,984 537,441
------------ ------------ -----------
Net assets, at value....................... $187,203,843 $225,351,731 $66,869,026
============ ============ ===========
Net assets consist of:
Undistributed net investment income....... $ 16,291,164 $ 548,107 $ 201,976
Unrealized appreciation (depreciation) on
investments and translation of assets
and liabilities denominated in foreign
currencies............................... (13,129,616) (6,422,830) 306,187
Net realized gain (loss) from investments
and foreign currency transactions........ (15,963,546) (2,435,636) 3,803,783
Capital shares............................ 232,126 224,710 54,182
Additional paid-in capital................ 199,773,715 233,437,380 62,502,898
------------ ------------ -----------
Net assets, at value....................... $187,203,843 $225,351,731 $66,869,026
============ ============ ===========
Shares outstanding......................... 23,212,589 22,470,954 5,418,177
============ ============ ===========
Net asset value per share.................. $8.06 $10.03 $12.34
============ ============ ===========
Representative computation of net asset
value and offering price per share:
Net asset value and redemption price per
share (Global Government Income Fund)
($ 187,203,843 (/) 23,212,589). $8.06
============
Maximum offering price (100/95.75 of
$8.06+)*................................. $8.42
============
</TABLE>
+The maximum offering price for each of the other series of the Trust is
calculated as follows: Franklin Short-Intermediate U.S. Government Securities
Fund - 100/97.75 of $10.03; Franklin Convertible Securities Fund - 100/95.50 of
$12.34; Franklin Adjustable U.S. Government Securities Fund - 100/97.75 of
$9.20; Franklin Equity Income Fund - 100/95.50 of $14.14; Franklin Adjustable
Rate Securites Fund - 100/97.75 of $9.70
*On sales of $100,000 or more the offering price is reduced as stated in the
section of the Prospectus entitled "How to Buy Shares of the Fund."
The accompanying notes are an integral part of these financial statements.
19
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF ASSETS AND LIABILITIES (CONT.)
OCTOBER 31, 1994
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE FRANKLIN
U.S. GOVERNMENT FRANKLIN EQUITY ADJUSTABLE RATE
SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- --------------- ---------------
<S> <C> <C> <C>
Assets:
Investments:
At identified cost........................................... $772,055,642 $76,738,123 $25,555,241
============ =========== ===========
At value..................................................... 705,999,804 79,350,462 24,640,724
Receivables from repurchase agreements at value and cost ...... -- 13,508,543 --
Cash........................................................... 75,682 82,590 --
Receivables:
Dividends and interest....................................... -- 448,551 --
Capital shares sold.......................................... 30,761 150,942 --
------------ ----------- -----------
Total assets............................................ 706,106,247 93,541,088 24,640,724
------------ ----------- -----------
Liabilities:
Payables:
Investment securities purchased.............................. -- 531,255 --
Capital shares repurchased................................... 2,322,870 63,934 --
Dividends to shareholders.................................... 2,608,865 -- --
Distribution fees............................................ 440,006 44,761 15,009
Administration fees.......................................... 60,823 -- --
Management fees.............................................. -- 124,794 --
Shareholder servicing costs.................................. 17,220 4,100 400
Accrued expenses and other payables............................ 39,641 9,480 61,075
------------ ----------- -----------
Total liabilities....................................... 5,489,425 778,324 76,484
------------ ----------- -----------
Net assets, at value............................................. $700,616,822 $92,762,764 $24,564,240
============ =========== ===========
Net assets consist of:
Undistributed net investment income............................ $ 1,257,858 $ 83,999 $ --
Unrealized appreciation (depreciation) on investments ......... (66,055,838) 2,612,339 (914,517)
Net realized gain (loss) from investments...................... (51,494,986) 1,641,692 (419,837)
Capital shares................................................. 761,265 65,603 25,320
Additional paid-in capital..................................... 816,148,523 88,359,131 25,873,274
------------ ----------- -----------
Net assets, at value............................................. $700,616,822 $92,762,764 $24,564,240
============ =========== ===========
Shares outstanding............................................... 76,126,510 6,560,288 2,532,014
============ =========== ===========
Net asset value per share........................................ $9.20 $14.14 $9.70
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN SHORT-INTERMEDIATE FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE
INCOME FUND SECURITIES FUND SECURITIES FUND
------------ --------------- ---------------
<S> <C> <C> <C>
Investment income:
Interest (Note 1)......................... $ 18,524,791 $ 13,598,114 $ 2,096,835
Dividends................................. 380,806 -- 1,245,377
------------ ------------ -----------
Total income......................... 18,905,597 13,598,114 3,342,212
------------ ------------ -----------
Expenses:
Management fees, net (Note 7)............. 1,130,298 1,308,206 327,355
Shareholder servicing costs (Note 7)...... 83,167 62,422 31,185
Distribution fees (Note 7)................ 60,673 69,950 55,016
Reports to shareholders................... 114,849 93,767 32,155
Custodian fees............................ 309,375 26,564 7,212
Professional fees......................... 18,870 20,270 6,409
Trustees' fees and expenses............... 16,695 20,881 4,920
Registration & filing fees................ 35,336 26,905 20,624
Other..................................... 11,064 15,385 10,123
------------ ------------ -----------
Total expenses....................... 1,780,327 1,644,350 494,999
------------ ------------ -----------
Net investment income............... 17,125,270 11,953,764 2,847,213
------------ ------------ -----------
Realized and unrealized gain (loss) from investments:
Net realized gain (loss) from:
Investments.............................. (15,601,950) (2,434,010) 3,805,756
Foreign currency transactions............ (210,613) -- 400
Net realized gain on expired written
foreign currency options (Note 3)...... 90,000 -- --
Net unrealized depreciation on
investments and translation of
assets and liabilities denominated
in foreign currencies.................. (13,307,282) (14,853,553) (5,480,396)
------------ ------------ -----------
Net realized and unrealized loss
on investments.......................... (29,029,845) (17,287,563) (1,674,240)
------------ ------------ -----------
Net increase (decrease) in net assets
resulting from operations............... $(11,904,575) $ (5,333,799) $ 1,172,973
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS (CONT.)
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
FRANKLIN
ADJUSTABLE FRANKLIN
U.S. GOVERNMENT FRANKLIN EQUITY ADJUSTABLE RATE
SECURITIES FUND INCOME FUND SECURITIES FUND
--------------- --------------- ---------------
<S> <C> <C> <C>
Investment income:
Interest (Note 1).......................... $ -- $ 524,823 $ --
Dividends.................................. 43,807,494 3,068,530 1,743,780
----------- ----------- -----------
Total income.......................... 43,807,494 3,593,353 1,743,780
----------- ----------- -----------
Expenses:
Management fees, net (Note 7).............. -- 312,644 --
Administration fees, net (Note 7).......... 1,077,633 -- --
Shareholder servicing costs (Note 7)....... 266,924 38,937 9,864
Distribution fees (Note 7)................. 2,393,621 71,129 71,674
Reports to shareholders.................... 307,662 51,568 7,888
Custodian fees............................. -- 7,376 --
Professional fees.......................... 9,637 7,314 7,269
Trustees' fees and expenses................ 89,062 5,658 --
Registration & filing fees................. 31,731 22,934 --
Other...................................... 100,250 4,708 21,789
Payments from Manager (Note 7)............. -- -- (42,018)
------------ ----------- -----------
Total expenses........................ 4,276,520 522,268 76,466
------------ ----------- -----------
Net investment income................ 39,530,974 3,071,085 1,667,314
------------ ----------- -----------
Realized and unrealized gain (loss) from
investments:
Net realized gain (loss) from investments.. (41,756,476) 1,644,175 (419,700)
Net unrealized depreciation on
investments.............................. (30,761,861) (2,521,207) (878,448)
------------ ----------- -----------
Net realized and unrealized loss on
investments................................ (72,518,337) (877,032) (1,298,148)
------------ ----------- -----------
Net increase (decrease) in net assets
resulting from operations.................. $(32,987,363) $ 2,194,053 $ 369,166
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 1994 AND
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
<TABLE>
<CAPTION>
FRANKLIN GLOBAL FRANKLIN SHORT-INTERMEDIATE FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND U.S. GOVERNMENT SECURITIES FUND SECURITIES FUND
------------------------ ------------------------------- ----------------------
YEAR NINE MONTHS YEAR NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
10/31/94 10/31/93 10/31/94 10/31/93 10/31/94 10/31/93
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income $ 17,125,270 $ 8,687,856 $ 11,953,764 $ 9,118,129 $ 2,847,213 $ 1,402,187
Net realized gain (loss) on
investments and foreign
currency transactions........ (15,812,563) 3,867,132 (2,434,010) 2,327,131 3,806,156 514,896
Net realized gain on expired
written foreign currency
options...................... 90,000 164,812 -- -- -- --
Net unrealized appreciation
(depreciation) on investments
and translation of assets
and liabilities denominated
in foreign currencies........ (13,307,282) 11,146,470 (14,853,553) 3,329,742 (5,480,396) 3,705,665
------------ ------------ ------------ ------------ ----------- -----------
Net increase (decrease) in
net assets resulting
from operations.......... (11,904,575) 23,866,270 (5,333,799) 14,775,002 1,172,973 5,622,748
Distributions to shareholders from:
Undistributed net investment
income......................... (1,894,107) (8,687,856) (11,480,943) (9,354,403) (2,799,225) (1,518,536)
Net realized capital gains....... (1,855,676) -- (2,327,982) (114,640) (456,579) --
Distribution in excess of net
investment income.............. -- (2,174,626) -- -- -- --
Return of capital distribution
for tax purposes (Note 5)....... (14,044,105) -- -- -- -- --
Increase (decrease) in net assets
from capital share transactions
(Note 4).......................... 21,275,793 28,723,568 (29,183,526) 32,990,155 21,511,587 15,029,224
------------ ------------ ------------ ------------ ----------- -----------
Net increase (decrease) in
net assets............... (8,422,670) 41,727,356 (48,326,250) 38,296,114 19,428,756 19,133,436
Net assets:
Beginning of period.............. $195,626,513 $153,899,157 $273,677,981 $235,381,867 $47,440,270 $28,306,834
------------ ------------ ------------ ------------ ----------- -----------
End of period.................... $187,203,843 $195,626,513 $225,351,731 $273,677,981 $66,869,026 $47,440,270
============ ============ ============ ============ =========== ===========
Undistributed net investment income
included in net assets:
Beginning of period............ $ 1,060,001 $ -- $ 75,286 $ 321,300 $ 153,988 $ 270,337
============ ============ ============ ============ =========== ===========
End of period.................. $ 16,291,164 $ 1,060,001 $ 548,107 $ 75,286 $ 201,976 $ 153,988
============ ============ ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
FRANKLIN INVESTORS SECURITIES TRUST
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS (CONT.)
