TFS-P
SUPPLEMENT TO THE PROSPECTUS
DATED MARCH 1, 1995
(each as previously supplemented February 1, 1995 and as
may be
further amended and supplemented)
Age High Income Fund Fund
Dated October 1, 1994
Franklin Balance Sheet Investment Fund
Dated March 1, 1995
Franklin California Tax-Free Income Fund, Inc.
Dated August 1, 1994
Franklin California Insured Tax-Free Income Fund
Dated November 1, 1994
Franklin California Intermediate-Term Tax-Free Income Fund,
Dated
November 1, 1994
Franklin Custodian Funds, Inc.
(FCF - Growth, Utilities, DynaTech, Income And U.S.
Government
Securities Series)
and the separate prospectuses for Income Series and U.S.
Government Securities Series
All Dated February 1, 1995
Franklin Equity Fund
Dated November 1, 1994, as Amended January 19, 1995
Franklin Federal Tax-Free Income Fund
Dated September 1, 1994
Franklin Gold Fund
Dated December 1, 1994
Franklin Pacific Growth Fund
Dated March 1, 1995
Franklin International Equity Fund
Dated March 1, 1995
Franklin Global Government Income Fund
Dated March 1, 1995
Franklin Short-Intermediate U.S. Government Securities
Fund,
Dated March 1, 1995
Franklin Convertible Securities Fund
Dated March 1, 1995
Franklin Adjustable U.S. Government Securities Fund
Dated March 1, 1995
Franklin Equity Income Fund
Dated March 1, 1995
Franklin Adjustable Rate Securities Fund
Dated March 1, 1995
Franklin Corporate Qualified Dividends Fund
Dated February 1, 1995
Franklin Rising Dividends Fund Dated
February 1, 1995
Franklin Investment Grade Income Fund
Dated February 1, 1995
Franklin Municipal Securities Trust
(Hawaii, Washington, Tennessee and Arkansas Municipal Bond
Funds)
Dated October 1, 1994
Franklin California High Yield Municipal Fund
Dated October 1, 1994
Franklin New York Tax-Free Income Fund, Inc.
Dated October 1, 1994
Franklin New York Insured Tax-Free Income Fund
Dated May 1, 1994
Franklin New York Intermediate-Term Tax Free Income Fund
Dated May 1, 1994
Franklin Partners Funds
(FPF - Franklin Tax-Advantaged International Bond, U.S.
Government Securities and High Yield Securities Funds)
Dated May 1, 1994, as Amended October 21,
1994 Franklin Premier Return Fund
Dated May 1, 1994, As Amended September 8, 1994
Franklin Real Estate Securities Fund
Dated September 1, 1994
Franklin Strategic Mortgage Portfolio
Dated February 1, 1995
Franklin California Growth Fund
Dated September 1, 1994, as Amended
November 11, 1994 Franklin Strategic
Income Fund
Dated December 30, 1994
Franklin Global Utilities Fund
Dated September 1, 1994
Franklin Small Cap Growth Fund
Dated September 1, 1994
Franklin Federal Intermediate Tax-Free Income Fund
Dated July 1, 1994, as amended September 30, 1994
Franklin Tax Free Trust
(TF1 - Insured, Massachusetts Insured, Michigan Insured,
Minnesota Insured, Ohio Insured, Arizona Insured and
Florida
Insured Tax-Free Income Funds)
Dated July 1, 1994,
(TF2 - Alabama, Florida, Georgia, Kentucky, Louisiana,
Maryland,
Missouri, North Carolina, Texas and Virginia Tax-Free
Income
Funds)
Dated July 1, 1994, As Amended October 4, 1994
(TF3 - Arizona, Colorado, Connecticut, Indiana, New Jersey,
Ohio,
Oregon, Pennsylvania, Puerto Rico and High Yield Tax-Free
Income
Funds)
Dated July 1, 1994, As Amended October 4, 1994
Franklin Templeton German Government Bond Fund
Dated March 1, 1995
Franklin Templeton International Currency Funds
(Global, High and High Income Currency Funds)
Dated March 1, 1995
During the period March 1, 1995
through April 30, 1995, the
securities firm of TFS Securities,
Inc., ("TFS") will receive the
full front-end sales commission with
respect to purchases originated by
TFS, from Franklin Templeton
Distributors, Inc.,
the principal underwriter for the
above funds.
FRANKLIN SHORT-INTERMEDIATE U.S. GOVERNMENT
SECURITIES FUND FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open
end management investment company consisting of both
diversified and non-diversified separate series. Each series
of the Trust in effect represents a separate fund with its
own investment objectives and policies, with varying
possibilities for income or capital appreciation, and
subject to varying market risks. Through the different
series, the Trust attempts to satisfy different investment
objectives.
This Prospectus pertains only to the Franklin Short
Intermediate U.S. Government Securities Fund (the "Fund"), a
diversified series, which invests in a portfolio of U.S.
government securities, with primary emphasis on securities
with remaining maturities of 3 1U2 years or less. The Fund's
investment objective is to provide as high a level of
current income consistent with prudent investing while
seeking preservation of shareholder's capital. The Fund will
invest in obligations of the U.S. government and its
agencies or instrumentalities. The Fund is designed for
individuals and institutional accounts, such as
corporations, banks, savings and loan associations, trust
companies, and other entities. There can, of course, be no
assurance that the Fund's objectives will be achieved.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information concerning the Fund
and other series of the Trust, dated March 1, 1995, as may
be amended from time to time, provides a further discussion
of certain areas in this Prospectus and other matters which
may be of interest to some investors. It has been filed with
the Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown
above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus is intended to set forth in a clear and
concise manner information about the Fund that a prospective
investor should know before investing. After reading the
Prospectus, it should be retained for future reference; it
contains information about the purchase and sale of shares
and other items which the prospective investor will find
useful to have.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT
AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON
IS AUTHORIZED
TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS. FURTHER INFORMATION MAY
BE OBTAINED FROM THE UNDERWRITER.
CONTENTS PAGE
Expense Table
Financial Highlights
About the Trust
Investment Objectives
Eand Policies of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
Eand Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund
Ein Connection with Retirement Plans
EInvolving Tax-Deferred Investments
Other Programs and Privileges
EAvailable to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding
Ean Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
ETaxpayer IRS Certifications
Portfolio Operations
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a
shareholder will bear directly or indirectly in connection
with an investment in the Fund. These figures are based on
aggregate operating expenses of the Fund (before fee waivers
and expense reductions) for the fiscal year ended October 31,
1994.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
E(as a percentage of offering price)
2.25% Deferred Sales Charge
NONE* Exchange Fee (per transaction)
$5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
0.54%+ Maximum 12b-1 Fees
0.07%*** Other Expenses:
EEShareholder Servicing Costs
0.02% EEReports to Shareholders
0.04% EEOther
0.05%
Total Other Expenses
0.11% Total Fund Operating Expenses
0.72%**+
*Investments of $1 million or more are not subject to a front-
end sales charge, but a contingent deferred sales charge of 1%
is
imposed on certain redemptions within 12 months of the
calendar month following such investments. See "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."
**$5.00 fee only imposed on Timing Accounts as described
under "Exchange Privilege." All other exchanges are processed
without a fee.
*** Based on the initial rate of Rule 12b-1 fees as discussed
in "Plan of Distribution" under "Management of the Fund."
Actual Rule 12b-1 fees incurred by the Fund for the six
months ended October 31, 1994 were 0.03%, which represents an
annualized rate of 0.06%. 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 longterm shareholders to pay more
than the economic equivalent of the maximum front-end sales
charges permitted under those same rules.
+ Based on the amount that would have been payable to the
investment manager, absent a fee reduction by the investment
manager. The investment manager, however, agreed in advance
to limit its management fee and to assume responsibility for
making payments to offset certain operating expenses
otherwise payable by the Fund. With this reduction,
management fees and total operating expenses represented
0.52% and 0.70%, respectively, of the average net assets of
the Fund. This arrangement may be terminated by the
investment manager at any time.
Investors should be aware that the above table is not
intended to reflect in precise detail the fees and expenses
associated with an individual's own investment in the Fund.
Rather the table has been provided only to assist investors
in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters,
investors should refer to the appropriate sections of this
Prospectus.
EXAMPLE
As required by regulations of the SEC, the following example
illustrates the expenses, including the initial sales charge,
that apply to a $1,000 investment in the Fund over various
time periods assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period. As noted in the
table above, the Fund charges no redemption fees:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$30 $45 $62 $110
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING
EXPENSES, BEFORE FEE WAIVERS OR EXPENSE REDUCTIONS, SHOWN
ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund, and only
indirectly by shareholders as a result of their investment in
the Fund. See "Management of the Fund" for description of the
Fund's expenses. In addition, federal regulations require the
example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial
highlights for a share of the Fund throughout the periods
from the effective date of registration (April 15, 1987) to
January 31, 1993, for the nine-month period from February 1,
1993 to October 31, 1993, and for the fiscal year ended
October 31, 1994. The
information for each of the last five fiscal periods has been
audited by Coopers & Lybrand, L.L.P., independent auditors,
whose audit report appears in the financial statements in the
Trust's Statement of Additional Information, a copy of which
may be
obtained as noted on the front cover of this Prospectus. The
remaining figures, which are also audited, are not covered by
the auditor's current report.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
-------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS(LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $.64 $ .045 $.685 $(.305) $ - $(.305) $10.38
1989 10.38 .78 (.300) .480 (.740) - (.740) 10.12
1990 10.12 .78 .097 .877 (.837) - (.837) 10.16
1991 10.16 .76 .248 1.008 (.864) (.004) (.868) 10.30
1992 10.30 .58 .374 .954 (.786) (.078) (.864) 10.39
1993 10.39 .57 .432 1.002 (.565) (.257) (.822) 10.57
1993(2) 10.57 .38 .245 .625 (.390) (.005) (.395) 10.80
1994(3) 10.80 .49 (.696) (.206) (0.472) (.092) (.564) 10.03
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
----------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
AT END EXPENSES INCOME PORTFOLIO
PERIOD TOTAL OF YEAR TO AVERAGE TO AVERAGE TURNOVER
ENDED RETURN++ (IN 000'S) NET ASSETS NET ASSETS ++ RATE
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1988(1) 6.33% $20,636 .14%* 6.5%* 13.14%
1989 4.63 29,150 .25 7.72 111.75
1990 8.78 30,996 .27 7.60 151.36
1991 10.19 48,981 .48 7.56 71.44
1992 9.44 163,690 .71 5.90 102.05
1993 10.01 235,382 .56 5.40 78.96
1993(2) 5.90 273,678 .55* 4.75* 31.71
1994(3) (1.99) 225,352 .65 4.75 99.09
</TABLE>
1 For the period April 15, 1987 (effective date of registration)
to January 31, 1988.
2 For the nine months ended October 31, resulting from a change
in fiscal year from January 31.
3 For the fiscal year ended October 31, 1994.
* Annualized.
+ Selected data for a share of capital stock outstanding throughout
the period.
++ Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value. During the periods indicated, Franklin Advisers, Inc., the investment
manager, reduced its management fees and reimbursed other expenses incurred by
the Funds in the Trust. Had such action not been taken, the ratios of
operating expenses to average net assets would have been as follows:
1988(1) .81% (annualized)
1989 .79
1990 .77
1991 .74
1993 .65
1993(2) .63 (annualized)
1994 .68
ABOUT THE TRUST
The Trust is an open-end management investment company, or
mutual fund, organized as a Massachusetts business trust on
December 16, 1986 and registered with the SEC under the 1940
Act. The Fund and the additional diversified and non-
diversified series of the Trust, each issue a separate series
of shares of beneficial interest.
Shares of the Fund may be purchased (minimum investment of
$100 initially and $25 thereafter) at the current public
offering price, which is equal to the Fund's net asset value
(see "Valuation of Fund Shares") plus a sales charge based
upon a variable percentage (ranging from 2.25% to less than
0.25% of the offering price) depending upon the amount
invested. (See "How to Buy Shares of the Fund.")
INVESTMENT OBJECTIVES
AND POLICIES OF THE FUND
The Fund seeks to provide investors with as high a level of
current income as is consistent with prudent investment
practices, while also seeking preservation of shareholders'
capital. The objectives are a fundamental policy of the Fund
and may not be changed without shareholder approval. The Fund
intends to invest up to 100% of its total net assets in U.S.
government securities. As a fundamental policy of the Fund
(which may only be changed with shareholder approval), the
Fund must invest at least 65% of the Fund's total net assets
in U.S. government securities. It is the investment policy of
the Fund (which may be changed upon notice to shareholders)
to maintain the average dollar weighted maturity of its
portfolio in a range of two to five years. Within this range,
the Fund intends to emphasize an average weighted maturity of
3 1U2 years or less.
The Fund may invest in obligations either issued or
guaranteed by the U.S. government and its agencies or
instrumentalities including, but not limited to: direct
obligations of the U.S. Treasury, such as U.S. Treasury
bills, notes and bonds; and obligations of U.S. government
agencies or instrumentalities such as Federal Home Loan
Banks, Federal National Mortgage Association, Government
National Mortgage Association, Banks for Cooperatives
(including Central Bank for Cooperatives), Federal Land
Banks, Federal Intermediate Credit Banks, Tennessee Valley
Authority, Export-Import Bank of the United States, Commodity
Credit Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation
or National Credit Union Administration. Since inception, the
assets of the Fund have been invested solely in direct
obligations of the U.S. Treasury and in repurchase agreements
backed by the U.S. Treasury. The level of income achieved by
the Fund may not be as
high as that of other funds which invest in lower quality,
longerterm securities. There is, of course, no assurance that
the Fund's investment objectives will be achieved. As the
value of the Fund's portfolio securities fluctuates, its net
asset
value per share will also fluctuate.
Certain of the U.S. government securities in which the Fund
may invest may be purchased at a discount. Such securities,
when held to maturity or retired, may include an element of
capital gain. The Fund does not intend to hold securities for
the purpose of
achieving such capital gains, but will generally hold them as
long as current yields on these securities remain attractive.
Capital losses may be realized when securities purchased at a
premium are held to maturity or are called or redeemed at a
price lower than their purchase price. Capital gains or
losses also may be realized upon the sale of securities.
Since a substantial portion of the Fund's assets at any
particular time may consist of debt securities, changes in
the level of interest rates, among other things, will likely
affect the value of the Fund's holdings and thus the value of
a shareholder's investment. The dividends per share paid by
the Fund may also vary with each distribution.
SOME OF THE FUND'S OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. The Fund may engage in repurchase
transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed-
upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer
of securities with an initial market value, including accrued
interest, equal to at least 102% of the dollar amount
invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain
coverage of at least 100%. A default by the seller might
cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in
liquidating the collateral. The Fund, however, intends to
enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are
deemed creditworthy by the Fund's investment manager. A
repurchase agreement is deemed to be a loan by the Fund under
the 1940 Act. The U.S. government security subject to resale
(the collateral) will be held on behalf of the Fund by a
custodian approved by the Fund's Board and will be held
pursuant to a written agreement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Fund may
purchase obligations on a "when-issued" or "delayed delivery"
basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for
a future time, generally within two weeks. Purchases of
securities on a when-issued or delayed delivery basis are
subject to market fluctuation and are subject to the risk
that the value or yields at delivery may be more or less than
the purchase price or the yields available when the
transaction was entered into. Although the Fund will
generally purchase securities on a when-issued basis with the
intention of acquiring such securities, it may sell such
securities before the settlement date if it is deemed
advisable. When the Fund is the buyer in such a transaction,
it will maintain, in a segregated account with its custodian,
cash or high-grade marketable securities having an aggregate
value equal to the amount of such purchase commitments until
payment is made. To the extent the Fund engages in when-
issued and delayed delivery transactions, it will do so only
for the purpose of acquiring portfolio securities consistent
with the Fund's investment objectives and policies, and not
for the purpose of investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller
to complete
the transaction. The other party's failure may cause the Fund
to miss a price or yield considered advantageous. Securities
purchased on a when-issued or delayed delivery basis do not
generally earn interest until their scheduled delivery date.
The Fund is not subject to any percentage limit on the amount
of its assets which may be invested in when-issued purchase
obligations.
ZERO COUPON BONDS. The Fund may also, consistent with its
other policies, invest in zero coupon bonds issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities. Zero coupon bonds are debt obligations
which are issued at a significant discount from face value.
The original discount approximates the total amount of
interest the bonds will accrue and compound over the period
until maturity or the first interest accrual date at a rate
of interest reflecting the market rate of the security at the
time of issuance. A zero coupon security pays no interest to
its holder during its life and its value (above its cost to a
Fund) consists of the difference between its face value at
maturity and its cost. Such investments experience greater
volatility in market value due to changes in interest rates
than debt obligations which provide for regular payments of
interest. The Fund will accrue income on such investments for
tax and accounting purposes, as required, which is
distributable to shareholders and which, because no cash is
received at the time of accrual, may require the liquidation
of other portfolio securities to satisfy the Fund's
distribution obligations.
CONCENTRATION. The Fund will not invest more than 25% of the
value of its total assets in any one particular industry.
BORROWING. The Fund does not borrow money or mortgage or
pledge any of the assets of the Fund, except that it may
borrow from banks for temporary or emergency purposes up to
5% of its total assets and pledge up to 5% of its total
assets in connection therewith.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures
approved by the Board of Trustees and subject to the
following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other
institutional investors, provided that such loans do not
exceed 10% of the value of the Fund's total assets at the
time of the most recent loan. The borrower must deposit with
the Fund's custodian collateral with an initial market value
of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to
market daily to maintain collateral coverage of at least
102%. Such collateral shall consist of cash, securities
issued by the U.S. Government, its agencies or
instrumentalities, or irrevocable letters of credit. The
lending of securities is a common practice in the securities
industry. The Fund engages in security loan arrangements with
the primary objective of increasing the Fund's income either
through investing the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there are
risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail
financially.
ILLIQUID INVESTMENTS. It is the policy of the Fund that
illiquid securities (securities that cannot be disposed of
within seven days in the normal course of business at
approximately the
amount at which the Fund has valued the securities) may not
constitute, at the time of purchase more than 10% of the
value of the total net assets of the Fund.
The Fund is subject to a number of additional investment
restrictions, some of which may be changed only with the
approval of shareholders, which limit its activities to some
extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see the
Statement of Additional
Information.
The foregoing discussion of permissible investments and
practices is subject to the fundamental policy of the Fund,
which can only be changed with shareholder approval, that the
Fund will only purchase securities and engage in trading
practices which are permitted without limitation to national
banks, federal savings and loan associations and federal
credit unions. Please see the Statement of Additional
Information for more details regarding the Fund's policies
regarding eligible federal credit union investments.
HOW SHAREHOLDERS PARTICIPATE IN
THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities.
If the securities owned by the Fund increase in value, the
value of the shares of the Fund which the shareholder owns
will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also
decline. In this way, shareholders participate in any change
in the value of the securities owned by the Fund.
In addition to the factors which affect the value of
individual securities,as described in the preceding sections,
a shareholder may anticipate that the value of Fund shares
will fluctuate with movements in the broader equity and bond
markets, as well. In particular, changes in interest rates
will affect the value of the Fund's holdings and thus its
share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are
likely to have a negative effect on the value of Fund shares.
History reflects both increases and decreases in the
prevailing rate of interest and these may reoccur
unpredictably in the future.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the
overall management of the Trust and for electing the officers
of the Trust who are responsible for administering its day-to-
day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as
the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company, the principal shareholders of
which are Charles B. Johnson, Rupert H. Johnson, Jr. and R.
Martin Wiskemann, who own approximately 20%, 16% and 10%,
respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the
financial services industry. Advisers acts as investment
manager or administrator to 33 U.S. registered investment
companies (111 separate series) with aggregate assets of over
$73 billion.
Pursuant to the management agreement, the Manager supervises
and implements the Fund's investment activities and provides
certain
administrative services and facilities which are necessary to
conduct the Fund's business.
The Fund is responsible for its own operating expenses
including, but not limited to, the Manager's fee; taxes, if
any; custodian, legal and auditing fees; fees and expenses of
Trustees who are not members of, affiliated with, or
interested persons of the Manager; salaries of any personnel
not affiliated with the Manager; insurance premiums; trade
association dues; expenses of obtaining quotations for
calculating the value of the Fund's net
assets; printing and other expenses which are not expressly
assumed by the Manager.
During the period ended October 31, 1994, fees totalling
0.54% of the average daily net assets of the Fund would have
accrued to Advisers. Total operating expenses, including
management fees, would have represented 0.68% of the average
net assets of the Fund. After fee waivers, the Fund paid
management fees totaling 0.52% of the average net assets of
the Fund and operating expenses totaling 0.65%. This
arrangement may be terminated by Advisers at any time.
Among the responsibilities of the Manager under the
management agreement is the selection of brokers and dealers
through whom transactions in the Fund's portfolio securities
will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more
than one broker is able to provide the best execution, the
Manager will consider the furnishing of quotations and of
other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of
shares of the Fund, as factors in selecting a broker. Further
information is included under "The Fund's Policies Regarding
Brokers Used on Portfolio Transactions" in the Statement of
Additional Information.
Shareholder accounting and many of the clerical functions for
the Fund are performed by Franklin/Templeton Investor
Services, Inc. ("Investor Services" or "Shareholder Services
Agent"), in its capacity as transfer agent and dividend-
paying agent. Investor Services is a wholly-owned subsidiary
of Resources.
PLAN OF DISTRIBUTION
The Fund has adopted a distribution plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the Fund may reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion
and distribution of the Fund's shares. Such expenses may
include, but are not limited to, the printing of prospectuses
and reports used for sales purposes, expenses of preparing
and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead
expenses attributable to the distribution of Fund shares, as
well as any distribution or service fees paid to securities
dealers or their firms or others who have executed a
servicing agreement with the Fund, Distributors or its
affiliates. The maximum amount which the Fund may pay to
Distributors or others for such distribution expenses is
0.10% per annum of the average daily net assets of the Fund,
payable on a quarterly basis. All expenses of distribution
and marketing in excess of 0.10% per annum will be borne by
Distributors, or others who have incurred them, without
reimbursement from the Fund. The Plan also covers any
payments to or by the Fund, Advisers, Distributors, or other
parties on behalf of the Fund, Advisers or Distributors, to
the extent such payments are deemed
to be for the financing of any activity primarily intended to
result in the sale of shares issued by the Fund within the
context of Rule 12b-1. The payments under the Plan are
included in the maximum operating expenses which may be borne
by the Fund.
