As filed with the Securities and Exchange Commission on August 2, 1995.
File Nos.
33-11444
811-4986
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.____
Post Effective Amendment No. 16 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18 (X)
FRANKLIN INVESTORS SECURITIES TRUST
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of Principal
Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
HARMON E. BURNS, 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[X ] on October 1, 1995 after filing pursuant to paragraph (a) (i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24F-2. The issuer has registered an indefinite
number or amount of securities under the Securities Act of 1933 pursuant to Rule
24f-2 under the Investment Company Act of 1940. The rule 24f-2 Notice for the
issuer's most recent fiscal year was filed on December 29, 1995.
FRANKLIN INVESTORS SECURITIES TRUST
CROSS REFERENCE SHEET
FORM N-1A
PART A: INFORMATION REQUIRED IN PROSPECTUS
(Franklin Convertible Securities Fund)
<TABLE>
<CAPTION>
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights";
Information "Performance"
4. General Description "About the Trust", "Investment
Objective and Policies of the
Fund"; "General Information"
5. Management of the Fund "Management of the Fund";
Portfolio Operations"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "Distributions to Shareholders";
Securities "General Information"
7. Purchase of Securities "How to Buy Shares of the Fund";
"Taxation of the Fund and Its
shareholders"; "Purchasing Shares
of the Fund in Connection with
Retirement Plans Involving
Tax-Deferred Investments"; "Other
Programs and Privileges Available
to Fund Shareholders"; "Valuation
of Fund Shares"
8. Redemption or Repurchase "How to Sell Shares of the Fund";
"Exchange Privilege", "How to Get
Information Regarding an
Investment in the Fund"
9. Pending Legal Proceedings Not Applicable
</TABLE>
PART A: INFORMATION REQUIRED IN PROSPECTUS
(Franklin Equity Income Fund)
<TABLE>
<CAPTION>
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Expense Table"
3. Condensed Financial "Financial Highlights";
Information "Performance"
4. General Description "About the Trust", "Investment
Objective and Policies of the
Fund"; "General Information"
5. Management of the Fund "Management of the Fund";
Portfolio Operations"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "Distributions to Shareholders";
Securities "General Information"
7. Purchase of Securities "How to Buy Shares of the Fund";
"Taxation of the Fund and Its
shareholders"; "Purchasing Shares
of the Fund in Connection with
Retirement Plans Involving
Tax-Deferred Investments"; "Other
Programs and Privileges Available
to Fund Shareholders"; "Valuation
of Fund Shares"
8. Redemption or Repurchase "How to Sell Shares of the Fund";
"Exchange Privilege", "How to Get
Information Regarding an
Investment in the Fund"
9. Pending Legal Proceedings Not Applicable
</TABLE>
Part B: Information Required in
STATEMENT OF ADDITIONAL INFORMATION
(Franklin Convertible Securities Fund)
(Franklin Equity Income Fund)
(Franklin Short-Intermediate U.S. Government Securities Fund
<TABLE>
<CAPTION>
N-1A Location in
ITEM NO. ITEM REGISTRATION STATEMENT
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and "About the Trust"; See also the
History Prospectus "About the Trust" and
"General Information"
13. Investment Objectives and "The Investment Objective and
Policies Policies of the Fund"
14. Management of the Trust "Trustees and Officers"
15. Control Persons and "Trustees and Officers"
Principal Holders of
Securities
16. Investment Advisory and "Investment Advisory and Other
Other Services Services"
17. Brokerage Allocation "The Trust's Policies Regarding
Brokers Used on Portfolio
Transactions"
18. Capital Stock and Securities See Prospectus "General Information"
19. Purchase, Redemption and "Additional Information Regarding
Pricing of Securities Being Fund Shares"
Offered
20. Tax Status "Additional Information Regarding
Taxation"
21. Underwriters "The Fund's Underwriter"
22. Calculation of Performance "General Information"
Data
23. Financial Statements "Financial Statements"
</TABLE>
37 P
SUPPLEMENT DATED OCTOBER 1, 1995
TO THE PROSPECTUS FOR
FRANKLIN CONVERTIBLE SECURITIES FUND
Franklin Investors Securities Trust
dated March 1, 1995
INTRODUCTION. As of October 1, 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 distribution 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.
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases
(as a percentage of offering price) 4.50% 1.00%^
Deferred Sales Charge NONE^^ 1.00%+
Exchange Fee (per transaction) $5.00++ $5.00++
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.63%* 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%*
========= ======
^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 following 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 following 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 slightly higher operating expenses and lower income
dividends for Class II shares, which will accumulate over time to outweigh the
difference in initial sales charges. 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
definitely should 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 "How to Buy Shares of the Fund" in the Prospectus.
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.
DIFFERENCES BETWEEN CLASS I AND CLASS II. The difference between Class I and
Class II shares lies primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below.