FOR THE YEAR ENDED OCTOBER 31, 1994 AND
FOR THE NINE MONTHS ENDED OCTOBER 31, 1993
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE U.S. FRANKLIN ADJUSTABLE RATE
GOVERNMENT SECURITIES FUND FRANKLIN EQUITY INCOME FUND SECURITIES FUND
---------------------------- --------------------------- ---------------------------
YEAR NINE MONTHS YEAR NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
10/31/94 10/31/93 10/31/94 10/31/93 10/31/94 10/31/93
--------- -------------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income.............. $ 39,530,974 $ 70,457,827 $ 3,071,085 $ 1,459,908 $ 1,667,314 $ 949,089
Net realized gain (loss) on
investments....................... (41,756,476) (7,642,575) 1,644,175 984,058 (419,700) (137)
Net unrealized appreciation
(depreciation) on investments..... (30,761,861) (11,107,442) (2,521,207) 2,263,533 (878,448) (40,575)
--------------- --------------- ----------- ----------- ------------ -----------
Net increase (decrease) in
net assets resulting from
operations................... (32,987,363) 51,707,810 2,194,053 4,707,499 369,166 908,377
Distributions to shareholders from:
Undistributed net investment
income............................ (35,166,432) (69,480,027) (3,312,595) (1,152,084) (1,667,314) (949,089)
Net realized capital gains -- -- (984,309) (205,929) -- (34)
Increase (decrease) in net assets
from capital share transactions
(Note 4)............................ (1,044,733,399) (1,140,147,375) 52,688,385 12,735,376 (11,946,617) 25,328,996
--------------- --------------- ----------- ----------- ------------ -----------
Net increase (decrease) in
net assets................... (1,112,887,194) (1,157,919,592) 50,585,534 16,084,862 (13,244,765) 25,288,250
Net assets:
Beginning of period................. $ 1,813,504,016 $ 2,971,423,608 $42,177,230 $26,092,368 $ 37,809,005 $12,520,755
--------------- --------------- ----------- ----------- ------------ -----------
End of period....................... $ 700,616,822 $ 1,813,504,016 $92,762,764 $42,177,230 $ 24,564,240 $37,809,005
=============== =============== =========== =========== ============ ===========
Undistributed net investment
income included in net assets:
Beginning of period.............. $ (3,106,684) $ -- $ 325,509 $ 16,794 $ -- $ --
=============== =============== =========== =========== ============ ===========
End of period.................... $ 1,257,858 $ (3,106,684) $ 83,999 $ 325,509 $ -- $ --
=============== =============== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is an open-end management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended. The Trust currently has six separate funds (the Funds) in
operation consisting of five separate diversified Funds: Franklin
Short-Intermediate U.S. Government Securities Fund (the Short-Intermediate
Fund), Franklin Convertible Securities Fund (the Convertible Fund), Franklin
Adjustable U.S. Government Securities Fund (the Adjustable U.S. Government
Fund), Franklin Equity Income Fund (the Equity Income Fund), and Franklin
Adjustable Rate Securities Fund (the Adjustable Rate Fund); and one
non-diversified Fund: Franklin Global Government Income Fund (the Global Fund).
Each of the Funds issues a separate series of the Trust's shares and maintains
a totally separate investment portfolio.
The Adjustable Rate Fund and the Adjustable U.S. Government Fund invest
substantially all of their assets in the Adjustable Rate Securities Portfolio
and the U.S. Government Adjustable Rate Mortgage Portfolio, respectively. Both
are open-end, diversified management investment companies having the same
investment objective as the Adjustable Rate Fund and Adjustable U.S. Government
Fund. The financial statements of the Adjustable Rate Securities Portfolio and
the U.S. Government Adjustable Rate Mortgage Portfolio, including the
Statements of Investments, are included elsewhere in this report and should be
read in conjunction with the financial statements of the Adjustable Rate Fund
and Adjustable U.S. Government Fund.
On June 15, 1993, the Board of Trustees authorized a change in the fiscal year
end of the Trust from January 31 of each year to October 31.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles for
investment companies.
A. SECURITY VALUATIONS:
Portfolio securities listed on a 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 asked prices. Other
securities for which market quotations are readily available are valued at
current market values, obtained from a pricing service, which are based on a
variety of factors, including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to specific securities. Portfolio securities which are
traded both in the over-the-counter market and on a securities exchange are
valued according to the broadest and most representative market as determined
by the Manager. Other securities for which market quotations are not available,
if any, are valued in accordance with procedures established by the Board of
Trustees. Short-term securities and similar investments with remaining
maturities of 60 days or less are valued at amortized cost, which approximates
value.
Securities denominated in foreign currencies and traded on foreign exchanges or
in foreign markets are valued in a similar manner and these values are
translated into U.S. dollars at current market quotations of their respective
currency against U.S. dollars last quoted by a major bank or, if no such
quotation is available, at the rate of exchange determined in accordance with
policies established by the Board of Trustees.
The values of the Adjustable Rate Fund and the Adjustable U.S. Government Fund
reflect the Funds' proportionate interest in the net assets of the Adjustable
Rate Securities Portfolio and the U.S. Government Adjustable Rate Mortgage
Portfolio, respectively. At October 31, 1994, the Adjustable Rate Fund owns 59%
of the Adjustable Rate Securities Portfolio and the Adjustable U.S. Government
Fund owns 94% of the U.S. Government Adjustable Rate Mortgage Portfolio. The
Portfolios' shares held by the Funds are valued at the net asset value of the
Portfolios.
25
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
B. INCOME TAXES:
The Trust intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and make the
requisite distributions to its shareholders which will be sufficient to relieve
it from income and excise taxes. Therefore, no income tax provision is
required. Each Fund is treated as a separate entity in the determination of
compliance with the Internal Revenue Code.
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Interest income and estimated expenses are accrued daily.
Bond discount is amortized as required by the Internal Revenue Code.
The Short-Intermediate Fund and the Adjustable Rate Fund normally declare
dividends from their net investment income daily and distribute monthly. Daily
allocations of net investment income will commence on the date of receipt of an
investor's funds. Dividends are normally declared each day the New York Stock
Exchange is open for business equal to an amount per day set from time to time
by the Board of Trustees, and are payable to shareholders of record at the
beginning of business on the ex-date. Once each month, dividends are reinvested
in additional shares of each Fund or paid in cash as requested by the
shareholders.
Net investment income differs for financial statement and tax purposes
primarily due to differing treatments of currency option contracts - see
Note 3.
Net realized capital gains and losses differ for financial statement and tax
purposes primarily due to differing treatment of wash sale transactions.
E. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the Funds based on
the ratio of the net assets of each Fund to the combined net assets. In all
other respects, expenses are charged to each Fund as incurred on a specific
identification basis.
F. FOREIGN CURRENCY TRANSLATION:
The accounting records of the Trust are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars at the rate of exchange of such currencies against U.S. dollars on the
date of valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recognized when reported by the custodian
bank.
The Trust does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included in the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of foreign currencies, currency
gains or losses realized between the trade dates and settlement dates on
securities transactions, and the difference between the amounts of dividends,
interest, and foreign withholding taxes recorded on the Trusts books and the
U.S. dollar equivalent of the amounts actually received or paid. Net unrealized
foreign exchange
26
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
F. FOREIGN CURRENCY TRANSLATION: (CONT.)
gains and losses arise from changes in the value of assets and liabilities
other than investments in securities at fiscal year end, resulting from changes
in exchange rates.
G. CHANGE IN ACCOUNTING POLICY FOR FOREIGN CURRENCY PRESENTATION:
Effective October 31, 1994, the Fund adopted AICPA Statement of Position (SOP)
93-4: Foreign Currency Accounting and Financial Statement Presentation for
Investment Companies. The adoption of SOP 93-4 had no effect on net assets for
the fiscal year ended October 31, 1994, but affected the classification on the
income statement of foreign currency transactions from assets and liabilities
other than investments.
H. REPURCHASE AGREEMENTS:
The Trust may enter into a Joint Repurchase Agreement whereby its uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements with government securities dealers recognized by
the Federal Reserve Board and/or member banks of the Federal Reserve System.