In implementing the Plan, the Board has determined that the
annual fees payable thereunder will be equal to the sum of:
(i) the amount obtained by multiplying 0.10% by the average
daily net assets represented by shares of the Fund that were
acquired by investors on or after the Effective Date of the
Plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets represented
by shares of the Fund that were acquired before the Effective
Date of the Plan ("Old Assets"). Such fees will be paid to
the current securities dealer of record on the shareholder's
account. In addition, until such time as the maximum payment
of 0.10% is reached on a yearly basis, up to an additional
0.02% will be paid to Distributors under the Plan. The
payments to be made to Distributors will be used by
Distributors to defray other marketing expenses that have
been incurred in accordance with the Plan, such as
advertising.
While the above is the current method for calculating the 12b-
1 fees to be paid by the Fund, the fee is a Fund expense so
that all shareholders, regardless of when they purchased
their shares, will bear 12b-1 expenses at the same rate. That
rate initially will be at least 0.07% (0.05% plus 0.02%) of
the average daily net assets and, as Fund shares are sold on
or after the Effective Date, will increase over time. Thus,
as the proportion of Fund shares purchased on or after the
Effective Date increases in relation to outstanding Fund
shares, the expenses attributable to payments under the
proposed Plan will also increase (but will not exceed the
maximum allowable under the Plan). While this is the
currently anticipated calculation for fees payable under the
Plan, the Plan permits the Fund's trustees to allow the Fund
to pay a full 0.10% on all assets at any time. The approval
of the Fund's Board of Trustees would be required to change
the calculation of the payments to be made under the Plan.
For more information, please see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make
to its shareholders:
1. INCOME DIVIDENDS. The Fund receives income in the form of
dividends, interest and other income derived from its
investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital
gains or losses in connection with sales or other
dispositions of its portfolio securities. Distributions by
the Fund derived from net short-term and net long-term
capital gains (after taking into account any net capital loss
carryovers) may generally be made once a year in December to
reflect the net short-term and net long-term capital gains
realized by the Fund as of October 31, its fiscal year-end.
The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or
adjust the timing of these distributions for operational or
other reasons.
The Fund may derive capital gains or losses in connection
with sales or other dispositions of its portfolio
securities. Distributions by the Fund derived from net short-
term and net long-term capital gains (after taking into
account any net capital loss carryovers) may generally be
made twice each year. One distribution may be made in
December to reflect any net shortterm and net long-term
capital gains realized by the Fund as of October 31 of such
year. Any net short-term and net longterm capital gains
realized by the Fund during the remainder of the fiscal year
may be distributed following the end of the fiscal year.
These distributions, when made, will generally be fully
taxable to the Fund's shareholders. The Fund may make more
than one distribution derived from net short-term and net
long-term
capital gains in any year or adjust the timing of its
distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Fund's Board of Trustees,
without prior notice to or approval by shareholders, the
Fund's current policy is to declare income dividends daily
and pay them monthly on or about the last business day of
the month. The amount of income dividend payments by the
Fund is dependent upon the amount of net income received by
the Fund from its portfolio holdings, is not guaranteed and
is subject to the discretion of the Fund's Board of
Trustees. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY
FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES.
In order to be entitled to a dividend, an investor must have
acquired Fund shares prior to the close of business on the
record date. An investor considering purchasing Fund shares
shortly before the record date of a distribution should be
aware that because the value of the Fund's shares is based
directly on the amount of its net assets, rather than on the
principle of supply and demand, any distribution of income
or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution.
While a dividend or capital gain distribution received
shortly after purchasing shares represents, in effect, a
return of a portion of the shareholder's investment, it may
be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain
distributions, if any, will be automatically reinvested in
the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge)
on the dividend reinvestment date. Shareholders have the
right to change their election with respect to the receipt
of distributions by notifying the Fund, but any such change
will be effective only as to distributions for which the
record date is seven or more business days after the Fund
has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions
in the form of additional shares. This is a convenient way
to accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application
included with this Prospectus, a shareholder may direct the
selected distributions to another fund in the Franklin Group
of Funds(Registered Trademark) or the Templeton Funds, to
another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the
Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last
option is requested, the shareholder should allow at least
15 days for initial processing. Dividends which may be paid
in the interim will be sent to the address of record.
Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services
Department. Dividend and
capital gain distributions are eligible for investment in
another fund in the Franklin Group of Funds or the Templeton
Funds at net asset value. See "Purchases at Net Asset Value"
under "How to Buy Shares of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax
considerations that affect mutual funds and their
shareholders. Additional information on tax matters relating
to the Fund and its shareholders is included in the section
entitled "Additional Information Regarding Taxation" in the
Statement of Additional Information.
Each fund of the Trust is treated as a separate entity for
federal income tax purposes. The Fund has elected and
qualified to be treated as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). By distributing all of its net
investment income and net realized short-term and long-term
capital gain for a fiscal year in accordance with the timing
requirements imposed by the Code and by meeting certain
other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable
for federal income or excise taxes.
For federal income tax purposes, any income dividends which
the shareholder receives from the Fund, as well as any
distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to
receive them in cash or in additional shares. Distributions
derived from the excess of net long-term capital gain over
net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has
owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are
declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder
until the following January, will be treated as if received
by the shareholder on December 31 of the calendar year in
which they are declared.
Redemptions and exchanges of Fund shares are taxable events
on which a shareholder may realize a gain or loss. Any loss
incurred on sale or exchange of the Fund's shares, held for
six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge
incurred in
purchasing shares of the Fund will not be included in the
federal tax basis of such shares sold or exchanged within
ninety (90) days of their purchase (for purposes of
determining gain or loss with respect to such shares) if the
sales proceeds are reinvested in the Fund or in another fund
in the Franklin/Templeton Group and a sales charge which
would otherwise apply to the reinvestment is reduced or
eliminated. Any portion of such sales charge excluded from
the tax basis of the shares sold will be added to the tax
basis of the shares acquired in the reinvestment.
Shareholders should consult with their tax advisors
concerning the tax rules applicable to the redemption or
exchange of Fund shares.
For corporate shareholders, none of the distributions paid
by the Fund for the fiscal year ended January 31, 1994
qualified for the dividends received deduction, and it is
not anticipated that any of the current year's dividends
will qualify.
Many states grant tax-free status to dividends paid out to
shareholders of mutual funds from interest income earned by
the mutual fund from direct obligations of the U.S.
government, subject in some cases to minimum investment
requirements to be met by the Fund. Investments in
repurchase agreements collateralized by U.S. government
securities do not generally qualify for this purpose. The
Fund may also generate and distribute realized capital gains
from the sale of portfolio securities, which are generally
subject to state income taxes (as well as federal income
taxes, as noted above). At the end of each calendar year,
the Fund will provide shareholders with the percentage of
any dividends paid which may qualify for such taxfree
status. Shareholders should consult their own tax advisors
with respect to the application of state and local income
tax laws to these distributions and on the application of
other state and local intangible property or income tax laws
to their shares and to distributions and redemption proceeds
received from the Fund.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid and
will, promptly after the close of each calendar year, advise
them of the tax status for federal income tax purposes of
such dividends and distributions.
Shareholders who are not U.S. persons for purposes of
federal income taxation should consult with their financial
or tax advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by them
from the Fund and the application of foreign tax laws to
these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through
securities dealers which execute an agreement with
Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The
minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans
established by the Franklin Templeton Group. The Fund and
Distributors reserve the right to refuse any order for the
purchase of shares.
The Fund may impose a $10 charge for each returned item
against
any shareholder account which, in connection with the
purchase of Fund shares, submits a check or a draft which is
returned unpaid to the Fund.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is the net asset value per share, plus a sales charge,
next computed (1) after the shareholder's securities dealer
receives the order which is promptly transmitted to the
Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a
completed Shareholder Application accompanied by a
negotiable check). The sales charge is a variable percentage
of the offering price depending upon the amount of the sale.
On orders for 100,000 shares or more, the offering price
will be calculated to four decimal places. On orders for
less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net asset
value per share is included under the caption "Valuation of Fund
Shares." Set forth below is a table of total sales charges or
underwriting commissions and dealer concessions.
TOTAL SALES CHARGE
DEALER AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET
PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF
OFFERING
AT OFFERING PRICE PRICE INVESTED
PRICE*,***
Less than $100,000 2.25% 2.31% 2.00%
$100,000 but less than
$250,000 1.75% 1.78% 1.50%
$250,000 but less than
$500,000 1.25% 1.27% 1.00%
$500,000 but less than
$1,000,000 1.00% 1.01% 0.85%
$1,000,000 or more none none See below
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth above.
**The following commissions will be paid by Distributors, from
its own resources, to securities dealers who initiate and are
responsible for purchases of $1 million or more: 0.75% on
sales of $1 million but less than $2 million, plus 0.60% on
sales of $2 million but less than $3 million, plus 0.50% on
sales of $3 million but less than $50 million, plus 0.25% on
sales of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. Dealer concession breakpoints
are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may at
times be allowed to the securities dealer. If 90% or more of
the sales commission is allowed, such securities dealer may be
deemed to be an underwriter as that term is defined in the
Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1 million
or more, but a contingent deferred sales charge of 1% is
imposed on certain redemptions of all or a portion of
investments of $1 million or more within 12 months of the
calendar month following
such investments ("contingency period"). See "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable
sales charge on the purchase of Fund shares is determined by
adding the amount of the shareholder's current purchase plus
the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the funds
in the Franklin Group of Funds(Registered Trademark) and the
Templeton Group of Funds. Included for these aggregation
purposes are (a) the mutual funds in the Franklin Group of
Funds except Franklin Valuemark Funds and Franklin Government
Securities Trust (the "Franklin Funds"), (b) other investment
products underwritten by Distributors or its affiliates
(although certain investments may not have the same schedule
of sales charges and/or may not be subject to reduction) and
(c) the U.S. mutual funds in the Templeton Group of Funds
except Templeton American Trust, Inc., Templeton Capital
Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton
Funds"). (Franklin Funds and Templeton Funds are collectively
referred to as the "Franklin Templeton Funds.") Sales charge
reductions based upon aggregate holdings of (a), (b) and (c)
above ("Franklin Templeton Investments") may be effective only
after notification to Distributors that the investment
qualifies for a discount.
Distributors, or one of its affiliates, may make payments, out
of its own resources, of up to 0.75% of the amount purchased
to securities dealers who initiate and are responsible for
purchases made at net asset value by non-designated retirement
plans, and up to 1% of the amount purchased to securities
dealers who initiate and are responsible for purchases made at
net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers), certain trust company and
trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10
million or more. See definitions under "Description of Special
Net Asset Value Purchases" and as set forth in the SAI.