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 annual maximum of .25% of average daily
net assets of such shares. With this multiclass structure, Class I shares have
higher front-end sales charges than Class II shares and comparatively lower Rule
12b-1 fees.
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 following 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 following 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.
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.
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. 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 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 in the same
class of shares of the Fund or the same class of another of the Franklin
Templeton Funds. See "Distributions to Shareholders" in the Prospectus and the
SAI for more information.
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. See table below:
TOTAL SALES CHARGE
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AT AS A PERCENTAGE OF OF NET AMOUNT AS A PERCENTAGE OF
OFFERING PRICE OFFERING PRICE INVESTED OFFERING PRICE*
any amount (less
than $1 million) 1.00% 1.01% 1.00%
* 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.
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 the
Fund Shareholders" will remain in effect as described in the Prospectus for the
new multiclass structure. For a complete discussion of these programs, see
"Other Programs and Privileges Available to Fund Shareholders" in 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% (or
applicable) 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 following 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 59 1/2; 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 for a SPECIFIED DOLLAR amount will result in additional
shares being redeemed to cover any applicable contingent deferred sales charge,
while requests for redemption of a SPECIFIC NUMBER of shares will result in the
applicable contingent deferred sales charge being deducted from the total dollar
amount redeemed.
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 1, 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 the state business trust law, or
(3) required to be voted on separately 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."
39 P
SUPPLEMENT DATED OCTOBER 1, 1995
TO THE PROSPECTUS FOR
FRANKLIN EQUITY INCOME FUND
Franklin Investors Securities Trust
dated March 1, 1995
INTRODUCTION. As of October 1, 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
distribution 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.
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases
(as a percentage of offering price) 4.50% 1.00%^
Deferred Sales Charge NONE^^ 1.00%+
Exchange Fee (per transaction) $5.00++ $5.00++
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.63%* 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%*
======== ======
^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 following 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 following 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 slightly higher operating expenses and lower income
dividends for Class II shares, which will accumulate over time to outweigh the
difference in initial sales charges. 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
definitely should 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 "How to Buy Shares of the Fund" in the Prospectus.
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.
DIFFERENCES BETWEEN CLASS I AND CLASS II. The difference between Class I and
Class II shares lies primarily in their front-end and contingent deferred sales
charges and Rule 12b-1 fees as described below.
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 annual maximum of .25% of average daily
net assets of such shares. With this multiclass structure, Class I shares have
higher front-end sales charges than Class II shares and comparatively lower Rule
12b-1 fees.
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 following 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 following 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.
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.
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. 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 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 in the same
class of shares of the Fund or the same class of another of the Franklin
Templeton Funds. See "Distributions to Shareholders" in the Prospectus and the
SAI for more information.
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. See table below:
TOTAL SALES CHARGE
AS A PERCENTAGE DEALER CONCESSION
SIZE OF TRANSACTION AT AS A PERCENTAGE OF OF NET AMOUNT AS A PERCENTAGE OF
OFFERING PRICE OFFERING PRICE INVESTED OFFERING PRICE*
any amount (less
than $1 million) 1.00% 1.01% 1.00%
* 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.
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 the
Fund Shareholders" will remain in effect as described in the Prospectus for the
new multiclass structure. For a complete discussion of these programs, see
"Other Programs and Privileges Available to Fund Shareholders" in 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% (or
applicable) 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 following 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 59 1/2; 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 for a SPECIFIED DOLLAR amount will result in additional
shares being redeemed to cover any applicable contingent deferred sales charge,
while requests for redemption of a SPECIFIC NUMBER of shares will result in the
applicable contingent deferred sales charge being deducted from the total dollar
amount redeemed.
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 1, 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 the state business trust law, or
(3) required to be voted on separately 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."
36 S
SUPPLEMENT DATED OCTOBER 1, 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 1, 1995 AND IS EFFECTIVE FROM OCTOBER 1,
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
(*).
NAME, POSITIONS AND
ADDRESS OFFICES WITH PRINCIPAL OCCUPATIONS
AND AGE THE TRUST DURING PAST FIVE YEARS
Frank H. Abbott, III (74)
1045 Sansome St.
San Francisco, CA 94111
Trustee
President and Director, Abbott Corporation (an investment company);
and director, trustee or managing general partner, as the case may
be, of 31 of the investment companies in the Franklin Group of
Funds.
Harris J. Ashton (63)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Trustee
President, Chief Executive Officer and Chairman of the Board,
General Host Corporation (nursery and craft centers); Director, RBC
Holdings, Inc. (a bank holding company) and Bar-S Foods; and
director, trustee or managing general partner, as the case may be,
of 55 of the investment companies in the Franklin Templeton Group of
Funds.
S. Joseph Fortunato (63)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Trustee
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of
General Host Corporation; director, trustee or managing general
partner, as the case may be, of 57 of the investment companies in
the Franklin Templeton Group of Funds.