The value and face amount of the Joint Repurchase Agreement has been allocated
to the Funds based on its pro-rata interest at October 31, 1994.
In a repurchase agreement, the Trust purchases a U.S. government security from
a dealer or bank subject to an agreement to resell it at a mutually agreed upon
price and date. Such a transaction is accounted for as a loan by the Trust to
the seller, collateralized by the underlying security. The transaction requires
the initial collateralization of the seller's obligation by U.S. Government
securities with market value, including accrued interest, of at least 102% of
the dollar amount invested by the Funds, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. The
collateral is delivered to the Fund's custodian and held until resold to the
dealer or bank. At October 31, 1994, all outstanding repurchase agreements held
by the Trust had been entered into on that date.
2. FORWARD FOREIGN CURRENCY CONTRACTS
A forward currency contract, which is individually negotiated and privately
traded by currency traders and their customers, is a commitment to purchase or
sell a specific currency for an agreed-upon price at a future date.
The Global Fund may enter into forward contracts with the objective of
minimizing the risk to the Fund from adverse changes in the relationship
between currencies or to enhance income. The Fund may also enter into a forward
contract in relation to a security denominated in a foreign currency or when it
anticipates receipt in a foreign currency of dividends or interest payments in
order to "lock in" the U.S. dollar price of that security or the U.S. dollar
equivalent of such dividend or interest payments.
The Fund segregates in its custodian bank sufficient cash, cash equivalents or
readily marketable debt securities as deposits for commitments created by open
forward contracts. The Fund could be exposed to risk if counterparties to the
contracts are unable to meet the terms of their contracts or if the value of
the foreign currency changes unfavorably.
As of October 31, 1994, the Global Fund had the following forward foreign
currency contracts outstanding:
<TABLE>
<CAPTION>
IN UNREALIZED
CONTRACTS TO SELL EXCHANGE FOR SETTLEMENT DATE GAIN (LOSS)
-------------------------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
2,650,000 New Zealand Dollars. U.S.$ 1,613,453 11/30/94 U.S.$(13,643)
48,000,000 German Deutschemarks U.S.$32,021,134 11/04/94 121,078
----------- --------
$33,634,587 $107,435
=========== ========
</TABLE>
27
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. OPTION CONTRACTS
The Global Fund may write covered put and call options and purchase put and
call options which trade in the over-the-counter (OTC) market. OTC call options
give the holder the right to buy an underlying security or currency from an
option writer at a stated exercise price; OTC put options give the holder the
right to sell an underlying security or currency to an option writer at a
stated exercise price. OTC options are arranged directly with dealers, and
pricing is typically negotiated by reference to information from market makers.
Transactions in purchased options on currencies for the year ended October 31,
1994 were as follows:
<TABLE>
<CAPTION>
PUT
-----------------------
FACE
AMOUNT
COST OPTIONED
-------- -----------
<S> <C> <C>
Outstanding at October 31, 1993.................... $ -- --
Options purchased.................................. 130,225 23,368,984
Options exercised.................................. (46,000) (10,000,000)
Options expired.................................... (84,225) (13,368,984)
-------- -----------
Outstanding at October 31, 1994.................... $ -- --
======== ===========
</TABLE>
Transactions in written options on currencies for the year ended October 31,
1994 were as follows:
<TABLE>
<CAPTION>
CALL
------------------------
AMOUNT OF
AMOUNT OF CURRENCIES
PREMIUMS OPTIONED
--------- -----------
<S> <C> <C>
Outstanding at October 31, 1993.................... $ -- --
Options written.................................... 202,670 23,574,661
Options exercised.................................. (112,670) (13,574,661)
Options expired.................................... (90,000) (10,000,000)
--------- -----------
Outstanding at October 31, 1994.................... $ -- --
========= ===========
</TABLE>
The Global Fund realized a net short term capital loss of $541,919 on purchased
options and exercised written options, and a net short term capital gain of
$90,000 on premiums received on expired written options.
28
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
4. TRUST SHARES
At October 31, 1994 there were an unlimited number of shares of beneficial
interest authorized with a par value of $0.01 per share. Transactions in each
of the Trust's shares for the year ended October 31, 1994 and for the nine
months ended October 31, 1993 were as follows:
<TABLE>
<CAPTION>
FRANKLIN
FRANKLIN GLOBAL SHORT-INTERMEDIATE U.S. FRANKLIN CONVERTIBLE
GOVERNMENT INCOME FUND GOVERNMENT SECURITIES FUND SECURITIES FUND
------------------------------- -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ --------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended October 31, 1994
Shares sold........................ 3,796,264 $ 33,419,371 4,313,964 $ 44,921,900 1,219,366 $ 15,220,916
Shares issued in reinvestment......
of distributions................. 990,104 8,503,475 830,236 8,591,490 168,878 2,090,918
Shares redeemed.................... (3,724,526) (32,088,082) (6,851,195) (70,807,735) (547,097) (6,756,318)
Changes from exercise of exchange
privilege:
Shares sold...................... 6,892,336 61,109,234 3,062,282 31,843,753 1,654,708 20,710,637
Shares redeemed.................. (5,719,956) (49,668,205) (4,225,285) (43,732,934) (786,883) (9,754,566)
----------- --------------- ---------- ------------ ---------- ------------
Net increase (decrease)....... 2,234,222 $ 21,275,793 (2,869,998) $(29,183,526) 1,708,972 $ 21,511,587
=========== =============== ========== ============ ========== ============
Nine months ended October 31, 1993
Shares sold........................ 3,132,310 $ 28,574,215 7,951,390 $ 85,374,158 901,908 $ 10,897,243
Shares issued in reinvestment of
distributions...................... 524,009 4,763,243 485,716 5,219,095 83,403 1,000,357
Shares redeemed.................... (1,993,767) (18,112,506) (4,536,268) (48,709,818) (233,556) (2,786,030)
Changes from exercise of exchange
privilege:
Shares sold...................... 4,720,174 43,119,821 1,390,826 14,928,987 949,792 11,424,393
Shares redeemed.................. (3,284,663) (29,621,205) (2,220,138) (23,822,267) (466,500) (5,506,739)
----------- --------------- ---------- ------------ ---------- ------------
Net increase.................. 3,098,063 $ 28,723,568 3,071,526 $ 32,990,155 1,235,047 $ 15,029,224
=========== =============== ========== ============ ========== ============
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND EQUITY INCOME FUND RATE SECURITIES FUND
------------------------------- -------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ --------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Year ended October 31, 1994
Shares sold........................ 3,326,762 $ 31,759,086 1,527,023 $ 21,485,674 679,940 $ 6,750,951
Shares issued in reinvestment of
distributions.................... 2,149,801 20,490,985 228,516 3,222,627 122,836 1,210,194
Shares redeemed.................... (96,848,038) (924,096,481) (494,546) (6,953,175) (2,401,365) (23,641,545)
Changes from exercise of
exchange privilege:
Shares sold...................... 9,453,526 89,992,788 3,064,919 43,326,425 3,084,064 30,626,065
Shares redeemed.................. (27,618,581) (262,879,777) (594,376) (8,393,166) (2,719,427) (26,892,282)
------------ --------------- ---------- ------------ ---------- ------------
Net increase (decrease)....... (109,536,530) $(1,044,733,399) 3,731,536 $ 52,688,385 (1,233,952) $(11,946,617)
============ =============== ========== ============ ========== ============
</TABLE>
29
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
4. TRUST SHARES (CONT.)
<TABLE>
<CAPTION>
FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN ADJUSTABLE
U.S. GOVERNMENT SECURITIES FUND EQUITY INCOME FUND RATE SECURITIES FUND
-------------------------------- ------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ --------------- ------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Nine months ended
October 31, 1993
Shares sold..................... 31,420,134 $ 309,366,714 591,740 $ 8,424,387 1,678,030 $ 16,880,805
Shares issued in reinvestment
of distributions............... 4,017,124 39,542,565 72,561 1,028,509 70,418 708,233
Shares redeemed................. (119,230,775) (1,173,985,899) (199,709) (2,866,323) (529,605) (5,325,263)
Changes from exercise of
exchange privilege:
Shares sold.................... 10,303,356 101,458,808 914,654 12,979,279 2,459,907 24,746,127
Shares redeemed................ (42,291,571) (416,529,563) (489,111) (6,830,476) (1,161,218) (11,680,906)
------------ --------------- -------- ----------- ---------- ------------
Net increase (decrease) .... (115,781,732) $(1,140,147,375) 890,135 $12,735,376 2,517,532 $ 25,328,996
============ =============== ======== =========== ========== ============
</TABLE>
5. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1994, for tax purposes, the Funds had accumulated net realized
gains or capital loss carryovers as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- --------------- --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Accumulated net realized gains.. -- $3,803,383 -- $1,652,756 --
======== ========== ========== =========== ========== ========
Capital loss carryovers
Expiring in:
October 31, 2000 ............. -- -- $ 1,918,358 -- --
October 31, 2001 ............. -- -- 7,708,871 -- --
October 31, 2002 ............. $793,547 $2,435,636 -- 41,867,757 -- $414,821
-------- ---------- ---------- ----------- ---------- --------
$793,547 $2,435,636 -- $51,494,986 $414,821
======== ========== ========== =========== ========== ========
</TABLE>
For income tax purposes, the aggregate cost of securities is higher (and
unrealized appreciation is lower) than for financial reporting purposes at
October 31, 1994 by $33,247 in the Global Fund, $11,064 in the Equity Income
Fund and $5,872 in the Adjustable Rate Fund.