Distributors or one of its affiliates, out of its own own
resources, may also provide additional compensation to
securities dealers in connection with sales of shares of the
Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers in connection with
conferences, sales or training programs for their employees,
seminars for the public, advertising, sales campaigns and/or
shareholder services and programs regarding one or more of the
Franklin Templeton Funds, and other dealer-sponsored programs
or events. In some instances, this compensation may be made
available only to certain securities dealers whose
representatives have sold or are expected to sell significant
amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses,
including lodging, incurred in connection with trips taken by
invited registered representatives and members of their
families to locations within or outside of the United States
for meetings or seminars of a business nature. Dealers may not
use sales of the Fund's shares to qualify for this
compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund
or its shareholders.
Certain officers and directors of the Fund are also affiliated
with Distributors. A detailed description is included in the
SAI.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which provide
for a reduced sales charge. To be certain to obtain the
reduction of the sales charge, the investor or the dealer
should notify Distributors at the time of each purchase of
shares which qualifies for the reduction. In determining
whether a purchase qualifies for any of the discounts,
investments in any Franklin Templeton Investments may be
combined with those of the investor's spouse and children
under the age of 21. In addition, the aggregate investments of
a trustee or other fiduciary account (for an account under
exclusive investment authority) may be considered in
determining whether a reduced sales charge is available, even
though there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a
reduction in the sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value
(whichever is higher) of existing investments in the Franklin
Templeton Investments may be combined with the amount of the
current purchase in determining the sales charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for a
reduced sales charge on a purchase of shares of the Fund by
completing the Letter of Intent section of the Shareholder
Application (the "Letter of Intent" or "Letter"). By
completing the Letter, the investor expresses an intention to
invest during the next 13 months a specified amount which, if
made at one time, would qualify for a reduced sales charge,
grants to Distributors a security interest in the reserved
shares and irrevocably appoints Distributors as attorney-in-
fact with full power of substitution to surrender for
redemption any or all shares for the purpose of paying any
additional sales charge due. Purchases under the Letter will
conform with the requirements of Rule 22d-1 under the 1940
Act. The investor or the investor's securities dealer must
inform Investor Services or Distributors that this Letter is
in effect each time a purchase is made.
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH
ARE LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE
PURCHASES") ACKNOWLEDGES AND AGREES TO THE FOLLOWING
PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of
the total intended purchase will be reserved in shares of the
Fund, for series funds add "in which you invest," registered
in the investor's name, to assure that the full applicable
sales charge will be paid if the intended purchase is not
completed. The reserved shares will be included in the total
shares owned as reflected on periodic statements; income and
capital gain distributions on the reserved shares will be paid
as directed by the investor. The reserved shares will not be
available for disposal by the investor until the Letter of
Intent has been completed or the higher sales charge paid. For
more information, see "Additional Information Regarding
Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is based
upon the aggregate dollar value of shares previously purchased
and still owned by the group, plus the amount of the current
purchase. For example, if members of the group had previously
invested and still held $80,000 of Fund shares and now were
investing $25,000, the sales charge would be 1.75%.
Information concerning the current sales charge applicable to
a group may be
obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for
more than six months, (ii) has a purpose other than acquiring
Fund shares at a discount and (iii) satisfies uniform criteria
which enable Distributors to realize economies of scale in its
costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings
between representatives of the Fund or Distributors and the
members, agree to include sales and other materials related to
the Fund in its publications and mailings to members at
reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to
the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such
time as the investor notifies the Fund and the investor's
employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the
payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time
the money reaches the Fund. The investment in the Fund will be
made at the offering price per share determined on the day
that both the check and payroll deduction data are received in
required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition of
either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, trustees,
directors and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group,
and by their spouses and family members including any
subsequent payments made by such parties after cessation of
employment; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer;
(3) insurance company separate accounts for pension plan
contracts; (4) accounts managed by the Franklin Templeton
Group; (5) Shareholders of Templeton Institutional Funds, Inc.
reinvesting redemption proceeds from that fund under an
employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the
Fund; (6) certain unit investment trusts and unit holders of
such trusts reinvesting their distributions from the trusts in
the Fund; (7) registered securities dealers and their
affiliates, for their investment account only, and (8)
registered personnel and employees of securities dealers and
by their spouses and family members, in accordance with the
internal policies and procedures of the employing securities
dealer.
Shares of the Fund may be purchased at net asset value by
persons who have redeemed, within the previous 120 days, their
shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed
a contingent deferred sales charge on redemption. An investor
may reinvest an amount not exceeding the redemption proceeds.
While credit will be given for any contingent deferred sales
charge paid on the shares redeemed and subsequently
repurchased, a new contingency period will begin. Shares of
the Fund redeemed in connection with an exchange into another
fund (see "Exchange Privilege") are not considered "redeemed"
for this privilege. In order to exercise this privilege, a
written order for the purchase of shares of the Fund must be
received by the Fund or the Fund's Shareholder Services Agent
within 120 days after the redemption. The 120 days, however,
do not begin to run on redemption proceeds placed immediately
after redemption in a Franklin Bank Certificate of
Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a
securities dealer or other financial institution, who may
charge the shareholder a fee for this service. The redemption
is a taxable transaction but reinvestment without a sales
charge may affect the amount of gain or loss recognized and
the tax basis of the shares reinvested. If there has been a
loss on the redemption, the loss may be disallowed if a
reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a
reinvestment is included in the tax section of this Prospectus
and the SAI.
Dividends and capital gains received in cash by the
shareholder may also be used to purchase shares of the Fund or
another of the Franklin Templeton Funds at net asset value and
without the imposition of a contingent deferred sales charge
within 120 days of the payment date of such distribution. To
exercise this privilege, a written request to reinvest the
distribution must accompany the purchase order. Additional
information may be obtained from Shareholder Services at 1-
800/632-2301. See "Distributions in Cash" under "Distributions
to Shareholders."
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by investors who have, within the past 60 days, redeemed an
investment in an unaffiliated mutual fund which charged the
investor a contingent deferred sales charge upon redemption
and which has investment objectives similar to those of the
Fund.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by broker-dealers, who have entered into a supplemental
agreement with Distributors or by registered investment
advisers affiliated with such broker-dealer, on behalf of
their clients who are participating in a comprehensive fee
program (sometimes known as a wrap fee program).
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by anyone who has taken a distribution from an existing
retirement plan already invested in the Franklin Templeton
Funds (including former participants of the Franklin Templeton
Profit Sharing 401(k) plan), to the extent of such
distribution. In order to exercise this privilege a written
order for the purchase of shares of the Fund must be received
by Franklin Templeton Trust Company (the "Trust Company"), the
Fund or Investor Services, within 120 days after the plan
distribution. A prospectus outlining the investment objectives
and policies of a fund in which the shareholder wishes to
invest may be obtained by calling toll free at 1-800/DIAL BEN
(1-800/342-5236).
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by any state, county, or city, or any instrumentality,
department, authority or agency thereof which has determined
that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales
charge or commission in connection with the purchase of shares
of any registered management investment company ("an eligible
governmental authority"). SUCH INVESTORS SHOULD CONSULT THEIR
OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO WHAT EXTENT THE
SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond
offerings into the Fund should consult with expert counsel to
determine the effect, if any, of various payments made by the
Fund or its investment manager on arbitrage rebate
calculations. If an
investment by an eligible governmental authority at net asset
value is made through a securities dealer who has executed a
dealer agreement with Distributors, Distributors or one of its
affiliates may make a payment, out of their own resources, to
such securities dealer in an amount not to exceed 0.25% of the
amount invested. Contact Franklin's Institutional Sales
Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by certain designated retirement plans, including
profit sharing, pension, 401(k) and simplified employee
pension plans ("designated plans"), subject to minimum
requirements with respect to number of employees or amount of
purchase, which may be established by Distributors. Currently,
those criteria require that the employer establishing the plan
have 200 or more employees or that the amount invested or to
be invested during the subsequent 13-month period in the Fund
or in any of the Franklin Templeton Investments total at least
$1,000,000. Employee benefit plans not designated above or
qualified under Section 401 of the Code ("non-designated
plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for
qualified groups previously described under "Group Purchases"
which enable Distributors to realize economies of scale in its
sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trust companies and bank trust departments for funds over
which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency, advisory,
custodial or similar capacity. Such purchases are subject to
minimum requirements with respect to amount of purchase, which
may be established by Distributors. Currently, those criteria
require that the amount invested or to be invested during the
subsequent 13-month period in this Fund or any of the Franklin
Templeton Investments total at least $1,000,000. Orders for
such accounts will be accepted by mail accompanied by a check
or by telephone or other means of electronic data transfer
directly from the bank or trust company, with payment by
federal funds received by the close of business on the next
business day following such order.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trustees or other fiduciaries purchasing securities for
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without regard
to where such assets are currently invested.
Refer to the SAI for further information.
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to
state law.
GENERAL
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to
state law.
PURCHASING SHARES OF THE FUND
IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or employer
sponsored retirement plans involving tax-deferred investments.
The Fund may be used as an investment vehicle for an existing
retirement plan, or Franklin Templeton Trust Company ( the
"Trust Company") may provide the plan documents and serve as
custodian or trustee. A plan document must be adopted for a
retirement plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as
custodian or trustee for retirement plans. Brochures for the
Trust Company plans contain important information regarding
eligibility, contribution and deferral limits and distribution
requirements. Please note that an application other than the
one contained in this Prospectus must be used to establish a
retirement plan account with the Trust Company. To obtain a
retirement plan brochure or application, call toll free
1800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan
accounts. Specific forms are required to be completed for
distributions from Franklin Templeton Trust Company retirement
plans.
Individuals and plan sponsors should consult with legal, tax
or benefits and pension consultants before choosing a
retirement plan. In addition, retirement plan investors
should consider consulting their investment representatives or
advisors concerning investment decisions within their plan.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
Certain of the programs and privileges described in this
section may not be available directly from the Fund to
shareholders whose shares are held, of record, by a financial
institution or in a "street name" account or networked account
through the National Securities Clearing Corporation ("NSCC")
(see the section captioned "Account Registrations" in this
Prospectus).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and
capital gain distributions, are generally credited to an
account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining
shares in uncertificated form (also known as "plan balance")
minimizes the risk of loss or theft of a share certificate. A
lost, stolen or destroyed certificate cannot be replaced
without obtaining a sufficient indemnity bond. The cost of
such a bond, which is generally borne by the shareholder, can
be 2% or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested in
writing by the shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that
period and after each other transaction which affects the
shareholder's account. This statement will also show the total
number of shares owned by the shareholder, including the
number of shares in "plan balance" for the account of the
shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be able
to arrange to make additional purchases of shares
automatically on a monthly basis by electronic funds transfer
from a checking account, if the bank which maintains the
account is a member of the Automated Clearing House, or by
preauthorized checks drawn on the shareholder's bank account.
A shareholder may, of course, terminate the program at any
time. The Shareholder Application included with this
Prospectus contains the requirements applicable to this
program. In addition, shareholders may obtain more information
concerning this program from their securities dealers or from
Distributors.