David W. Garbellano (80)
111 New Montgomery St., #402
San Francisco, CA 94105
Trustee
Private Investor; Assistant Secretary/Treasurer and Director,
Berkeley Science Corporation (a venture capital company); and
director, trustee or managing general partner, as the case may be,
of 30 of the investment companies in the Franklin Group of Funds.
*Edward B. Jamieson (47)
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 (62)
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 56 of the investment
companies in the Franklin Templeton Group of Funds.
*Rupert H. Johnson, Jr. (54)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Trustee
Executive Vice President and Director, Franklin Resources, Inc. and
Franklin Templeton Distributors, Inc.; President and Director,
Franklin Advisers, Inc.; Director, Franklin/Templeton Investor
Services, Inc.; and officer and/or director, trustee or managing
general partner, as the case may be, of most other subsidiaries of
Franklin Resources, Inc. and of 43 of the investment companies in
the Franklin Templeton Group of Funds.
Frank W. T. LaHaye (66)
20833 Stevens Creek Blvd.
Suite 102
Cupertino, CA 95014
Trustee
General Partner, Peregrine Associates and Miller & LaHaye, which are
General Partners of Peregrine Ventures and Peregrine Ventures II
(venture capital firms); Chairman of the Board and Director,
Quarterdeck Office Systems, Inc.; Director, FischerImaging
Corporation; and director or trustee, as the case may be, of 26 of
the investment companies in the Franklin Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Trustee
Chairman, White River Corporation (information services); Director,
Fund American Enterprises Holdings, Inc., Lockheed Martin
Corporation, MCI Communications Corporation, MedImmune, Inc.
(biotechnology), InfoVest Corporation (information services), and
Fusion Systems Corporation (industrial technology); and director,
trustee or managing general partner, as the case may be, of 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)
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 42 of the investment companies in the
Franklin Templeton Group of Funds.
Kenneth V. Domingues (62)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers,
Inc., and Franklin Templeton Distributors, Inc.; officer and/or
director, as the case may be, of other subsidiaries of Franklin
Resources, Inc.; and Officer and/or managing general partner, as the
case may be, of 37 of the investment companies in the Franklin Group
of Funds.
Martin L. Flanagan (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer,
Franklin Resources, Inc.; Executive Vice President, Templeton
Worldwide, Inc.; Senior Vice President and Treasurer, Franklin
Advisers, Inc. and Franklin Templeton Distributors, Inc.; Senior
Vice President, Franklin/Templeton Investor Services, Inc.; officer
of most other subsidiaries of Franklin Resources, Inc.; and officer
of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (46)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Secretary
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc.
and officer of 37 of the investment companies in the Franklin Group of
Funds.
Charles E. Johnson (39)
777 Mariners Island Blvd.
San Mateo CA 94404
Vice President
Senior Vice President and Director, Franklin Resources, Inc.; Senior
Vice President, Franklin Templeton Distributors, Inc.; President and
Director, Templeton Worldwide, Inc. and Franklin Institutional
Services Corporation; officer and/or director, as the case may be,
of some of the subsidiaries of Franklin Resources, Inc. and officer
and/or director or trustee, as the case may be, of 24 of the
investment companies in the Franklin Templeton Group of Funds.
Diomedes Loo-Tam (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the
investment companies in the Franklin Group of Funds.
Edward V. McVey (58)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President/National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 32 of the investment companies in
the Franklin Group of Funds.
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(Registered Trademark) 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 BOARDS IN THE
TOTAL FEES RECEIVED FROM THE FRANKLIN TEMPLETON GROUP
RECEIVED FROM FRANKLIN TEMPLETON OF FUNDS ON WHICH EACH
NAME TRUST* GROUP OF FUNDS** 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 112 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 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 PAYMENTS TO
FUND ADVERTISINPROSPECTUSES BROKER-DEALERS
(OTHER THAN TO CURRENT
SHAREHOLDERS)
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:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five-, or ten-year periods at the end of the
one-, five-, or ten-year periods (or fractional portion thereof)
As discussed in each 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:
Yield = 2[(A-B + 1)6 - 1]
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Yield, which is calculated according to a formula prescribed by the SEC, is not
indicative of the amounts which were or will be paid to the Funds' shareholders.
Amounts paid to shareholders are reflected in the quoted "current distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by a Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of time.
The current distribution rate for 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
1
<PAGE>
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.
2
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
FRANKLIN INVESTORS SECURITIES TRUST
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Franklin Investors Securities Trust (the Trust) is an open-end management
investment company (mutual fund) registered under the Investment Company Act of
1940 as amended. The Trust currently has six separate funds (the Funds) in
operation consisting of five separate diversified Funds: Franklin
Short-Intermediate U.S. Government Securities Fund (the Short-Intermediate
Fund), Franklin Convertible Securities Fund (the Convertible Fund), Franklin
Adjustable U.S. Government Securities Fund (the Adjustable U.S. Government
Fund), Franklin Equity Income Fund (the Equity Income Fund), and Franklin
Adjustable Rate Securities Fund (the Adjustable Rate Fund); and one
non-diversified Fund: Franklin Global Government Income Fund (the Global Fund).