30
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
6. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales of
short-term securities) for the year ended October 31, 1994 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE U.S. FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
----------- ------------------ --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Purchases..... $149,150,474 $248,291,750 $57,319,151 $ 64,575,675 $61,162,575 $31,412,482
============ ============ =========== ============== =========== ===========
Sales......... $139,985,147 $285,863,784 $37,885,029 $1,094,477,708 $25,065,768 $43,540,875
============ ============ =========== ============== =========== ===========
</TABLE>
7. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, office space and facilities to each Fund, and receives fees
computed monthly on the net assets on the last day of the month of each fund,
except for the Adjustable U.S. Government Fund and the Adjustable Rate Fund, as
follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE MONTH END NET ASSETS
------------------- ---------------------------------------------------
<S> <C>
.625 of 1% First $100 million
.500 of 1% over $100 million, up to and including $250 million
.450 of 1% over $250 million
</TABLE>
Under the terms of a separate administration agreement with the Adjustable U.S.
Government Fund and the Adjustable Rate Fund, Franklin Advisers, Inc. provides
various administrative, statistical, and other services, and receives fees
computed monthly based on the average daily net assets as follows:
<TABLE>
<CAPTION>
ANNUALIZED FEE RATE AVERAGE MONTHLY NET ASSETS
------------------- ------------------------------------------------
<S> <C>
.100 of 1% First $5 billion
.090 of 1% over $5 billion, up to and including $10 billion
.080 of 1% over $10 billion
</TABLE>
The terms of these agreements provide that aggregate annual expenses of the
Funds be limited to the extent necessary to comply with the limitations set
forth in the laws, regulations and administrative interpretations of the states
in which the Funds' shares are registered. The Funds' expenses did not exceed
these limitations; however, for the year ended October 31, 1994, Franklin
Advisers, Inc. agreed in advance to waive a portion of the management fees for
the Short-Intermediate Fund, Convertible Fund and Equity Income Fund of
$61,865, $45,999, and $124,686, respectively. In addition, Franklin Advisers,
Inc. agreed in advance to waive a portion of the administration fee for the
Adjustable Rate Securities Fund of $37,387 and made payments of $42,018 for
other expenses as reflected in the Statement of Operations.
In its capacity as underwriter for the shares of the Trust, Franklin/Templeton
Distributors, Inc. received commissions on sales of the Trust's shares.
Commissions received by Franklin/Templeton Distributors, Inc., and the amounts
which were subsequently paid to other dealers for the year ended October 31,
1994 were as follows:
<TABLE>
<CAPTION>
FRANKLIN FRANKLIN FRANKLIN
GLOBAL SHORT-INTERMEDIATE FRANKLIN ADJUSTABLE FRANKLIN FRANKLIN
GOVERNMENT U.S. GOVERNMENT CONVERTIBLE U.S. GOVERNMENT EQUITY ADJUSTABLE RATE
INCOME FUND SECURITIES FUND SECURITIES FUND SECURITIES FUND INCOME FUND SECURITIES FUND
=========== =============== =============== =============== =========== ===============
<S> <C> <C> <C> <C> <C> <C>
Total commissions received... $1,226,772 $641,082 $465,108 $306,789 $697,331 $78,020
========== ======== ======== ======== ======== =======
Paid to other dealers........ $1,163,201 $544,575 $446,433 $267,958 $661,316 $67,930
========== ======== ======== ======== ======== =======
</TABLE>
31
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS (CONT.)
7. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES (CONT.)
Commissions are deducted from the gross proceeds received from the sale of the
shares of the Trust, and as such are not expenses of the Funds.
Pursuant to a shareholder service agreement with Franklin/Templeton Investor
Services, Inc., the Funds pay costs on a per shareholder account basis. Such
costs incurred for the year ended October 31, 1994 aggregated $492,499 which
$441,720 was paid to Franklin/Templeton Investor Services, Inc.
Under the terms of a Distribution Agreement pursuant to Rule 12b-1 of the
Investment Company Act of 1940, the Adjustable U.S. Government Fund and the
Adjustable Rate Fund will reimburse Franklin/Templeton Distributors, Inc. in an
amount up to 0.10% per annum of the Funds' average daily net assets for costs
incurred in the promotion, offering and marketing of the Fund's shares.
Effective May 1, 1994, the other four Funds implemented a similar plan of
distributiion. The maximum annual amount which the Global Fund, the
Short-Intermediate Fund, the Convertible Fund, and the Equity Income Fund may
pay to Franklin/Templeton Distributors, Inc., are 0.15%, 0.10%, 0.25%, and
0.25%, respectively. Cost incurred by the Funds under the agreement aggregated
$2,722,063 for the year ended October 31, 1994.
Certain officers and trustees of the Trust are also officers and/or directors
of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and
Franklin/Templeton Investor Services, Inc., all wholly-owned subsidiaries of
Franklin Resources, Inc.
8. RULE 144A SECURITIES
Rule 144A provides a non-exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for specified resales of restricted
securities to qualified institutional investors. The Funds value these
securities as disclosed in Note 1.
At October 31, 1994, 144A securities were held as follows:
<TABLE>
<CAPTION>
FRANKLIN
GLOBAL FRANKLIN FRANKLIN
GOVERNMENT CONVERTIBLE EQUITY
INCOME FUND SECURITIES FUND INCOME FUND
---------------------------- -----------
<S> <C> <C> <C>
Value............................................ $2,601,841 $17,359,913 $8,285,201
========== =========== ==========
Ratio of value to net assets..................... 1.39% 25.96% 8.93%
========== =========== ==========
</TABLE>
See the accompanying statement of investments in securities and net assets for
specific information on such securities.
9. CREDIT RISKS
Although the Convertible Fund and the Equity Income Fund have diversified
portfolios, 65.47% and 14.90% of their portfolios are invested in lower rated
and comparable quality unrated high yield securities, respectively. Investments
in higher yield securities are accompanied by a greater degree of credit risk
and such lower quality securities tend to be more sensitive to economic
conditions than higher rated securities. The risk of loss due to default by the
issuer may be significantly greater for the holders of high yielding
securities, because such securities are generally unsecured and are often
subordinated to other creditors of the issuer.
Although each of the Funds has a diversified investment portfolio, there are
certain credit risks, foreign currency exchange risks, or event risks due to
the manner in which certain Funds are invested, which may subject the Funds
more significantly to economic changes occurring in certain industries or
sectors, as follows:
The Global Fund has investments in excess of 10% of its total net assets
in debt securities denominated in Australian Dollars and Canadian Dollars.
10. FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
periods are set forth in the prospectus under the caption "Financial
Highlights."
32
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES 95.8%
FEDERAL HOME LOAN MORTGAGE CORP. (FHLMC) 28.8%