The market value of the Fund's shares is subject to
fluctuation. Before undertaking any plan for systematic
investment, the investor should keep in mind that such a
program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided
that the net asset value of the shares held by the shareholder
is at least $5,000. There are no service charges for
establishing or maintaining a Systematic Withdrawal Plan. The
minimum amount which the shareholder may withdraw is $50 per
withdrawal transaction although this is merely the minimum
amount allowed under the plan and should not be mistaken for a
recommended amount. Retirement plans subject to mandatory
distribution requirements are not subject to the $50 minimum.
The plan may be established on a monthly, quarterly,
semiannual or annual basis. If the shareholder establishes a
plan, any capital gain distributions and income dividends paid
by the Fund will be reinvested for the shareholder's account
in additional shares at net asset value. Payments will then be
made from the liquidation of shares at net asset value on the
day of the transaction (which is generally the first business
day of the month in which the payment is scheduled) with
payment generally received by the shareholder three to five
days after the date of liquidation. By completing the "Special
Payment Instructions for Distributions" section of the
Shareholder Application included with this Prospectus, a
shareholder may direct the selected withdrawals to another of
the Franklin Templeton Funds, to another person, or directly
to a checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to
the extent withdrawals exceed shares earned through dividends
and distributions, particularly in the event of a market
decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining balance
will be sent to the shareholder. As with other redemptions, a
liquidation to make a withdrawal payment is a sale for federal
income tax purposes. Because the amount withdrawn under the
plan may be more than the shareholder's actual yield or
income, part of the payment may be a return of the
shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the additional
purchases. The shareholder should ordinarily not make
additional investments of less than $5,000 or three times the
annual withdrawals under the plan during the time such a plan
is in effect. A Systematic Withdrawal Plan may be terminated
on written notice by the shareholder or the Fund, and it will
terminate automatically if all shares are liquidated or
withdrawn from the account, or upon the Fund's receipt of
notification of the death or incapacity of the shareholder.
Shareholders may change the amount (but not below the
specified minimum) and schedule of withdrawal payments, or
suspend one such payment by giving written notice to Investor
Services at least seven business days prior to the end of the
month preceding a scheduled payment. Share certificates may
not be issued while a Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual
funds with various investment objectives or policies. The
shares of most of these mutual funds are offered to the public
with a sales charge. If a shareholder's investment objective
or outlook for the securities markets changes, the Fund shares
may be exchanged for shares of other Franklin Templeton Funds
which are eligible for sale in the shareholder's state of
residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Investors
should review the prospectus of the fund they wish to exchange
from and the fund they wish to exchange into for all specific
requirements or limitations on excercising the exchange
privilege, for example, minimum holding periods or applicable
sales charges. Exchanges may be made in any of the following
ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of
the written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD, IF
ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY CALLING
INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED FRANKLIN
TELEFACTS SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF THE
SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO A
PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD BE
NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to
effect exchanges from the Fund into an identically registered
account in one of the other available Franklin Templeton
Funds. The Telephone Exchange Privilege is available only for
uncertificated shares or those which have previously been
deposited in the shareholder's account. The Fund and Investor
Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Please
refer to "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be
difficult to implement and the eleFACTS option may not be
available. In this event, shareholders should follow the other
exchange procedures discussed in this section, including the
procedures for processing exchanges through securities
dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the
Fund's shares, Investor Services will accept exchange orders
by telephone or by other means of electronic transmission from
securities dealers who execute a dealer or similar agreement
with Distributors. See also "Exchanges By Telephone" above.
Such a dealer-ordered exchange will be effective only for
uncertificated shares on deposit in the shareholder's account
or for which certificates have previously been deposited. A
securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject to
a contingent deferred sales charge in the original fund
purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be
imposed. The contingency period will be tolled (or stopped)
for the period such shares are exchanged into and held in a
Franklin or Templeton money market fund. See also "How to Sell
Shares of the Fund - Contingent Deferred Sales Charge."
Exchanges are made on the basis of the net asset values of the
funds involved, except as set forth below. Exchanges of shares
of the Fund which were purchased without a sales charge will
be charged a sales charge in accordance with the terms of the
prospectus of the fund being purchased, unless the investment
on which no sales charge was paid was transferred in from a
fund on which the investor paid a sales charge. Exchanges of
shares of the Fund which were purchased with a lower sales
charge to a fund which has a higher sales charge will be
charged the difference, unless the shares were held in the
Fund for at least six months prior to executing the exchange.
When an investor requests the exchange of the total value of
the Fund account, accrued but unpaid income dividends and
capital gain distributions will be reinvested in the Fund at
the net asset value on the date of the exchange, and then the
entire share balance will be exchanged into the new fund in
accordance with the procedures set forth above. Because the
exchange is considered a redemption and purchase of shares,
the shareholder may realize a gain or loss for federal income
tax purposes. Backup withholding and information reporting may
also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax
section in this Prospectus and in the SAI .
There are differences among the Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the
shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the
Fund pursuant to the exchange privilege, the Fund might have
to liquidate portfolio securities it might otherwise hold and
incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may
result in periodic large inflows of money. If this should
occur, it is the
general policy of the Fund to initially invest this money in
short-term, interest-bearing money market instruments, unless
it is felt that attractive investment opportunities consistent
with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-
term money market instruments and invested in portfolio
securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by the
Fund at any time upon 60 days' written notice to shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may
accomplish exchanges directly. Certain restrictions may apply,
however, to other types of retirement plans. See "Restricted
Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing
services to purchase or redeem shares based on predetermined
market indicators ("Timing Accounts") will be charged a $5.00
administrative service fee per each such exchange. All other
exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses,
certain funds do not accept or may place differing limitations
than those below on exchanges by Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose
transactions seem to follow a timing pattern who: (i) make an
exchange request out of the Fund within two weeks of an
earlier exchange request out of the Fund, or (ii) make more
than two exchanges out of the Fund per calendar quarter, or
(iii) exchange shares equal in value to at least $5 million,
or more than 1% of the Fund's net assets. Accounts under
common ownership or control, including accounts administered
so as to redeem or purchase shares based upon certain
predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of
exchange requests by any Timing Account, person, or group if,
in the Manager's judgment, the Fund would be unable to invest
effectively in accordance with its investment objectives and
policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted
or refused if the Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets.
In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and
therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order for
the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and
receive from the Fund the value of the shares. Shares may be
redeemed in
any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of
this Prospectus, and any share certificates which have been
issued for the shares being redeemed, properly endorsed and in
order for transfer. The shareholder will then receive from the
Fund the value of the shares based upon the net asset value
per share next computed after the written request in proper
form is received by Investor Services. Redemption requests
received after the time at which the net asset value is
calculated (at 1:00 p.m. Pacific time) each day that the New
York Stock Exchange (the "Exchange") is open for business will
receive the price calculated on the following business day.
Shareholders are requested to provide a telephone number(s)
where they may be reached during business hours, or in the
evening if preferred. Investor Services' ability to contact a
shareholder promptly when necessary will speed the processing
of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE
GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE
FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone
other than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any
address other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in
excess of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based on the
transfer instructions, including, for example, when (a) the
current address of one or more joint owners of an account
cannot be confirmed, (b) multiple owners have a dispute or
give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions
received by the Fund are given by an agent, not the actual
registered owner, (e) the Fund determines that joint owners
who are married to each other are separated or may be the
subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or
other entity has not been established to the satisfaction of
the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the
Securities Exchange Act of 1934. Generally, eligible guarantor
institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies,
savings banks, industrial loan companies and credit unions;
(2) national securities exchanges, registered securities
associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a
clearing agency or which have minimum net capital of $100,000;
or (4) institutions that participate in the Securities
Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature
will not be sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied
by the share certificate and a share assignment form signed by
the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced
above. Shareholders are advised, for their own protection, to
send the share certificate and assignment form in separate
envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court jurisdiction
require the following documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction
from the authorized officer(s) of the corporation, and (2) a
corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction
from a general partner and (2) pertinent pages from the
partnership agreement identifying the general partners or a
certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from
the trustee(s) and (2) a copy of the pertinent pages of the
trust document listing the trustee(s) or a Certification for
Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents and
the applicable state law since these accounts have varying
requirements, depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"), included
with this Prospectus may redeem shares of the Fund by
telephone, subject to the Restricted Account exception noted
under "Telephone Transactions - Restricted Accounts."
INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR
INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY
CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL
EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS
GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER
"TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with the completed Agreement on file,
redemptions of uncertificated shares or shares which have
previously been deposited with the Fund or Investor Services
may be made for up to $50,000 per day per Fund account.
Telephone redemption requests received before 1:00 p.m.
Pacific time on any business day will be processed that same
day. The redemption check will be sent within seven days, made
payable to all the registered owners on the account, and will
be sent only to the address of record. Redemption requests by
telephone will not be accepted within 30 days following an
address change by telephone. In that case, a shareholder
should follow the other redemption procedures set forth in
this Prospectus. Institutional accounts (certain corporations,
bank trust departments, government entities, and qualified
retirement plans which qualify to purchase shares at net asset
value pursuant to the terms of this
Prospectus) which wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges
Agreement which is available from Franklin's Institutional
Services Department by telephoning 1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities dealers who
have entered into a dealer or similar agreement with
Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is
that if the shareholder redeems shares through a dealer, the
redemption price will be the net asset value next calculated
after the shareholder's dealer receives the order which is
promptly transmitted to the Fund, rather than on the day the
Fund receives the shareholder's written request in proper
form. These documents, as described in the preceding section,
are required even if the shareholder's securities dealer has
placed the repurchase order. After receipt of a repurchase
order from the dealer, the Fund will still require a signed
letter of instruction and all other documents set forth above.
A shareholder's letter should reference the Fund, the account
number, the fact that the repurchase was ordered by a dealer
and the dealer's name. Details of the dealer ordered trade,
such as trade date, confirmation number, and the amount of
shares or dollars, will help speed processing of the
redemption. The seven-day period within which the proceeds of
the shareholder's redemption will be sent will begin when the
Fund receives all documents required to complete ("settle")
the repurchase in proper form. The redemption proceeds will
not earn dividends or interest during the time between receipt
of the dealer's repurchase order and the date the redemption
is processed upon receipt of all documents necessary to settle
the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded to
the Fund as soon as possible. The shareholder's dealer may
charge a fee for handling the order. The SAI contains more
information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers on
investments of $1 million or more, a contingent deferred sales
charge of 1% applies to redemptions of those investments
within the contingency period of 12 months of the calendar
month following their purchase. The charge is 1% of the
lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the
total cost of such shares, and is retained by Distributors.
In determining if a charge applies, shares not subject to a
contingent deferred sales charge are deemed to be redeemed
first, in the following order: (i) shares representing amounts
attributable to capital appreciation of those shares held less
than 12 months; (ii) shares purchased with reinvested
dividends and capital gain distributions; and (iii) other
shares held longer than 12 months; and followed by any shares
held less than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for: exchanges;
any account fees, distributions to participants in Trust
Company retirement plan accounts due to death, disability or
attainment of age 59 1/2; tax-free returns of excess
contributions to employee benefit plans; distributions from
employee benefit plans, including those due to plan
termination or plan transfer; redemptions through a Systematic
Withdrawal Plan set up prior to February 1, 1995 and, for
Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's
net asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to a
shareholder's account falling below the minimum specified
account size. In addition to the waiver referred to above,
shares of participants in Trust Company retirement plan
accounts will, in the event of death, disability or attainment
of age 59 1/2, no longer be subject to the contingent deferred
sales charge.