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
ADJUSTABLE RATE SECURITIES PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Adjustable Rate Securities Portfolios (the Trust) is a no load, open-end,
diversified management investment company (mutual fund) registered under
the Investment Company Act of 1940 as amended. The Trust currently has two
separate portfolios (the Portfolios) consisting of the U.S. Government
Adjustable Rate Mortgage Portfolio (Mortgage Portfolio) and 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
47
FRANKLIN INVESTORS SECURITIES TRUST
File Nos. 33-11444 & 811-4986
FORM N-1A
PART C: OTHER INFORMATION
ITEM 24 FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements
1) Audited financial statements filed in Part B are incorporated
herein by reference to Part B of Form Type 485BPOS filed by
Registrant with the SEC, on April 24, 1995, Accession Number
0000809707-95-000004.
(i) Report of Independent Auditors - December 7, 1994
(ii) Statements of Investments in Securities and Net Assets -
October 31, 1994
(iii)Statements of Assets and Liabilities - October 31, 1994
(iv) Statements of Operations - for the year ended October 31,
1994
(v) Statements of Changes in Net Assets - for the year ended
October 31, 1994 and for the nine months ended October 31,
1993.
(vi) Notes to Financial Statements
2. Unaudited Financial Statements dated April 30, 1995, are incorporated
herein by reference to the Registrant's Semi-Annual Report to
Shareholders as filed with the SEC on Form Type N-30D on June 29, 1995
(i) Statement of Investments in Securities and Net Assets -
April 30, 1995
(ii) Statement of Assets and Liabilities dated April
30, 1995
(iii) Statement of Operations for the six months ended
April 30, 1995
(iv) Statements of Changes in Net Assets for the six months ended
April 30, 1995 and for the year ended October 31, 1994
(v) Notes to Financial Statements
b) Exhibits:
The following exhibits are incorporated by reference as noted except 11(i),
15(viii), 15(ix) and 18(i) which are attached:
(1) copies of the charter as now in effect;
(i) Agreement and Declaration of Trust dated December 16, 1986
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(ii) Certificate of Amendment to Agreement and Declaration of
Trust dated March 13, 1990
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(iii)Certificate of Amendment of Agreement and Declaration of
Trust dated March 21, 1995
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4986
Filing Date: April 24, 1995
(2) copies of the existing By-Laws or instruments corresponding
thereto;
(i) By-Laws
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(ii) Amendment to By-Laws dated February 28, 1994
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the
rights of the holders of such securities, and copies of each
security being registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the
management of the assets of the Registrant;
(i) Management Agreement dated April 15, 1987 between Franklin
Investors Securities Trust and Franklin Advisers, Inc.
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(ii) Administration Agreement dated June 3, 1991 between
Franklin Adjustable U.S. Government Securities Fund and
Franklin Advisers, Inc.
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(iii)Administration Agreement dated December 26, 1991 between
Franklin Adjustable Rate Securities Fund and Franklin
Advisers, Inc.
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(iv) Subadvisory Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. providing for service to
Franklin Investors Securities Trust on behalf of the
Franklin Global Government Income Fund dated May 1, 1994.
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Form of Amended and Restated Distribution Agreement between
Registrant and Franklin/Templeton Distributors, Inc.
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(ii) Form of Dealer Agreement between Franklin/ Templeton
Distributors, Inc. and securities dealers
Registrant: Frankin Federal Tax-Free Income Fund
Filing: Post Effective Amendment No. 17 to Registration
Statement on Form N1-A
File No. 2-75925
Filing Date: March 28, 1995
(7) copies of all bonus, profit sharing, pension or other similar
contracts or arrangements wholly or partly for the benefit of
trustees or officers of the Registrant in their capacity as such;
any such plan that is not set forth in a formal document, furnish a
reasonably detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and
similar investments of the Registrant, including the schedule of
remuneration;
(i) Custody Agreement between Registrant and Bank of America
National Trust and Savings Association dated March 12, 1993
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(ii) Amendment to Custodian Agreement between Registrant and Bank
of America National Trust and Savings Association dated
December 1, 1994:
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 54 to Registration on
Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(iii) Copy of Custodian Agreements between Registrant and
Citibank Delaware:
1. Citicash Management ACH Customer Agreement
2. Citibank Cash Management Services Master Agreement
3. Short Form Bank Agreement - Deposits and
Disbursements of Funds
Registrant: Franklin Premier Return Fund
Filing: Post-Effective Amendment No. 54 to Registration
on Form N-1A
File No. 2-12647
Filing Date: February 27, 1995
(9) copies of all other material contracts not made in the ordinary
course of business which are to be performed in whole or in part at
or after the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the
securities being registered, indicating whether they will when sold
be legally issued, fully paid and nonassessable;
Not Applicable
(11) copies of any other opinions, appraisals or rulings and consents to
the use thereof relied on in the preparation of this registration
statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Letter of Understanding dated April 12, 1995
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Franklin IRA Form
Registrant: Age High Income Fund
Filing: Post-effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(ii) Franklin 403(b) Retirement Plan
Registrant: Age High Income Fund
Filing: Post-effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(iii)Franklin Trust Company Insured CD IRA
Registrant: Age High Income Fund
Filing: Post-effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(iv)Franklin Business Retirement Plans
Registrant: Age High Income Fund
Filing: Post-effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(v) Franklin SEP-IRA (5305-SEP and 5305A-SEP)
Registrant: Age High Income Fund
Filing: Post-effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Distribution Plan between Franklin Global Government Income
Fund and Franklin/Templeton Distributors, Inc., effective
May 1, 1994
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(ii) Distribution Plan between Franklin Short-Intermediate U.S.