$ 7,354,680 FHLMC, Cap 11.253%, Margin 1.75% + CMT, Resets Annually, 5.125%, 11/01/16 ..... $ 7,288,194
8,470,613 FHLMC, Cap 11.60%, Margin 2.25% + CMT, Resets Annually, 5.716%, 11/01/21 ...... 8,682,336
3,806,379 FHLMC, Cap 11.939%, Margin 2.127% + CMT, Resets Annually, 6.992%, 07/01/20 .... 3,828,958
22,475,592 FHLMC, Cap 12.17%, Margin 2.18% + CMT, Resets Annually, 6.022%, 03/01/23 ...... 23,220,096
1,413,476 FHLMC, Cap 12.176%, Margin 2.015% + CMT, Resets Annually, 6.466%, 04/01/20 .... 1,419,653
4,818,550 FHLMC, Cap 12.177%, Margin 2.265% + CMT, Resets Annually, 6.593%, 07/01/20 .... 4,857,677
5,357,065 FHLMC, Cap 12.616%, Margin 2.167% + CMT, Resets Annually, 7.252%, 09/01/21 .... 5,464,179
1,120,550 FHLMC, Cap 12.68%, Margin 2.195% + CMT, Resets Annually, 6.717%, 02/01/19 ..... 1,133,693
3,324,146 FHLMC, Cap 12.723%, Margin 2.189% + CMT, Resets Annually, 6.463%, 04/01/19 .... 3,358,322
7,350,239 FHLMC, Cap 12.79%, Margin 2.07% + CMT, Resets Annually, 6.107%, 04/01/19 ...... 7,472,142
1,181,863 FHLMC, Cap 12.80%, Margin 2.05% + CMT, Resets Annually, 5.933%, 11/01/18 ...... 1,188,161
9,571,131 FHLMC, Cap 12.806%, Margin 2.23% + CMT, Resets Annually, 6.209%, 04/01/18 ..... 9,658,362
4,996,418 FHLMC, Cap 12.875%, Margin 1.875% + CMT, Resets Annually, 5.856%, 07/01/17 .... 5,146,286
8,305,049 FHLMC, Cap 13.006%, Margin 2.00% + CMT, Resets Annually, 6.187%, 09/01/19 ..... 8,379,686
8,524,163 FHLMC, Cap 13.045%, Margin 1.875% + CMT, Resets Annually, 6.166%, 12/01/18 .... 8,779,845
6,639,317 FHLMC, Cap 13.07%, Margin 2.12% + CMT, Resets Annually, 6.210%, 04/01/22 ...... 6,784,552
4,564,155 FHLMC, Cap 13.156%, Margin 1.915% + CMT, Resets Annually, 5.328%, 12/01/16 .... 4,543,360
2,640,188 FHLMC, Cap 13.16%, Margin 2.115% + CMT, Resets Annually, 6.289%, 07/01/19 ..... 2,665,473
4,887,886 FHLMC, Cap 13.246%, Margin 2.175% + CMT, Resets Annually, 6.87%, 10/01/18 ..... 4,953,384
2,190,279 FHLMC, Cap 13.269%, Margin 2.249% + CMT, Resets Annually, 6.005%, 05/01/19 .... 2,205,611
1,057,517 FHLMC, Cap 13.286%, Margin 2.164% + CMT, Resets Annually, 6.031%, 10/01/19 .... 1,066,018
3,368,250 FHLMC, Cap 13.292%, Margin 2.115% + CMT, Resets Annually, 5.816%, 03/01/19 .... 3,375,977
985,931 FHLMC, Cap 13.302%, Margin 2.04% + CMT, Resets Annually, 5.632%, 04/01/18 ..... 985,985
2,241,214 FHLMC, Cap 13.306%, Margin 2.057% + CMT, Resets Annually, 5.637%, 12/01/18 .... 2,239,981
3,460,141 FHLMC, Cap 13.36%, Margin 2.242% + CMT, Resets Annually, 6.472%, 07/01/20 ..... 3,495,279
6,895,684 FHLMC, Cap 13.364%, Margin 2.225% + CMT, Resets Annually, 6.256%, 07/01/19 .... 6,954,849
13,106,095 FHLMC, Cap 13.37%, Margin 2.04% + CMT, Resets Annually, 5.969%, 04/01/19 ...... 13,171,560
8,742,793 FHLMC, Cap 13.562%, Margin 2.388% + CMT, Resets Annually, 6.587%, 07/01/21 .... 8,834,252
12,418,183 FHLMC, Cap 13.65%, Margin 2.249% + CMT, Resets Annually, 6.457%, 07/01/20 ..... 12,542,513
16,272,820 FHLMC, Cap 13.74%, Margin 2.306% + CMT, Resets Annually, 6.407%, 04/01/21 ..... 16,476,149
963,999 FHLMC, Cap 13.77%, Margin 2.057% + CMT, Resets Annually, 5.686%, 02/01/19 ..... 963,907
7,166,308 FHLMC, Cap 13.793%, Margin 2.214% + CMT, Resets Annually, 7.042%, 11/01/19 .... 7,274,405
5,619,083 FHLMC, Cap 14.277%, Margin 2.412% + CMT, Resets Annually, 7.115%, 07/01/19 .... 5,705,948
3,940,234 FHLMC, Cap 14.307%, Margin 1.957% + 3CMT, Resets Annually, 7.601%, 12/01/21 ... 4,058,421
1,945,647 FHLMC, Cap 14.451%, Margin 2.00% + CMT, Resets Annually, 6.70%, 12/01/18 ...... 2,007,654
4,736,717 FHLMC, Cap 14.90%, Margin 2.546% + CMT, Resets Annually, 6.212%, 02/01/19 ..... 4,776,159
------------
TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (COST $218,827,414) ................ 214,959,027
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (CONT.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)aa59.2%
$ 2,453,276 FNMA, Cap 11.49%, Margin 2.225% + CMT, Resets Annually, 7.60%, 09/01/21 ....... $ 2,501,924
5,728,096 FNMA, Cap 12.26%, Margin 1.725% + CMT, Resets Semi-Annually, 6.329%, 01/01/19 5,786,705
3,682,423 FNMA, Cap 12.605%, Margin 2.536% + 6 Month DR, Resets Semi-Annually, 6.585%,
11/01/18 ..................................................................... 3,802,084
19,924,714 FNMA, Cap 12.637%, Margin 2.00% + NCI, Resets Annually, 6.05%, 11/01/17 ....... 20,173,674
7,120,214 FNMA, Cap 12.64%, Margin 2.00% + CMT, Resets Annually, 6.47%, 03/01/19 ........ 7,200,886
16,186,106 FNMA, Cap 12.66%, Margin 1.75% + 6 Month DR, Resets Annually, 5.79%, 01/01/19 . 16,317,537
11,960,782 FNMA, Cap 12.705%, Margin 1.25% + COFI, Resets Monthly, 5.054%, 09/01/18 ...... 11,639,276
12,715,988 FNMA, Cap 12.729%, Margin 1.875% + NOI, Resets Annually, 5.823%, 07/01/29 ..... 12,890,769
5,239,485 FNMA, Cap 12.787%, Margin 1.25% + COFI, Resets Monthly, 7.454%, 01/01/19 ...... 5,272,205
5,977,277 FNMA, Cap 12.788%, Margin 2.11% + CMT, Resets Annually, 6.533%, 11/01/20 ...... 6,045,155
20,649,548 FNMA, Cap 12.797%, Margin 1.75% + NCI, Resets Monthly, 5.625%, 12/01/28 ....... 20,881,752
9,193,762 FNMA, Cap 12.804%, Margin 1.75% + CMT, Resets Annually, 5.842%, 05/01/19 ...... 9,244,143
4,549,263 FNMA, Cap 12.84%, Margin 2.762% + 6 Month DR, Resets Semi-Annually, 6.842%,
06/01/17 ..................................................................... 4,654,465
8,921,850 FNMA, Cap 12.85%, Margin 2.078% + CMT, Resets Annually, 7.981%, 10/01/17 ...... 9,200,613
9,544,282 FNMA, Cap 12.89%, Margin 2.125% + 6 Month DR, Resets Semi-Annually, 6.114%,
07/01/17 ..................................................................... 9,681,433
2,871,726 FNMA, Cap 12.911%, Margin 2.00% + 6 Month DR, Resets Semi-Annually, 6.27%,
02/01/18 ..................................................................... 2,961,453
10,815,481 FNMA, Cap 12.938%, Margin 1.25% + COFI, Resets Monthly, 5.054%, 02/01/19 ...... 10,524,761
5,473,844 FNMA, Cap 12.993%, Margin 2.092% + CMT, Resets Annually, 6.387%, 12/01/19 ..... 5,532,255
7,709,689 FNMA, Cap 13.01%, Margin 2.10% + CMT, Resets Monthly, 6.019%, 06/01/19 ........ 7,772,854
16,053,770 FNMA, Cap 13.017%, Margin 1.25% + COFI, Resets Monthly, 5.11%, 07/01/17 ....... 15,632,278
10,547,437 FNMA, Cap 13.021%, Margin 1.986% + CMT, Resets Annually, 6.465%, 07/01/22 ..... 10,778,162
16,751,007 FNMA, Cap 13.03%, Margin 1.25% + COFI, Resets Monthly, 6.836%, 02/01/20 ....... 16,855,617
8,694,386 FNMA, Cap 13.03%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 5.846%,
12/01/20 ..................................................................... 8,786,720
7,998,755 FNMA, Cap 13.063%, Margin 2.175% + CMT, Resets Monthly, 5.694%, 04/01/19 ...... 8,026,310
9,050,349 FNMA, Cap 13.099%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 5.847%,
07/01/20 ..................................................................... 9,157,777
5,870,361 FNMA, Cap 13.108%, Margin 2.246% + CMT, Resets Annually, 6.424%, 01/01/20 ..... 5,932,141
33,918,927 FNMA, Cap 13.125%, Margin 1.25% + COFI, Resets Monthly, 5.109%, 04/01/18 ...... 33,007,186
6,321,511 FNMA, Cap 13.147%, Margin 1.895% + CMT, Resets Annually, 6.328%, 04/01/19 ..... 6,386,193
4,661,550 FNMA, Cap 13.202%, Margin 2.478% + 6 Month DR, Resets Semi-Annually, 6.443%,
11/01/26 ..................................................................... 4,834,890
4,661,069 FNMA, Cap 13.249%, Margin 2.00% + CMT, Resets Annually, 6.031%, 06/01/19 ...... 4,699,854
6,570,495 FNMA, Cap 13.281%, Margin 2.00% + CMT, Resets Annually, 6.338%, 10/01/19 ...... 6,638,204
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE SECURITIES (CONT.)
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) (CONT.)