Requests for redemptions for a specified dollar amount will,
unless otherwise specified, result in additional shares being
redeemed to cover any applicable contingent deferred sales
charge while requests for redemption of a specific number of
shares will result in the applicable contingent deferred sales
charge being deducted from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used to
purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these
checks will also be held pending clearance. Shares purchased
by federal funds wire are available for immediate redemption.
In addition, the right of redemption may be suspended or the
date of payment postponed if the Exchange is closed (other
than customary closing) or upon the determination of the SEC
that trading on the Exchange is restricted or an emergency
exists, or if the SEC permits it, by order, for the protection
of shareholders. Of course, the amount received may be more or
less than the amount invested by the shareholder, depending on
fluctuations in the market value of securities owned by the
Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of
certain additional forms to ensure compliance with IRS
regulations. To liquidate a retirement account, a shareholder
or securities dealer may call Franklin's Retirement Plans
Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from
such plans to a participant under age 59 1/2, unless the
distribution meets one of the exceptions set forth in the
Internal Revenue Code, as defined in Treasury regulations.
OTHER
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services
Department or the securities dealer may call Franklin's Dealer
Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative
of record, if any, may be able to execute various transactions
by calling Investor Services at 1-800/632-2301.
All shareholders will be able to: (i) effect a change in
address, (ii) change a dividend option (see "Restricted
Accounts" below), (iii) transfer Fund shares in one account to
another identically registered account in the Fund, and (iv)
exchange Fund shares as described in this Prospectus by
telephone. In addition, shareholders who complete and file an
Agreement as described
under "How to Sell Shares of the Fund - Redemptions by
Telephone" will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by
telephone are genuine. These will include: recording all
telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or
account information requested by the telephone service agent
at the time of the call for the purpose of establishing the
caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the
Fund and Investor Services follow instructions communicated by
telephone which were reasonably believed to be genuine at the
time of their receipt, neither they nor their affiliates will
be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under
no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction
will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because
of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To assure
compliance with all applicable regulations, special forms are
required for any distribution, redemption, or dividend
payment. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain
restrictions may apply to other types of retirement plans.
Changes to dividend options must also be made in writing.
To obtain further information regarding distribution or
transfer procedures, including any required forms, retirement
account shareholders may call to speak to a Retirement Plan
Specialist at 1-800/527-2020 for Franklin accounts or 1-
800/354-9191 (press "2" when prompted to do so) for Templeton
accounts.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will be
difficult to execute because of heavy telephone volume. In
such situations, shareholders may wish to contact their
investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this
Prospectus.
Neither the Fund nor Investor Services will be liable for any
losses resulting from the inability of a shareholder to
execute a telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written
notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as of
1:00 p.m. Pacific time each day that the Exchange is open for
trading. Many newspapers carry daily quotations of the prior
trading day's closing "bid" (net asset value) and "ask"
(offering price, which includes the maximum front-end sales
charge of the Fund).
The net asset value per share of the Fund is determined in the
following manner: The aggregate of all liabilities, accrued
expenses and taxes and any necessary reserves is deducted from
the aggregate gross value of all assets, and the difference is
divided by the number of shares of the Fund outstanding at the
time. For the purpose of determining the aggregate net assets
of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued and
dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are readily
available are valued at the last quoted sale price of the day
or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. Over-the-counter
portfolio securities for which market quotations are readily
available are valued within the range of the most recent bid
and ask prices as obtained from one or more dealers that make
markets in the securities. Portfolio securities which are
traded both in the over-the-counter market and on a stock
exchange are valued according to the broadest and most
representative market as determined by the Manager. Other
securities for which market quotations are readily available
are valued at the current market price, which may be obtained
from a pricing service, based on a variety of factors,
including recent trades, institutional size trading in similar
types of securities (considering yield, risk and maturity)
and/or developments related to specific issues. Securities and
other assets for which market prices are not readily available
are valued at fair value as determined following procedures
approved by the Board of Trustees.
With the approval of the Board, the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above
described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's
account should be directed to Investor Services at the address
shown on the back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current
price, yield or performance information specific to a fund in
the Franklin Funds by calling the automated Franklin TeleFACTS
system (day or night) at 1-800/247-1753. Information about the
Fund may be accessed by entering Fund Code followed by the #
sign, when requested to do so by the automated operator. The
TeleFACTS system is also available for processing exchanges.
See "Exchange Privilege."
To assist shareholders and securities dealers wishing to speak
directly with a representative, the following is a list of the
various Franklin departments, telephone numbers and hours of
operation to call. The same numbers may be used when calling
from a rotary phone:
DEPARTMENT NAME TELEPHONE NO. HOURS OF OPERATION
(PACIFIC TIME)
(Monday through Friday)
SHAREHOLDER SERVICES 1-800/632-2301 6:00 A.M. TO 5:00
P.M.
DEALER SERVICES 1-800/524-4040 6:00 A.M. TO 5:00
P.M.
FUND INFORMATION 1-800/DIAL BEN 6:00 A.M. TO 8:00
P.M.,
8:30 A.M. TO 5:00 P.M.
(SATURDAY)
RETIREMENT PLANS 1-800/527-2020 6:00 A.M. TO 5:00
P.M.
TDD (HEARING IMPAIRED) 1-800/851-0637 6:00 A.M. TO 5:00
P.M.
In order to ensure that the highest quality of service is
being provided, telephone calls placed to or by
representatives in Franklin's service departments may be
accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions of
total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or
risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of
$1,000 invested at the maximum public offering price (offering
price includes front-end sales charge) for one-, five- and ten
year periods, or portion thereof, to the extent applicable,
through the end of the most recent calendar quarter, assuming
reinvestment of all distributions. The Fund may also furnish
total return quotations for other periods or based on
investments at various sales charge levels or at net asset
value. For such purposes total return equals the total of all
income and capital gain paid to shareholders, assuming
reinvestment of all distributions, plus (or minus) the change
in the value of the original investment, expressed as a
percentage of the purchase price.
Current yield reflects the income per share earned by the
Fund's portfolio investments; it is calculated by dividing the
Fund's net investment income per share during a recent 30-day
period by the maximum public offering price on the last day of
that period and annualizing the result.
Yield which is calculated according to a formula prescribed by
the SEC (see the SAI ) is not indicative of the dividends or
distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders
are reflected in the current distribution rate, which may be
quoted to shareholders. The current distribution rate is
computed by dividing the total amount of dividends per share
paid by the Fund during the past 12 months by a current
maximum offering price. Under certain circumstances, such as
when there has been a change in the amount of dividend payout,
or a fundamental change in investment policies, it might be
appropriate to annualize the dividends paid during the period
such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate
differs from the current yield computation because it may
include distributions to shareholders from sources other than
dividends and interest, such as shortterm capital gain, and is
calculated over a different period of time.
In each case performance figures are based upon past
performance, reflect all recurring charges against Fund income
and
will assume the payment of the maximum sales charge on the
purchase of shares. When there has been a change in the sales
charge structure, the historical performance figures will be
restated to reflect the new rate. The investment results of
the Fund, like all other investment companies, will fluctuate
over time; thus, performance figures should not be considered
to
represent what an investment may earn in the future or what
the Fund's yield, distribution rate or total return may be
in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports
containing audited financial statements of the Trust,
including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically
sent to shareholders. Copies may be obtained by investors or
shareholders, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page
of this prospectus.
Additional information on Fund performance is included in
the Fund's Annual Report to Shareholders and the Statement
of Additional Information.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on
December 16, 1986. The Trust is authorized to issue an
unlimited number of shares of beneficial interest, with a
par value of $.01 per share in various series. All shares
have one vote and, when issued, are fully paid,
nonassessable, and redeemable.
All shares of each series have equal voting, dividend and
liquidation rights. Shares of each fund vote separately as
to issues affecting that fund, or the Trust, unless
otherwise permitted by the 1940 Act. The shares have
noncumulative voting rights, which means that in all
elections of trustees, the holders of more than 50% of the
shares voting can elect 100% of the trustees if they choose
to do so and in such event, the holders of the remaining
shares voting will not be able to elect any person or
persons to the Board of Trustees. The Trust does not intend
to hold annual meetings. The Trust may, however, hold a
special shareholder meeting for such purposes as changing
fundamental investment restrictions, approving a new
management agreement or any other matters which are required
to be acted on by shareholders under the 1940 Act. A meeting
may also be called by a majority of the Board of Trustees or
by shareholders holding at least ten percent of the shares
entitled to vote at the meeting. Shareholders may receive
assistance in communicating with other shareholders in
connection with the election or removal of trustees such as
that provided in Section 16(c) of the 1940 Act. The Board of
Trustees may from time to time establish other funds of the
Trust, the assets and liabilities of which will be separate
and distinct from any other fund.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value,
shares of any shareholder whose account has a value of less
than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of
shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided
advance notice is given to the shareholder. More information
is included in the Statement of Additional Information.
OTHER INFORMATION
Shares have no preemptive or subscription rights, and are
fully transferable. There are no conversion rights; however,
holders of shares of any fund may reinvest all or any
portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in
"Exchange Privilege."
Distribution or redemption checks sent to shareholders do
not earn interest or any other income during the time such
checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss to the shareholder
caused by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check,
draft or wire. The Fund has no facility to receive, or pay
out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's
intentions as to ownership. Where there are two co-owners on
the account,
the account will be registered as "Owner 1" and "Owner 2";
the "or" designation is not used except for money market
fund accounts. If co-owners wish to have the ability to
redeem or convert on the signature of only one owner, a
limited power of attorney may be used.
Accounts should not be registered in the name of a minor
either as sole or co-owner of the account. Transfer or
redemption for such an account may require court action to
obtain release of the funds until the minor reaches the
legal age of majority. The account should be registered in
the name of one "Adult" as custodian for the benefit of the
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for"
should only be used if the account is being established
pursuant to a legal, valid trust document. Use of such a
designation in the absence of a legal trust document may
cause difficulties and require court action for transfer or
redemption of the funds.
Shares, whether in certificate form or not, registered as
joint tenants or "Jt Ten" shall mean as "joint tenants with
rights of survivorship" and not as "tenants in common."