Government Securities Fund and Franklin/Templeton
Distributors, Inc., Effective May 1, 1994
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(iii)Distribution Plan between Franklin Convertible Securities
Fund and Franklin/Templeton Distributors, Inc., effective
May 1, 1994
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(iv) Amended and restated Distribution Plan between Franklin
Adjustable U.S. Government Securities Fund and
Franklin/Templeton Distributors, Inc. effective July 1, 1993
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(v) Distribution Plan between Franklin Equity Income Fund and
Franklin/Templeton Distributors, Inc., effective May 1,
1994
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(vi) Amended and restated Distribution Plan between Franklin
Adjustable Rate Securities Fund and Franklin/Templeton
Distributors, Inc., effective July 1, 1993
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(vii) Class II Distribution Plan pursuant to Rule 12b-1 on behalf
of Franklin Global Government Income Fund Effective March
30, 1995
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(viii)Form of Class II Distribution Plan pursuant to Rule 12b-1 on
behalf of Franklin Convertible Securities Fund
(ix)Form of Class II Distribution Plan pursuant to Rule 12b-1 on
behalf of Franklin Equity Income Fund
(16) Schedule for computation of each performance quotation provided in
the registration statement in response to Item 22 (which need not be
audited).
(i) Schedule for computation of performance quotation
Registrant: Franklin Tax-Advantaged U.S.
Government Securities Fund
Filing: Post Effective Amendment No. 8 to
Registration Statement of Registrant on Form
N-1A
File No. 33-11963
Filing Date: March 1, 1995
(17) Power of Attorney
(i) Power of Attorney dated February 16, 1995
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(ii) Certificate of Secretary dated February 16, 1995
Filing: Post Effective Amendment No. 15 to
Registration Statement on Form N1-A
File Nos. 33-11444 and 811-4968
Filing Date: April 24, 1995
(18) Copies of any plan entered into by registrant pursuant to Rule
18f-3 under the 1940 Act
(i) Form of Multiple Class Plan
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of June 30, 1995, the number of shareholders of record of Registrant's shares
were as follows:
<TABLE>
<CAPTION>
NUMBER OF RECORD HOLDERS
Class I Class II
<S> <C> <C>
Franklin Convertible Securities Fund 5,721 None
Franklin Equity Income Fund 10,260 None
</TABLE>
ITEM 27. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court or appropriate
jurisdiction the question whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The officers and directors of the Registrant's investment adviser also serve as
officers and/or directors for (1) the adviser's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Group of
Funds. For additional information, please see Part B.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Franklin/Templeton Distributors, Inc.("Distributors") also acts as principal
underwriter of shares of AGE High Income Fund, Inc., Franklin Custodian Funds,
Inc. , Franklin Tax-Exempt Money Fund, Franklin Equity Fund, Franklin Gold Fund,
Franklin Municipal Securities Trust, Franklin California Tax-Free Income Fund,
Inc., Franklin New York Tax-Free Income Fund, Inc., Franklin California Tax-Free
Trust, Franklin Premier Return Fund, Franklin Tax-Free Trust, Franklin New York
Tax-Free Trust, Franklin Strategic Mortgage Portfolio, Franklin Strategic
Series, Franklin International Trust, Franklin Tax-Advantaged International Bond
Fund, Franklin Tax-Advantaged U.S. Government Securities Fund, Franklin
Tax-Advantaged High Yield Securities Fund, Franklin Managed Trust, Franklin
Balance Sheet Investment Fund, Franklin Federal Tax- Free Income Fund,
Institutional Fiduciary Trust, Franklin Money Fund, Franklin Federal Money Fund,
Franklin/Templeton Global Trust, Templeton Global Investment Trust, Templeton
Variable Annuity Fund, Templeton Variable Products Series Fund, Templeton Real
Estate Securities Fund, Templeton Growth Fund, Inc., Templeton Funds, Inc.,
Templeton Smaller Companies Growth Fund, Inc., Templeton Income Trust, Templeton
Global Opportunities Trust, Templeton Institutional Funds, Inc., Templeton
American Trust, Inc., Templeton Capital Accumulator Fund, Inc., and Templeton
Developing Markets Trust and Franklin/Templeton Japan Fund.