$ 8,886,885 FNMA, Cap 13.32%, Margin 1.25% + COFI, Resets Semi-Annually, 7.433%, 04/01/03.. $ 8,931,275
18,407,487 FNMA, Cap 13.452%, Margin 2.148% + CMT, Resets Annually, 6.322%, 09/01/22 ..... 18,602,975
15,652,775 FNMA, Cap 13.644%, Margin 2.011% + CMT, Resets Annually, 6.242%, 01/01/18 ..... 15,812,231
9,596,917 FNMA, Cap 13.662%, Margin 2.177% + CMT, Resets Annually, 6.382%, 03/01/21 ..... 9,690,103
12,065,101 FNMA, Cap 13.791%, Margin 2.143% + CMT, Resets Annually, 6.416%, 12/01/20 ..... 12,191,085
5,399,057 FNMA, Cap 13.797%, Margin 2.20% + CMT, Resets Annually, 5.801%, 03/01/19 ...... 5,425,069
6,828,249 FNMA, Cap 13.80%, Margin 0.94% + 6 Month DR, Resets Semi-Annually, 6.786%,
07/01/24 ..................................................................... 6,836,751
6,265,875 FNMA, Cap 13.887%, Margin 2.25% + CMT, Resets Annually, 5.756%, 02/01/19 ...... 6,290,876
4,635,385 FNMA, Cap 13.896%, Margin 2.25% + CMT, Resets Annually, 5.639%, 12/01/18 ...... 4,651,818
10,298,111 FNMA, Cap 14.069%, Margin 2.089% + CMT, Resets Annually, 6.429%, 01/01/19 ..... 10,411,019
3,166,559 FNMA, Cap 14.142%, Margin 2.118% + CMT, Resets Annually, 5.977%, 03/01/21 ..... 3,250,298
17,224,751 FNMA, Cap 14.354%, Margin 2.07% + 5CMT, Resets Annually, 8.033%, 05/01/21 ..... 17,762,938
11,838,930 FNMA, Cap 14.887%, Margin 1.720% + CMT, Resets Annually, 5.94%, 01/01/16 ...... 12,238,435
5,078,261 FNMA, Cap 14.952%, Margin 2.523% + CMT, Resets Annually, 6.926%, 05/01/19 ..... 5,154,481
2,767,292 FNMA, Cap 15.381%, Margin 2.168% + CMT, Resets Annually, 6.529%, 02/01/20 ..... 2,798,554
------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (COST $453,687,272) ......... 442,867,184
------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) 7.8%
12,471,767 GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 6.50%, 07/20/23 ........ 12,221,209
7,917,654 GNMA, Cap 11.50%, Margin 1.50% + CMT, Resets Annually, 6.50%, 08/20/23 ........ 7,758,589
10,000,000 dGNMA, Cap 12.00%, Margin 1.50% + CMT, Resets Annually, 7.00%, 10/20/17 ........ 9,956,251
19,736,825 GNMA, Cap 13.00%, Margin 1.50% + CMT, Resets Annually, 5.75%, 02/20/16 ........ 18,868,405
9,979,713 GNMA, Cap 13.00%, Margin 1.50% + CMT, Resets Annually, 5.75%, 03/20/16 ........ 9,540,606
------------
TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (COST $62,556,073) ....... 58,345,060
------------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST $735,070,759) ........... 716,171,271
------------
GOVERNMENT SECURITIES 1.3%
10,000,000 U.S. Treasury Notes, 4.00% - 4.25%, 01/31/96 - 05/15/96 (COST $9,777,084) ..... 9,710,431
------------
Total Long Term Investments (COST $744,847,843) ......................... 725,881,702
------------
aSHORT TERM INVESTMENTS
GOVERNMENT SECURITIES 3.4%
26,630,000 U.S. Treasury Bills, 5.54% - 5.855%, 09/21/95 - 10/19/95 (COST $25,153,213) ... 25,156,431
------------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $770,001,056) ...... 751,038,133
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (NOTE 1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
b,cRECEIVABLES FROM REPURCHASE AGREEMENTS
$ 5,634 Joint Repurchase Agreement, 4.824%, 11/01/94 (Maturity Value $5,355)
(COST $5,354)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%, 11/15/94 - 07/31/99 ............ $ 5,354
------------
TOTAL INVESTMENTS (COST $770,006,410) 100.5% ........................ 751,043,487
LIABILITIES IN EXCESS OF OTHERS ASSETS, NET (.5)% ................... (3,572,373)
------------
NET ASSETS 100.0% ................................................... $747,471,114
============
At October 31, 1994, the net unrealized depreciation based on the cost of
investments for income tax purposes of $770,011,327 was as follows:
Aggregate gross unrealized appreciation for all investments in which there
was an excess of value over tax cost .......................................... $ 386,754
Aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value .......................................... (19,354,594)
------------
Net unrealized depreciation .................................................... $(18,967,840)
============
</TABLE>
PORTFOLIO ABBREVIATIONS:
CMT - 1 Year Constant Maturity Treasury Index
3CMT - 3 Year Constant Maturity Treasury Index
5CMT - 5 Year Constant Maturity Treasury Index
COFI - 11th District Cost of Funds Index
DR - Discount Rate
NCI - National Median Cost of Funds Index
TB - Treasury Bill Rate
aCertain short-term securities are traded on a discount basis; the rates
shown are the discount rates at the time of purchase by the Fund. Other
securities bear interest at the rates shown, payable at fixed dates or upon
maturity.
bFace amount for repurchase agreements is for the underlying collateral.
cSee Note 1(f) regarding Joint Repurchase Agreement.
dSee Note 1(g) regarding securities purchased on a when-issued or delayed
delivery basis.
The accompanying notes are an integral part of these financial statements.
36
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994
<TABLE>
<CAPTION>
FACE VALUE
AMOUNT ADJUSTABLE RATE SECURITIES PORTFOLIO (NOTE 1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
b,cADJUSTABLE RATE MORTGAGE SECURITIES 85.3%
$4,290,610 FBMS, Cap 10.816%, Margin 1.06% + 6 Month LIBOR, Resets Semi-Annually, 6.67%,
07/25/09............................................................................. $ 4,258,431
3,456,496 Glendale Federal Bank, Cap 12.25%, Margin 1.78% + CMT, Resets Annually, 7.39%,
03/25/30............................................................................. 3,462,977
1,442,684 Homeowners Federal Savings, Cap 13.00%, Margin 1.75% + CMT, Resets Annually,
6.00%, 01/25/18 ..................................................................... 1,426,453
2,599,638 PHMS, Cap 10.88%, Margin 2.50% + CMT, Resets Annually, 7.00%, 01/25/23 ............... 2,606,137
3,349,085 PHMS, Cap 11.67%, Margin 2.67% + CMT, Resets Annually, 6.86%, 07/25/22 ............... 3,365,830
3,771,292 RFC, Cap 11.46%, Margin 2.25% + CMT, Resets Annually, 7.39%, 11/25/22 ................ 3,717,079
3,546,603 RFC, Cap 11.73%, Margin 1.00% + COFI, Resets Semi-Annually, 4.86%, 07/25/19 .......... 3,333,807
1,931,004 RTC, Cap 12.66%, Margin 1.75% + 6 Month TB, Resets Semi-Annually, 6.99%, 04/26/21..... 1,902,039
3,894,880 RTC, Cap 13.35%, Margin .90% + CMT, Resets Annually, 6.93%, 04/25/22 ................. 3,838,891
2,712,404 RTC, Cap 14.69%, Margin 1.55% + CMT, Resets Annually, 7.36%, 06/25/22 ................ 2,671,718
1,856,660 RTC, Cap 16.48%, Margin NACR - 0.13%, Resets Annually, 7.44%, 07/25/20 ............... 1,827,650
3,098,163 Salomon Brothers Mortgage Securities, Cap 14.00%, Margin 0.96%+ NACR, Resets Annually,
7.39%, 12/25/17...................................................................... 3,109,782
-----------
TOTAL ADJUSTABLE RATE MORTGAGE SECURITIES (COST $36,966,456) ................... 35,520,794
-----------
GOVERNMENT SECURITIES 6.2%
2,625,000 U.S. Treasury Notes, 3.875%, 10/31/95 (COST $2,574,468) .............................. 2,567,578
-----------
TOTAL LONG TERM INVESTMENTS (COST $39,540,924) ................................. 38,088,372
-----------
SHORT TERM INVESTMENTS
aGOVERNMENT SECURITIES 7.9%
3,460,000 U.S. Treasury Bills, 5.335%, 08/24/95 (COST $3,303,173) ............................. 3,298,411
-----------
TOTAL INVESTMENTS BEFORE REPURCHASE AGREEMENTS (COST $42,844,097) ............. 41,386,783
-----------
b,cRECEIVABLES FROM REPURCHASE AGREEMENTS .1%
23,951 Joint Repurchase Agreement, 4.824%, 11/01/94 (Maturity Value $23,061) (Cost $23,058)
Collateral: U.S. Treasury Notes, 4.00% - 11.625%, 11/15/94 - 07/31/99 ............. 23,058
-----------
TOTAL INVESTMENTS (COST $42,867,155)aa99.5% ............................... 41,409,841
OTHER ASSETS AND LIABILITIES, NET .5% .................................... 208,912
-----------
NET ASSETS 100.0% ........................................................ $41,618,753
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
ADJUSTABLE RATE SECURITIES PORTFOLIOS
STATEMENT OF INVESTMENTS IN SECURITIES AND NET ASSETS, OCTOBER 31, 1994 (CONT.)
<TABLE>
<CAPTION>
VALUE
ADJUSTABLE RATE SECURITIES PORTFOLIO (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
At October 31, 1994, the net unrealized depreciation based on the cost of investments
for income tax purposes of $42,873,764 was as follows:
Aggregate gross unrealized appreciation for all investments in which there was an
excess of value over tax cost ................................................... $ --
Aggregate gross unrealized depreciation for all investments in which there was an
excess of tax cost over value ................................................... (1,463,923)
-----------
Net unrealized depreciation ....................................................... $(1,463,923)
===========
</TABLE>
PORTFOLIO ABBREVIATIONS:
CMT - 1 Year Constant Maturity Treasury Index
COFI - 11th District Cost of Funds Index
FBMS - First Boston Mortgage Securities Corp.
LIBOR - London Interbank Offered Rate
NACR - National Average Contract Rate
PHMS - Prudential Home Mortgage Securities
RFC - Residential Finance Corp.
RTC - Resolution Trust Corp.
TB - Treasury Bill Rate
aCertain short-term securities are traded on a discount basis; the rates
shown are the discount rates at the time of purchase by the Fund. Other
securities bear interest at the rates shown, payable a fixed dates or upon
maturity.
bFace amount for repurchase agreements is for the underlying collateral.
cSee Note 1(f) regarding Joint Repurchase Agreement.
The accompanying notes are an integral part of these financial statements.