Except as indicated, a shareholder may transfer an account
in the Fund carried in "street" or "nominee" name by the
shareholder's securities dealer to a comparably registered
Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have
executed dealer agreements on file with Distributors. Unless
a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and
will so inform the shareholder's delivering securities
dealer. To effect the transfer, a shareholder should
instruct the securities dealer to transfer the account to a
receiving securities dealer and sign any documents required
by the securities dealer(s) to evidence consent to the
transfer. Under current procedures, the account transfer may
be processed by the delivering securities dealer and the
Fund after the Fund receives authorization in proper form
from the shareholder's delivering securities dealer. In the
future, it may be possible to effect such transfers
electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner
or
the owner's nominee listed in publicly available nominee
lists, regardless of whether the account was initially
registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of
record on an investor's account, the investor will be deemed
to have authorized the use of electronic instructions on the
account, including, without limitation, those initiated
through the services of the NSCC, to have adopted as
instruction and signature any such electronic instructions
received by the Fund and the Shareholder Services Agent, and
to have authorized them to execute the instructions without
further inquiry. At the present time, such services which
are available, or which are anticipated to be made available
in the near future, include the "NSCC's Networking,"
"Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment,
or by calling Franklin's Fund Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund
may be required to report to the Internal Revenue Service
("IRS") any taxable dividend, capital gain distribution, or
other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to
individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN")
and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject
to backup withholding if the IRS or a securities dealer
notifies the Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject
to backup withholding for previous under-reporting of
interest or dividend income.
The Fund reserves the right to (1) refuse to open an account
for any person failing to provide a TIN along with the
required certifications and (2) close an account by
redeeming its shares in full at the then current net asset
value upon receipt of notice from the IRS that the TIN
certified as correct by the shareholder is in fact incorrect
or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a
certified TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-
to day management of the Fund's portfolios and have been
since the Fund's inception.
Jack Lemein, Senior Vice President of Advisers, holds a
bachelor of science degree in finance from the University of
Illinois. Mr. Lemein has been in the securities industry
since 1967 and with Advisers since 1984. He is a member of
several securities industry committees and associations.
David Capurro, Portfolio Manager of Advisers, holds a
bachelor of science degree in business administration and a
master's degree in finance from California State University
at Hayward. Mr. Capurro has been with Advisers since 1983.
Tom Runkel, Portfolio Manager of Advisers, is a Chartered
Financial Analyst and holds a bachelor of arts degree in
political science from the University of California at Davis
and a master's degree in business administration from the
University of Santa Clara. Mr. Runkel has been with
Advisers since 1983. He is a member of several securities
industry committees and associations.
FRANKLIN INVESTORS SECURITIES TRUST
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INVESTMENT MANAGER
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
CUSTODIAN
Bank of America NT & SA
555 California Street, 4th Floor
San Francisco, California 94104
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services,
Inc. 777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INDEPENDENT AUDITORS
Coopers & Lybrand
333 Market Street
San Francisco, California 94105
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
For an enlarged version of this
prospectus please call 1-800/DIAL BEN.
Your Representative Is:
36 P 10/94
FRANKLIN CONVERTIBLE SECURITIES
FUND FRANKLIN INVESTORS SECURITIES
TRUST PROSPECTUS MARCH 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX
7777 SAN MATEO, CA 94403-7777 1-
800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open
end management investment company consisting of both
diversified and non-diversified series. Each series of the
Trust in effect represents a separate fund with its own
investment objective and policies with varying possibilities
for income or capital appreciation, and subject to varying
market risks. Through the different series, the Trust
attempts to satisfy different investment objectives.
This Prospectus pertains only to the Franklin Convertible
Securities Fund (the "Fund"), a diversified series whose
investment objective is to maximize total return, consistent
with reasonable risk, by seeking to optimize capital
appreciation and high current income under varying market
conditions. The Fund seeks to achieve this objective
primarily through investing in convertible securities as
described in detail in this Prospectus. There can, of course,
be no assurance that the Fund's objective will be achieved.
This Prospectus is intended to set forth in a clear and
concise manner information about the Fund that a prospective
investor should know before investing. After reading the
Prospectus, it should be retained for future reference; it
contains information about the purchase and sale of shares
and other items which a prospective investor will find useful
to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THE FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON
INVESTMENT GRADE BONDS, COMMONLY KNOWN AS "JUNK BONDS",
ISSUED BY BOTH U.S. AND FOREIGN ISSUERS, WHICH ENTAIL DEFAULT
AND OTHER RISKS GREATER THAN THOSE ASSOCIATED WITH HIGHER
RATED SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE FUND IN LIGHT OF THE
SECURITIES IN WHICH THE FUND INVESTS. SEE "RISK
CONSIDERATIONS - HIGH YIELD SECURITIES."
A Statement of Additional Information ("SAI") concerning the
Fund and other series of the Trust, dated March 1, 1995, as
may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other
matters which may be of interest to some investors. It has
been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown
above.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT
AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE
UNDERWRITER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS PAGE
Expense Table
Financial Highlights
About the Trust
Investment Objective and
EPolicies of the Fund
Risk Considerations
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
Eand Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund
Ein Connection with Retirement Plans
EInvolving Tax-Deferred Investments
Other Programs and Privileges
EAvailable to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information
ERegarding an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
ETaxpayer IRS Certifications
Portfolio Operations
Appendix
<TABLE>
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a
shareholder will bear directly or indirectly in connection
with an investment
in the Fund. These figures are based on aggregate operating
expenses of the Fund, before fee waivers and expense
reductions, for the fiscal year ended October 31, 1994. <S>
<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.50%
Deferred Sales Charge NONE*
Exchange Fee (per transaction)
$5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
0.63%*** 12b-1 Fees
0.20%+ Other Expenses:
Reports to Shareholders 0.05%
Shareholder Servicing Costs 0.05%
Other 0.10%
Total Other Expenses
0.20%
Total Fund Operating Expenses
1.03%***,+
* Investments of $1 million or more are not subject to a
front-
end sales charge; however, a contingent deferred sales
charge of 1% is imposed on certain redemptions within 12
months of the calendar month following such investments.
See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
** $5.00 fee imposed only on Timing Accounts as described
under "Exchange Privilege." All other exchanges are
processed without a fee.
*** Represents the amount that would have been payable to
the investment manager absent a fee reduction by the
investment manager. The investment manager, however, agreed
in advance to waive a portion of its management fees and to
assume responsibility for making payments to offset certain
operating expenses otherwise payable by the Fund. With this
reduction, management fees and total operating expenses
represented 0.55% and 0.95%, respectively, of the average
net assets of the Fund. + Represents the initial rate as
discussed in "Plan of
Distribution" under "Management of the Fund." Actual Rule
12b-1 fees incurred by the Fund for the six months ended
October 31, 1994 were 0.09%, which represents an annualized
rate of 0.19%. Consistent with National Association of
Securities Dealers, Inc.'s rules, it is possible that the
combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charges
permitted under those same rules.
Investors should be aware that the above table is not
intended to reflect in precise detail the fees and expenses
associated with an individual's own investment in the Fund.
Rather the table has been provided only to assist investors
in gaining a more complete understanding of fees, charges
and expenses. For a more detailed discussion of these
matters, investors should refer to the appropriate sections
of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example
illustrates the expenses, including the front-end sales
charge, that apply to a $1,000 investment in the Fund over
various time periods
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each time period.
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN
YEARS
<C> <C> <C>
<C> $55 $76 $99
$165
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING
EXPENSES, BEFORE FEE WAIVERS OR EXPENSE REDUCTIONS, SHOWN
ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment
in the Fund. See "Management of the Fund" for a description
of the Fund's expenses. In addition, federal regulations
require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%.
</TABLE>
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial
highlights for a share of the Fund from the effective date
of the registration statement through each of the fiscal
years ended January 31, 1993, the nine months ended October
31, 1993 and the fiscal year ended October 31, 1994. The
information for each of the five fiscal years in the period
ended October 31, 1994 has been audited by Coopers & Lybrand
L.L.P., independent auditors, whose audit report appears in
the financial statements in the Trust's SAI. The remaining
figures, which are also audited, are not covered by the
auditors' current report. See the discussion "Reports to
Shareholders" under "General Information."
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
- -------------------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSET
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS (LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END TOTAL
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAINS DISTRIBUTIONS OF YEAR RETURN++
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $.58 $(1.168) $(.588) $(.312) $ -- $(.312) $9.10 (4.80)%
1989 9.10 .78 .404 1.184 (.684) -- (.684) 9.60 13.08
1990 9.60 .80 (.395) .405 (.695) -- (.695) 9.31 3.85
1991 9.31 .78 (.729) .051 (.831) -- (.831) 8.53 .37
1992 8.53 .44 2.194 2.634 (.684) -- (.684) 10.48 31.50
1993 10.48 .61 1.034 1.644 (.684) -- (.684) 11.44 16.12
1993(2) 11.44 .45 1.413 1.863 (.513) -- (.513) 12.79 16.50
1994(3) 12.79 .59 (.327) (.263) (.594) (0.119) (.713) 12.34 2.07
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------
RATIO OF NET
NET ASSETS RATIO OF INVESTMENT
AT END EXPENSES INCOME PORTFOLIO
PERIOD OF YEAR TO AVERAGE TO AVERAGE TURNOVER
ENDED (IN 000'S) NET ASSETS NET ASSETS RATE
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
1988(1) $14,734 .15%* 6.82%* 148.67%
1989 17,290 .25 8.27 70.75
1990 14,774 .24 8.25 30.87
1991 15,843 .25 8.90 45.42
1992 20,282 .26 6.84 64.90
1993 28,307 .25 6.01 60.00
1993(2) 47,440 .25* 5.25* 31.05
1994(3) 66,869 .84* 4.84* 68.39
</TABLE>
(1) For the period April 15, 1987 (effective date of registration) to January
31, 1988.
(2) For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
(3) For the year ended October 31, 1994
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value.
During the periods indicated, Franklin Advisers, Inc., the investment manager,
reduced its management fees and reimbursed other expenses incurred by the Funds
in the Trust. Had such action not been taken, the ratios of operating expenses
to average net assets would have been as follows:
<TABLE>
<S> <C>
1988(1)....................94%*
1989.......................90
1990.......................89
1991.......................84
1992.......................94
1993.......................81
1993(2)....................86*
</TABLE>
ABOUT THE TRUST
The Trust, which was organized as a Massachusetts business
trust on December 16, 1986, is an open-end management
investment company, or mutual fund, and is registered with
the SEC under the Investment Company Act of 1940 (the "1940
Act"). The Trust currently consists of six series, each of
which issues a separate series of the Trust's shares and
maintains a totally separate investment portfolio.
Shares of the Fund may be purchased (minimum investment of
$100 initially and $25 thereafter) at the current public
offering price which is equal to the Fund's net asset value
(see "Valuation of Fund Shares") plus a sales charge not
exceeding 4.5% of the offering price. See "How to Buy Shares
of the Fund."
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The Fund seeks to maximize total return, consistent with
reasonable risk, by seeking to optimize capital appreciation
and high current income under varying market conditions. The
Fund pursues this investment objective by investing at least
65% of its net assets (except when maintaining a temporary
defensive position) in convertible securities as described
below, and common stock received upon conversion or exchange
of such securities and retained in the Fund's portfolio to
permit their orderly disposition. This investment objective
has been adopted as a fundamental policy of the Fund and may
not be changed without shareholder approval.