(b) The information required by this Item 29 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
Schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 (SEC File No.
8-5889).
(c) Not Applicable. Registrant's principal underwriter is an affiliated
person of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31
(a) of the Investment Company Act of 1940 and the Rules thereunder are kept by
the Registrant or its shareholder services agent, Franklin/Templeton Investor
Services, Inc., both of whose address is 777 Mariners Island Blvd., San Mateo,
California 94404.
ITEM 31. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to promptly call a meeting of shareholders for
the purpose of voting upon the question of removal of any trustee or trustees
when requested in writing to do so by the record holders of not less than 10 per
cent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940.
(b) The Registrant hereby undertakes to comply with the information requirement
in Item 5A of the Form N-1A by including the required information in the Trust's
annual report and to furnish each person to whom a prospectus is delivered a
copy of the annual report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Mateo and the State of California, on the 2nd
day of August, 1995.
FRANKLIN INVESTORS SECURITIES TRUST
(Registrant)
By: EDWARD B. JAMIESON*
Edward B. Jamieson, President
Pursuant to the requirements of the Securities Act of 1933 this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
EDWARD B. JAMIESON* Trustee and Principal Executive Officer
Edward B. Jamieson Dated: August 2, 1995
MARTIN L. FLANAGAN* Principal Financial Officer
Martin L. Flanagan Dated: August 2, 1995
DIOMEDES LOO-TAM* Principal Accounting Officer
Diomedes Loo-Tam Dated: August 2, 1995
FRANK H. ABBOTT III* Trustee
Frank H. Abbott III Dated: August 2, 1995
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: August 2, 1995
S. JOSEPH FORTUNATO* Trustee
S. Joseph Fortunato Dated: August 2, 1995
DAVID W. GARBELLANO* Trustee
David W. Garbellano Dated: August 2, 1995
CHARLES B. JOHNSON* Trustee
Charles B. Johnson Dated: August 2, 1995
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: August 2, 1995
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: August 2, 1995
GORDON S. MACKLIN* Trustee
Gordon S. Macklin Dated: August 2, 1995
*By/s/Larry L. Greene
Larry L. Greene, Attorney-in-Fact
Pursuant to Power of Attorney previously filed
FRANKLIN INVESTORS SECURITIES TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. IN
SEQUENTIAL
NUMBERING SYSTEM
EX-99.B1(i) Agreement and Declaration of Trust *
dated December 16, 1986
EX-99.B1(ii) Certificate of Amendment to *
Agreement and Declaration of Trust
dated August 11, 1987
EX-99.B1(iii) Certificate of Amendment to *
Agreement and Declaration of Trust
dated March 21, 1995
EX-99.B2(i) By-Laws *
EX-99.B2(ii) Amendment to By-Laws dated February *
28, 1994
EX-99.B5(i) Management Agreement between *
Registrant and Franklin Advisers,
Inc. dated April 15, 1987
EX-99.B5(ii) Administration Agreement between *
Franklin Adjustable U.S. Government
Securities Fund and Franklin
Advisers, Inc. dated June 3, 1991
EX-99.B5(iii) Administration Agreement between *
Franklin Adjustable Rate Securities
Fund and Franklin Advisers, Inc.
dated December 26, 1991
EX-99.B5(iv) Sub-advisory Agreement between *
Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc.
Dated May 1, 1994
EX-99.B6(i) Form of Amended and Restated *
Distribution Agreement between
Registrant and Franklin
Distributors Inc.
EX-99.B6(ii) Form of Dealer Agreements between *
Registrant and Franklin/Templeton
Distributors, Inc.