38
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 1994
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------ --------------------
<S> <C> <C>
Assets:
Investments in securities:
At identified cost....................................................... $770,001,056 $42,844,097
============ ===========
At value................................................................. 751,038,133 41,386,783
Receivables from repurchase agreements, at value and cost................. 5,354 23,058
Receivables:
Capital shares sold...................................................... -- 21,008
Interest................................................................. 4,947,930 120,253
Investment securities sold............................................... 3,598,800 213,186
Unamortized organization costs (Note 2)................................... -- 4,941
------------ -----------
Total assets......................................................... 759,590,217 41,769,229
------------ -----------
Liabilities:
Payables:
Investment securities purchased on a when-issued basis (Note 1).......... 9,992,778 --
Capital shares repurchased............................................... 2,012,228 133,138
Management fees.......................................................... -- 8,199
Accrued expenses and other liabilities.................................... 114,097 9,139
------------ -----------
Total liabilities.................................................... 12,119,103 150,476
------------ -----------
Net assets, at value....................................................... $747,471,114 $41,618,753
============ ===========
Net assets consist of:
Unrealized depreciation on investments.................................... $(18,962,923) $(1,457,314)
Accumulated net realized loss............................................. (129,728,595) (2,103,106)
Capital shares............................................................ 813,678 42,970
Additional paid-in capital................................................ 895,348,954 45,136,203
------------ -----------
Net assets, at value....................................................... $747,471,114 $41,618,753
============ ===========
Shares outstanding......................................................... 81,367,809 4,297,010
============ ===========
Net asset value per share.................................................. $9.19 $9.69
============ ===========
Representative computation (U.S. Government Adjustable Rate Mortgage
Portfolio) of net asset value, offering price and redemption price per share:
(747,471,114 (/) 81,367,809).............................................. $9.19
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1994
<TABLE>
<CAPTION>
U.S. GOVERNMENT
ADJUSTABLE RATE ADJUSTABLE RATE
MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------ --------------------
<S> <C> <C>
Investment income:
Interest (Note 1)......................................................... $ 48,150,402 $ 4,454,519
------------ -----------
Expenses:
Management fees, net (Note 6)............................................. -- 205,735
Custodian fees............................................................ 112,471 9,279
Professional fees......................................................... 61,443 9,756
Trustees' fees and expenses............................................... 9,319 55
Reports to shareholders................................................... 3,063 3,432
Amortization of organization costs (Note 2)............................... -- 2,196
Registration and filing fees.............................................. -- 1,250
Other..................................................................... -- 849
------------ -----------
Total expenses....................................................... 186,296 232,552
------------ -----------
Net investment income............................................... 47,964,106 4,221,967
------------ -----------
Realized and unrealized loss on investments:
Net realized loss......................................................... (67,057,492) (1,993,495)
Net unrealized depreciation............................................... (12,751,845) (1,410,266)
------------ -----------
Net realized and unrealized loss on investments............................ (79,809,337) (3,403,761)
------------ -----------
Net increase (decrease) in net assets resulting from operations............ $(31,845,231) $ 818,206
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
ADJUSTABLE RATE SECURITIES PORTFOLIOS
FINANCIAL STATEMENTS (CONT.)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED OCTOBER 31, 1994
AND THE NINE MONTHS ENDED OCTOBER 31, 1993
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE RATE
ADJUSTABLE RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
---------------------------------- --------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED NINE MONTHS YEAR ENDED NINE MONTHS
10/31/94 ENDED 10/31/93 10/31/94 ENDED 10/31/93
--------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Increase (decrease) in net assets:
Operations:
Net investment income................... $ 47,964,106 $ 106,502,915 $ 4,221,967 $ 2,658,795
Net realized gain (loss) from security
transactions.......................... (67,057,492) 7,294,889 (1,993,495) (51,910)
Net unrealized depreciation on
investments........................... (12,751,845) (31,684,300) (1,410,266) (61,448)
--------------- --------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations......... (31,845,231) 82,113,504 818,206 2,545,437
Distributions to shareholders from
undistributed net investment income
(Note 1)................................ (47,964,106) (106,502,915) (4,221,967) (2,658,795)
Increase (decrease) in net assets from
capital share transactions (Note 4)..... (1,302,948,561) (2,046,792,768) (79,286,725) 79,767,042
--------------- --------------- ------------ ------------
Net increase (decrease) in net
assets............................ (1,382,757,898) (2,071,182,179) (82,690,486) 79,653,684
Net assets (there is no undistributed net
investment income at beginning or end
of year):
Beginning of year...................... 2,130,229,012 4,201,411,191 124,309,239 44,655,555
--------------- --------------- ------------ ------------
End of year............................ $ 747,471,114 $ 2,130,229,012 $ 41,618,753 $124,309,239
=============== =============== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Adjustable Rate Securities Portfolios (the Trust) is a no load, open-end,
diversified management investment company (mutual fund) registered under
the Investment Company Act of 1940 as amended. The Trust currently has two
separate portfolios (the Portfolios) consisting of the U.S. Government
Adjustable Rate Mortgage Portfolio (Mortgage Portfolio) and the Adjustable Rate
Securities Portfolio (Securities Portfolio). The shares of the Trust are
issued in private placements and are thus exempt from registration under the
Securities Act of 1933.
On June 15, 1993, the Board of Trustees authorized a change in the fiscal
year end of the Trust from January 31 of each year to October 31.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
for investment companies.
A. SECURITIES VALUATIONS:
Portfolio securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily available are
valued at the last quoted sale price of the day or, if there is no such
reported sale, within the range of the most recent quoted bid and asked
prices. Other securities for which market quotations are readily
available are valued at current market values, obtained from a pricing
service, which are based on a variety of factors, including recent trades,
institutional size trading in similar types of securities (considering yield,
risk and maturity) and/or developments related to specific securities.
Portfolio securities which are traded both in the over-the-counter market and
on a securities exchange are valued according to the broadest and most
representative market as determined by the Manager. Securities for which
market quotations are not readily available, if any, are valued at their fair
value as determined following procedures approved by the Board of Trustees.
Short-term securities and similar investments with remaining maturities of 60
days or less are valued at amortized cost, which approximates value.
B. INCOME TAXES:
The Trust intends to continue to qualify for the tax treatment applicable to
regulated investment companies under the Internal Revenue Code and to make
the requisite distributions to its shareholders which will be sufficient to
relieve it from income and excise taxes. Therefore, no income tax provision
is required. Each Portfolio is treated as a separate entity in the
determination of compliance with the Internal Revenue Code.
C. SECURITY TRANSACTIONS:
Security transactions are accounted for on the date the securities are
purchased or sold (trade date). Realized gains and losses on security
transactions are determined on the basis of specific identification for both
financial statement and income tax purposes.
D. INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS:
Distributions to shareholders are recorded on the ex-dividend date.
Interest income and estimated expenses are accrued daily. Bond discount, if
any, is amortized as required by the Internal Revenue Code. The Fund normally
declares dividends from its net investment income daily and distributes
monthly. Daily allocations of net investment income will commence on the date
of receipt of an investor's funds. Dividends are normally declared each day
the New York Stock Exchange is open for business equal to the Portfolio's
total net investment income and are payable to shareholders of record at
the beginning of business on the ex-date. Once each month, dividends are
reinvested in additional shares of the Portfolio or paid in cash as requested
by the shareholders.
Net realized capital losses differ for financial statement and tax purposes
primarily due to losses deferred from wash sale transactions.
42
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONT.)
1. SIGNIFICANT ACCOUNTING POLICIES (CONT.)
E. EXPENSE ALLOCATION:
Common expenses incurred by the Trust are allocated among the
Portfolios based on the ratio of net assets of each Portfolio to the
combined net assets. In all other respects, expenses are charged to each
Portfolio as incurred on a specific identification basis.
F. REPURCHASE AGREEMENTS:
The Trust may enter into a Joint Repurchase Agreement whereby its uninvested
cash balance is deposited into a joint cash account to be used to invest in one
or more repurchase agreements with government securities dealers
recognized by the Federal Board and/or member banks of the Federal Reserve
System. The value and face amount of the Joint Repurchase Agreement has been
allocated to the Trust based on its pro-rata interest at October 31, 1994.
In a repurchase agreement, the Trust purchases a U.S. Government security
from a dealer or bank subject to an agreement to resell it at a mutually
agreed upon price and date. Such a transaction is accounted for as a loan by
the Trust to the seller, collateralized by the underlying security. The
transaction requires the initial collateralization of the seller's obligation
by U.S. Government securities with market value, including accrued
interest, of at least 102% of the dollar amount invested by the Trust, with
the value of the underlying security marked to market daily to maintain
coverage of at least 100%. The collateral is delivered to the Trust's
custodian and held until resold to the dealer or bank. At October 31, 1994, all
outstanding joint repurchase agreements held by the Trust had been entered into
on that date.
G. SECURITIES PURCHASED ON A WHEN-ISSUED (WI) OR DELAYED DELIVERY BASIS:
The Trust may trade securities on a when-issued or delayed delivery basis,
with payment and delivery scheduled for a future date. These transactions are
subject to market fluctuations and are subject to the risk that the value at
delivery may be more or less than the trade date purchase price. Although the
Trust will generally purchase these securities with the intention of
acquiring such securities, they may sell such securities before the
settlement date. These securities are identified on the accompanying
statement of investments in securities and net assets. The Trust has set
aside sufficient investment securities as collateral for these purchase
commitments.