EX-99.B8(i) Custody Agreement between *
Registrant and Bank of America
National Trust and Savings
Association dated March 12, 1993
EX-99.B8(ii) Amendment to Custodian Agreement *
between Registrant and Bank of
America, National Trust and Savings
Association dated December 1, 1994
EX-99.B8(iii) Copy of Custodian Agreements *
between Registrant and Citibank
Delaware
EX-99.B10(i) Opinion and consent of counsel *
EX-99.B11(i) Consent of Independent Auditors to Attached
Report for Franklin Investors
Securities Trust
EX-99.B13(i) Letter of Understanding dated April *
12, 1995
EX-99.B14(i) Franklin IRA Form Filed August 1, *
1989
EX-99.B14(ii) Franklin 403(b) Retirement Plan *
filed August 1, 1989
EX-99.B14(iii) Franklin Trust Company Insured CD *
IRA Filed August 1, 1989
EX-99.B14(iv) Franklin Business Retirement Plans *
filed August 1, 1989
EX-99.B14(v) Franklin SEP-IRA (5305-SEP and *
5305A-SEP) filed August 1, 1989
EX-99.B15(i) Distribution Plan between Franklin *
Global Government Income Fund and
Franklin/Templeton Distributors,
Inc. Effective May 1, 1994
EX-99.B15(ii) Distribution Plan between Franklin *
Short-Intermediate U.S. Government
Securities Fund and
Franklin/Templeton Distributors,
Inc. Effective May 1, 1994
EX-9.B15(iii) Distribution Plan between Franklin *
Convertible Securities Fund and
Franklin/Templeton Distributors,
Inc. Effective May 1, 1994
EX-99.B15(iv) Amended and Restated Distribution *
Plan between Franklin Adjustable
U.S. Government Securities Fund and
Franklin/Templeton Distributors,
Inc. Effective July 1, 1994
EX-99.B15(v) Distribution Plan between Franklin *
Equity Income Fund and
Franklin/Templeton Distributors,
Inc. Effective May 1, 1994
EX-99.B15(vi) Amended and Restated Distribution *
Plan between Franklin Adjustable
Rate Securities Fund and
Franklin/Templeton Distributors,
Inc. Effective July 1, 1993
EX-99.B15(vii) Class II Distribution Plan pursuant *
to Rule 12b-1 on behalf of Franklin
Global Government Income Fund
Effective March 30, 1995
EX-99.B15(viii) Form of Class II Distribution Plan Attached
pursuant to Rule 12b-1 on behalf of
Franklin Convertible Securities Fund
EX-99.B15(ix) Form of Class II Distribution Plan Attached
pursuant to Rule 12b-1 on behalf of
Franklin
EX-99.B16(i) Schedule for computation of *
performance quotation
EX-99.B17(i) Power of Attorney *
EX-99.B17(ii) Certificate of Secretary *
EX-99.B18(i) Form of Multiple Class Plan Attached
*Incorporated by Reference
CONSENT OF INDEPENDENT AUDITORS
To the Board of Trustees of
Franklin Investors Securities Trust
We consent to the incorporation by reference in Post-Effective Amendment No.
16 to the Registration Statement of Franklin Investors Securities Trust on
Form N-1A (File Nos. 33-11444 and 811-4986) of our report dated December 7,
1994 on our audit of the financial statements and financial highlights of the
Trust, which report is included in the Annual Report to Shareholders for the
year ended October 31, 1994, which is incorporated by reference in the
Registration Statement.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
San Francisco, California
August 2, 1995
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN INVESTORS SECURITIES TRUST
II. Fund and Class: FRANKLIN CONVERTIBLE SECURITIES FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors or
Trustees of the Investment Company (the "Board"), including a majority of the
Board members who are not interested persons of the Investment Company and who
have no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: __________________, 1995
Investment Company
By:________________________________
Franklin/Templeton Distributors, Inc.
By:_____________________________________
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN INVESTORS SECURITIES TRUST
II. Fund and Class: FRANKLIN EQUITY INCOME FUND - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors or
Trustees of the Investment Company (the "Board"), including a majority of the
Board members who are not interested persons of the Investment Company and who
have no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: __________________, 1995
Investment Company
By:________________________________
Franklin/Templeton Distributors, Inc.
By:_____________________________________
Franklin Fund
Form of Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of [Directors/Trustees] of the Franklin
Fund (the "Fund") [for its series]. The Board has
determined that the Plan is in the best interests of each class
and the Fund as a whole. The Plan sets forth the provisions
relating to the establishment of multiple classes of shares for
the Fund.
1. The Fund shall offer two classes of shares, to be
known as Franklin Fund - Class I and Franklin
Fund - Class II.
2. Class I shares shall carry a front-end sales charge ranging
from
[ % - %], and Class II shares shall carry a front-end
sales charge of 1.00%.
3. Class I shares shall not be subject to a contingent deferred
sales charge ("CDSC") except in the following limited
circumstances. On investments of $1 million or more, a contingent
deferred sales charge of 1.00% of the lesser of the then-current
net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the
contingency period of 12 months from the calendar month following
their purchase. The CDSC is waived in certain circumstances, as
described in the Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase
shall be assessed a CDSC of 1.00% on the lesser of the then-
current net asset value or the original net asset value at the
time of purchase. The CDSC is waived in certain circumstances as
described in the Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be used
to reimburse Franklin/Templeton Distributors, Inc. (the
"Distributor") or others for expenses incurred in the promotion
and distribution of the shares of Class I. Such expenses include,
but are not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of
the Distributor's overhead expenses attributable to the
distribution of Class 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 for the
Class, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two
components. The first component is a shareholder servicing fee,
to be paid to broker-dealers, banks, trust companies and others
who will provide personal assistance to shareholders in servicing
their accounts. The second component is an asset-based sales
charge to be retained by the Distributor during the first year
after sale of shares, and, in subsequent years, to be paid to
dealers or retained by the Distributor to be used in the
promotion and distribution of Class II shares, in a manner
similar to that described above for (Class I shares.
The Plans shall operate in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.,
Article III, section 26(d).
6. The only difference in expenses as between Class I and Class
It shares shall relate to differences in the Rule 12b-1 plan
expenses of each class, as described in each class' Rule 12b-1
Plan.
7. There shall be no conversion features associated with the
Class I and Class II shares.
8. Shares of Class I of the Fund may only be exchanged for shares
of Class I of any other fund in the Franklin/Templeton Group and
may not be exchanged into the Franklin/Templeton Money Fund I! of
the Franklin/Templeton Money Fund Trust. Shares of Class II of
the Fund may only be exchanged for shares of Class II of any
other fund in the Franklin/Templeton Group and may also be
exchanged into the Franklin/Templeton Money Fund II of the
Franklin/Templeton Money Fund Trust.
9. Each Class will vote separately with respect to the Rule 12b-1
Plan related to that Class.
10. On an ongoing basis, the [directors/trustees] pursuant to
their fiduciary responsibilities under the 1940 Act and
otherwise, will monitor the Fund for the existence of any
material conflicts between the interests of the two classes of
shares. The [directors/trustees], including a majority of the
independent [directors/trustees], shall take such action as is
reasonably necessary to eliminate any such conflict that may
develop. Franklin Advisers, Inc. and Franklin/Templeton
Distributors, Inc. shall be responsible for alerting the Board to
any material conflicts that arise.
11. All material amendments to this Plan must be approved by a
majority of the [directors/trustees] of the Fund, including a
majority of the [directors/trustees] who are not interested
persons of the Fund.
SCHEDULE A
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
Franklin Gold Fund Franklin Gold Fund - Class II; 232
Franklin Equity Fund Franklin Equity Fund - Class II; 234
AGE High Income Fund, Inc. AGE High Income Fund - Class II; 205
Franklin Custodian Funds, Inc. Growth Series - Class II; 206
Utilities Series - Class II; 207
Income Series - Class II; 209
U.S. Government Securities
Series - Class II; 210
Franklin California Tax-Free Franklin California Tax-Free Income
Income Fund, Inc. Fund - Class II; 212
Franklin New York Tax-Free Franklin New York Tax-Free Income
Income Fund, Inc. Fund - Class II; 215
Franklin Federal Tax-Free Franklin Federal Tax-Free Income
Income Fund Fund -Class II; 216
Franklin Managed Trust Franklin Rising Dividends
Fund - Class II; 258
Franklin California Tax-Free Franklin California Insured Tax-Free
Trust
Income Fund - Class II; 224
Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free
Income Fund - Class II; 281
Franklin Investors Securities Franklin Global Government Income
Trust
Fund - Class II; 235
Franklin Equity Income
Fund - Class II; 239
Franklin Strategic Series Franklin Global Utilities
Fund - Class II; 297
Franklin Real Estate Securities Franklin Real Estate Securities
Trust
Fund - Class II; 292
INVESTMENT COMPANY FUND AND CLASS; TITAN NUMBER
Franklin Tax-Free Franklin Alabama Tax-Free Income Fund - Class II; 264
Trust Franklin Arizona Tax-Free Income Fund - Class II; 226
Franklin Colorado Tax-Free Income Fund - Class II; 227
Franklin Connecticut Tax Free Income
Fund - Class II; 266
Franklin Florida Tax-Free Income Fund - Class II; 265
Franklin Georgia Tax-Free Income Fund - Class II; 228
Franklin High Yield Tax-Free Income Fund - Class II; 230
Franklin Insured Tax-Free Income Fund - Class II; 221
Franklin Louisiana Tax-Free Income Fund - Class II; 268
Franklin Maryland Tax-Free Income Fund - Class II; 269
Franklin Massachusetts Insured Tax-Free Income
Fund - Class II; 218
Franklin Michigan Insured Tax-Free Income
Fund - Class II; 219
Franklin Minnesota Insured Tax-Free Income
Fund - Class II; 220
Franklin Missouri Tax-Free Income Fund - Class II; 260
Franklin New Jersey Tax-Free Income
Fund - Class II; 271
Franklin North Carolina Tax-Free Income
Fund - Class II; 270
Franklin Ohio Insured Tax-Free Income
Fund - Class II; 222
Franklin Oregon Tax-Free Income Fund - Class II; 261
Franklin Pennsylvania Tax-Free Income
Fund - Class II; 229
Franklin Puerto Rico Tax-Free Income
Fund - Class II; 223
Franklin Texas Tax-Free Income Fund - Class II; 262
Franklin Virginia Tax-Free Income Fund - Class II; 263