2. UNAMORTIZED ORGANIZATION COSTS
The organization costs of the Securities Portfolio are amortized on a
straight-line basis over a period of five years, from December 26, 1991, the
effective date of registration. In the event Franklin Resources, Inc.
(which was the sole shareholder prior to December 26, 1991) redeems its seed
money shares within the five-year period, the pro rata share of the
then-unamortized deferred organization cost will be deducted from the
redemption price paid to Franklin Resources, Inc. New investors purchasing
shares of the portfolio subsequent to that date bear such costs during the
amortization period only as such charges are accrued daily against investment
income.
43
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONT.)
3. DISTRIBUTIONS AND CAPITAL LOSS CARRYOVERS
At October 31, 1994, for tax purposes, the Portfolios had accumulated capital
loss carryovers as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------- --------------------
<S> <C> <C>
Capital loss carryovers
Expiring in: 2000.................... $ 45,446,278 $ 57,701
2001.................... 17,175,340 50,908
2002.................... 67,102,060 1,987,888
------------ ----------
$129,723,678 $2,096,497
============ ==========
</TABLE>
For income tax purposes, the aggregate cost of securities is higher (and
unrealized depreciation is higher) than for financial reporting purposes
at October 31, 1994 by $4,917 in the Mortgage Portfolio and $6,609 in the
Securities Portfolio.
4. TRUST SHARES
At October 31, 1994, there was an unlimited number of $.01 par value
shares of beneficial interest authorized. Transactions in each of the
Portfolio's shares for the year ended October 31, 1994, and the nine months
ended October 31, 1993 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
------------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ --------------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended October 31, 1994
Shares sold.................................. 3,234,621 $ 31,184,230 9,103,489 $ 90,799,027
Shares issued in reinvestment of distributions 5,053,223 47,948,131 426,689 4,211,388
Shares redeemed.............................. (143,954,457) (1,382,080,922) (17,497,118) (172,994,477)
Changes from exercise of the exchange
privilege:
Shares redeemed............................ -- -- (132,789) (1,302,663)
------------ --------------- ----------- -------------
Net decrease................................. (135,666,613) $(1,302,948,561) (8,099,729) $ (79,286,725)
============ =============== =========== =============
Nine months ended October 31, 1993
Shares sold.................................. 35,150,104 $ 347,867,956 12,949,265 $ 130,092,823
Shares issued in reinvestment of distributions 10,857,572 107,414,657 263,368 2,646,062
Shares redeemed.............................. (253,133,809) (2,502,075,381) (5,271,267) (52,971,843)
------------ --------------- ----------- -------------
Net increase (decrease)...................... (207,126,133) $(2,046,792,768) 7,941,366 $ 79,767,042
============ =============== =========== =============
</TABLE>
44
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONT.)
5. PURCHASES AND SALES OF SECURITIES
Aggregate purchases and sales of securities (excluding purchases and sales
of short-term securities) for the year ended October 31, 1994, were as
follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT ADJUSTABLE ADJUSTABLE RATE
RATE MORTGAGE PORTFOLIO SECURITIES PORTFOLIO
-------------------------- --------------------
<S> <C> <C>
Purchases..................... $ 669,730,162 $177,224,773
============== ============
Sales......................... $1,976,011,176 $266,835,786
============== ============
</TABLE>
6. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES
Franklin Advisers, Inc., under the terms of a management agreement, provides
investment advice, administrative services, office space and facilities to the
Trust, and receives fees computed monthly on the average daily net assets of
the Trust during the month. The Trust pays a fee equal to an annualized
rate of 40/100 of 1% for the first $5 billion of net assets, 35/100 of 1%
of net assets in excess of $5 billion up to and including $10 billion, 33/100
of 1% of net assets in excess of $10 billion up to and including $15 billion,
and 30/100 of 1% of net assets in excess of $15 billion. The terms of the
management agreement provide that aggregate annual expenses of the Trust
be limited to the extent necessary to comply with the limitations set forth in
the laws, regulations and administrative interpretations of the states in
which the Trust's shares are registered. The Trust's expenses did not exceed
these limitations; however, for the year ended October 31, 1994, Franklin
Advisers, Inc. agreed in advance to waive a portion of the management fees of
$4,787,133 and $166,584, for the Mortgage Portfolio and Securities Portfolio,
respectively.
As of October 31, 1994, 76,822,612 shares of the Mortgage Portfolio were owned
by the Franklin Adjustable U.S. Government Securities Fund and 4,545,197
shares were owned by the Franklin Institutional Adjustable U.S. Government
Securities Fund. This represents 94% and 6%, respectively, of the outstanding
shares of the Mortgage Portfolio.
As of October 31, 1994, 2,542,902 shares of the Securities Portfolio
were owned by the Franklin Adjustable Rate Securities Fund and 1,752,851
shares were owned by the Franklin Institutional Adjustable Rate Securities
Fund. This represents 59% and 41%, respectively, of the outstanding shares
of the Securities Portfolio. The remaining 1,257 shares of the Securities
Portfolio were owned by Franklin Resources, Inc.
Certain officers and Trustees of the Trust are also officers and/or directors
of Franklin Advisers, Inc., a wholly-owned subsidiary of Franklin Resources,
Inc.
45
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS (CONT.)
7. FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
year by Fund are as follows:
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE
- --------------------------------------------------------------------------------------------------------------------------
NET
REALIZED & DISTRI- DISTRI- NET
NET ASSET NET UNREALIZED BUTIONS BUTIONS ASSET
YEAR VALUES AT INVEST- GAIN TOTAL FROM FROM NET FROM VALUES
ENDED BEGINNING MENT (LOSS) ON INVESTMENT INVESTMENT CAPITAL TOTAL AT END TOTAL
JAN. 31, OF YEAR INCOME SECURITIES OPERATIONS INCOME GAINS DISTRIBUTIONS OF YEAR RETURN+
- -------- --------- ------ ---------- ---------- ---------- ------- ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Adjustable Rate Mortgage Portfolio
1992(1) $10.00 $.493 $ .013 $ .506 $(.493) $(.003) $(.496) $10.01 5.13%
1993 10.01 .544 (.100) .444 (.544) -- (.544) 9.91 4.53
1993** 9.91 .313 (.090) .223 (.313) -- (.313) 9.82 2.28
1994*** 9.82 .415 (.630) (.215) (.415) -- (.415) 9.19 (2.22)
Adjustable Rate Securities Portfolio
1992(2) 10.00 -- -- -- -- -- -- 10.00 --
1993 10.00 .599 .020 .619 (.599) -- (.599) 10.02 6.36
1993** 10.02 .368 .010 .378 (.368) -- (.368) 10.03 3.83
1994*** 10.03 .469 (.340) .129 (.469) -- (.469) 9.69 1.32
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
------------------------------------------------------------
RATIO OF
NET EXPENSES RATIO OF NET
ASSETS TO AVERAGE INVESTMENT
YEAR AT END NET INCOME TO PORTFOLIO
ENDED OF YEAR ASSETS++ AVERAGE TURNOVER
JAN. 31, (IN 000'S) (SEE NOTE 6) NET ASSETS RATE
- -------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
U.S. Government Adjustable Rate Mortgage Portfolio
1992(1) $4,315,658 .31%* 7.25%* 48.96%
1993 4,201,411 .30 5.49 66.44
1993** 2,130,229 .27* 4.15* 76.55
1994*** 747,471 .02 4.01 58.43
Adjustable Rate Securities Portfolio
1992(2) -- -- -- --
1993 44,656 -- 5.80 88.92
1993** 124,309 .11* 4.76* 158.70
1994*** 41,619 .25 4.55 192.06
</TABLE>
*Annualized.
**For the nine months ended October 31, 1993.
***For the year ended October 31, 1994.
1For the period May 20, 1991 (effective date) to January 31, 1992.
2For the period December 26, 1991 (effective date) to January 31, 1992.
+Total return measures the change in value of an investment over the
period indicated. It assumes reinvestment of dividends and capital gains,
if any, at net asset value.
++During the periods indicated below, Franklin Advisers, Inc., the
investment manager, agreed to waive in advance a portion of its management
fees and made payments of other expenses incurred by the Portfolio. Had such
action not been taken, the ratios of expenses to average net assets would have
been as follows:
<TABLE>
<CAPTION>
RATIO OF EXPENSES
TO AVERAGE NET ASSETS
---------------------
<S> <C>
U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO
1992.................................................................. .41%*
1993.................................................................. .42
1993**................................................................ .41*
1994***............................................................... .42
ADJUSTABLE RATE SECURITIES PORTFOLIO
1993.................................................................. .64
1993**................................................................ .47*
1994***............................................................... .43
</TABLE>
46
ADJUSTABLE RATE SECURITIES PORTFOLIOS
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
Adjustable Rate Securites Portfolios:
We have audited the accompanying statements of assets and liabilities of
the two portfolios comprising the Adjustable Rate Securities Portfolios (the
Trust), including each Portfolio's statement of investments in securities and
net assets, as of October 31, 1994, and the related statements of operations
for the year then ended, the statements of changes in net assets for the year
then ended and for the nine months ended October 31, 1993 and the financial
highlights for each of the periods indicated in Note 7. These financial
statements and financial highlights are the responsibility of the Trusts'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of October 31, 1994, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of the two Portfolios comprising the Adjustable Rate Securities Portfolios as
of October 31, 1994, the results of each Portfolio's operations for the
year then ended, the changes in their net assets for the year then ended and
for the nine months ended October 31, 1993, and the financial highlights
for each of the periods indicated in Note 7 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
December 7, 1994