The balance of the Fund's net assets may be invested in
other securities (nonconvertible equity securities and
corporate bonds, covered call options and put options,
securities issued or guaranteed by the U.S. government, its
agencies and instrumentalities, repurchase agreements
collateralized by U.S. government securities, money market
securities and securities of foreign issuers), which, in the
aggregate, are considered to be consistent with the Fund's
investment objective. In addition, the
Fund may invest up to 10% of its total assets in illiquid
securities. As the value of the Fund's portfolio securities
fluctuates, its net asset value per share will also
fluctuate. When investing in convertible securities and in
nonconvertible fixed-income debt securities, the Fund may
purchase both rated and unrated securities depending upon
prevailing market and economic conditions. (See the Appendix
for a description of these ratings.) These ratings, which
represent the opinions of the rating services with respect
to the securities and are not absolute standards of quality,
will be considered in connection with the investment of the
Fund's assets but will not be a determining or limiting
factor. Rather than relying principally on the ratings
assigned by rating services, the investment analysis of
securities being considered for the Fund's portfolio may
also include, among other things, consideration of relative
values, based on such factors as anticipated cash flow,
interest or dividend coverage, asset coverage, earnings
prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and
business conditions, debt maturity schedules and borrowing
requirements and the issuer's changing financial condition
and public recognition thereof. Higher yields are ordinarily
available from securities in the lower-rated categories or
from unrated securities of comparable quality. Convertible
securities generally fall within the lowerrated categories
of nationally recognized statistical rating organizations
("NRSROs") that is, securities rated Baa or lower by Moody's
Investors Service ("Moody's") or BBB or lower by Standard &
Poor's Corporation ("S&P"). The Fund may only invest in
convertible and nonconvertible securities rated at least B
or above by an NRSRO or in securities which are not rated by
any NRSRO but are deemed by the investment manager to be of
comparable quality. To the extent the Fund acquires
securities rated B or unrated securities of comparable
quality, such securities are regarded as speculative in
nature and there may be a greater risk, including the risk
of bankruptcy or default by the issuer, as to the timely
repayment of the principal, and timely payment of interest
or dividends on such securities. As of October 31, 1994,
approximately 65.47% of the Fund's net assets were invested
in lower rated securities (those having a rating below the
four highest grades assigned by the rating services) or in
unrated securities with comparable credit characteristics.
(A breakdown of the securities' ratings is included under
"Risk Considerations - Asset Composition Table.") The Fund
will not invest in securities which are felt by the
investment manager to involve excessive risk. In the event
the rating on an issue held in the Fund's portfolio is
changed by the ratings service or the security goes into
default, such event will be considered by the investment
manager in its evaluation of the overall investment merits
of that security but will not generally result in an
automatic sale of the security.
The Fund will not invest more than 25% of its net assets in
any particular industry. This limitation does not apply to
U.S. government securities and repurchase agreements secured
by such government securities or obligations.
When maintaining a temporary defensive position, the Fund
may invest its assets without limit in U.S. government
securities and, subject to certain tax diversification
requirements, commercial paper (short-term debt securities
of large corporations), certificates of deposit and bankers'
acceptances of banks having total assets in excess of $5
billion, repurchase agreements and other money market
securities.
Convertible Securities. Convertible securities include
preferred stock, bonds or debentures, stock purchase
warrants and other
fixed-income securities which may be exchanged or converted
into a prescribed number of shares of the issuer's
underlying common stock at a specific price during a
specified time period.
Until they mature or are converted or exchanged, convertible
securities retain investment characteristics similar to
those of nonconvertible fixed income securities. Thus, the
interest income and dividends from convertible bonds and
preferred stocks will generally provide a fixed stream of
income with generally higher yields than common stocks, but
lower than nonconvertible securities of similar quality.
Such convertible bonds and preferred stocks are generally
senior securities and, therefore, have a claim to assets of
the corporation prior to the holders of common stock in the
case of liquidation. Convertible securities, however, are
generally subordinate in their claim on assets to similar
nonconvertible securities of the same company.
Since a substantial portion of the Fund's portfolio may at
any time consist of convertible and other fixed-income
securities, changes in the level of interest rates, among
other things, will likely affect the market value of the
Fund's holdings and thus the value of a shareholder's
investment. As the level of interest rates increases, the
market value of convertible securities may decline and,
conversely, as interest rates decline, the market value of
convertible securities may increase. The unique investment
characteristic of convertible securities, i.e., the right to
be exchanged for the issuer's common stock, generally causes
the market value of convertible securities to increase when
the market value of the underlying common stock increases.
Since securities prices fluctuate, however, there can be no
assurance of capital appreciation and most convertible
securities will not reflect the same level of capital
appreciation as their underlying common stocks. When the
underlying common stock is experiencing a decline, the value
of the convertible security tends to decline to a level
approximating the yield-to-maturity basis of straight
nonconvertible debt of similar quality, often called
"investment value," and may not experience the same decline
as the underlying common stock.
Many convertible securities sell at a premium over their
conversion values (i.e., the number of shares of common
stock to be received upon conversion multiplied by the
current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of
capital appreciation due to the conversion privilege. If
this appreciation potential is not realized, the premium may
not be recovered. Such securities tend to have a lesser
income element than other convertibles which trade closer to
their investment value.
Warrants. A warrant is an instrument issued by a corporation
which gives the holder the right to subscribe to a specified
amount of the corporation's capital stock at a set price for
a specified period of time.
The Fund limits its investments in warrants, valued at the
lower of cost or market, to 5% of the Fund's net assets or
to warrants attached to securities.
Options on Equity Securities. In seeking to achieve its
investment objective of maximizing total return, the Fund
may write covered call options on securities it actually
owns which are listed for trading on a national securities
exchange and it may also purchase listed call options
provided that the value of call options purchased will not
exceed 5% of the Fund's net assets.
Call options are short-term contracts (generally having a
duration of nine months or less) which give the purchaser of
the option the right to buy and obligates the writer to sell
the underlying security at the exercise price at any time
during the option period, regardless of the market price of
the underlying security. The purchaser of an option pays a
cash premium, which typically reflects, among other things,
the relationship of the exercise price to the market price
and the volatility of the underlying security, the remaining
term of the option, supply and demand factors and interest
rates.
Call options written by the Fund give the holder the right
to buy the underlying security from the Fund at a stated
exercise price upon exercising the option at any time prior
to its expiration. A call option written by the Fund is
"covered" if the Fund owns or has an absolute right (such as
by conversion) to the underlying security covered by the
call. A call option is also covered if the Fund holds a call
on the same security and in the same principal amount as the
call written and the exercise price of the call held (a) is
equal to or less than the exercise price of the call written
or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations
in a segregated account with its custodian.
When the Fund sells covered call options, it will receive
the cash premium which can be used in whatever way is felt
to be most beneficial to the Fund. The risk associated with
covered option writing is that in the event of a price rise
on the underlying security which would likely trigger the
exercise of the call option, the Fund will not participate
in the increase in price beyond the exercise price. It will
generally be the Fund's policy, in order to avoid the
exercise of a call option written by it, to cancel its
obligation under the call option by entering into a "closing
purchase transaction," if available, unless it is determined
to be in the Fund's interest to deliver the underlying
securities from its portfolio. A closing purchase
transaction consists of the Fund purchasing an option having
the same terms as the option written by the Fund, and has
the effect of canceling the Fund's position as a writer. The
premium which the Fund will pay in executing a closing
purchase transaction may be higher or lower than the premium
it received when writing the option, depending in large part
upon the relative price of the underlying security at the
time of each transaction. The aggregate premiums paid on all
such options held at any time will not exceed 20% of the
Fund's total net assets. As of the date of this Prospectus,
certain state regulations limit the aggregate value of
securities underlying outstanding options.
The Fund may also purchase put options on common stock that
it owns or may acquire through the conversion or exchange of
other securities to protect against a decline in the market
value of the underlying security or to protect the
unrealized gain in an appreciated security in its portfolio
without actually selling the security. A put option gives
the holder the right to sell the underlying security at the
option exercise price at any time during the option period.
The Fund may pay for a put either separately or by paying a
higher price for securities which are purchased subject to a
put, thus increasing the cost of the securities and reducing
the yield otherwise available from the same securities.
To the extent that the Fund does invest in options, it may
be limited by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a
regulated
investment company. Such investments may also be subject to
special tax rules that may affect the amount, character and
timing of income earned by the Fund and distributed to
shareholders. For more information, see the tax section of
the SAI.
OTHER INVESTMENT POLICIES OF THE FUND
The Fund's policies permit investment in convertible and
fixedincome securities without restrictions as to a
specified range of maturities. The Fund may also invest in
securities which are obligations of the U.S. government or
its agencies or instrumentalities. Such U.S. government
securities include, but are not limited to, U.S. Treasury
bonds, notes and bills, Treasury Certificates of
Indebtedness and securities issued by instrumentalities of
the U.S. government. Although participation certificates of
the Government National Mortgage Association ("GNMAs") are
guaranteed as to principal and interest by GNMA, which
guarantee is backed by the full faith and credit of the U.S.
government, the market value of these securities may
fluctuate based upon such factors as changing interest
rates. In addition, mortgages underlying GNMA obligations
are subject to repayment prior to maturity, and in times of
falling mortgage interest rates such premature repayments
may be more likely. To the extent GNMA obligations held by
the Fund are prepaid, the returned principal will be
reinvested in new obligations at thenprevailing interest
rates which may be lower than those of previously held
obligations.
Repurchase Agreements. The Fund may engage in repurchase
transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed
upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer
of securities with an initial market value, including
accrued interest, equal to at least 102% of the dollar
amount invested by the Fund in each agreement, with the
value of the underlying security marked to market daily to
maintain coverage of at least 100%. A default by the seller
might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in
liquidating the collateral. The Fund, however, intends to
enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are
deemed creditworthy by the Fund's investment manager. A
repurchase agreement is deemed to be a loan by the Fund
under the 1940 Act. The U.S. government security subject to
resale (the collateral) will be held on behalf of the Fund
by a custodian approved by the Trust's Board of Trustees and
will be held pursuant to a written agreement.
Short Sales Against the Box. The Fund may make short sales
of common stocks, provided the Fund owns an equal amount of
such securities or owns securities that are convertible or
exchangeable, without payment of further consideration, into
an equal amount of such common stock. In a short sale the
Fund does not immediately deliver the securities sold and
does not receive the proceeds from the sale. The Fund is
said to have a short position in the securities sold until
it delivers the securities sold, at which time it receives
the proceeds of the sale. To secure its obligation to
deliver the securities sold short, the Fund will deposit
collateral with its custodian bank which collateral will
generally consist of an equal amount of such securities or
securities convertible into or exchangeable for at least an
equal amount of such securities. The Fund may make a short
sale when the investment manager believes the price of the
stock may decline and when, for tax or other reasons, the
investment manager does not want to currently sell the stock
or convertible security it owns. In such case, any decline
in the value of the Fund's portfolio securities would be
reduced by a gain in the short sale transaction. Conversely,
any increase in the value of the Fund's portfolio securities
would be reduced by a loss in the short sale transaction.
The Fund may not make short sales or maintain a short
position unless, at all times when a short position is open,
not more than 20% of its total assets (taken at current
value) is held as collateral for such sales.
Borrowing. The Fund does not borrow money or mortgage or
pledge any of its assets except that it may borrow from
banks for temporary or emergency purposes up to 5% of its
total assets and pledge up to 5% of its total assets in
connection therewith.
Loans of Portfolio Securities. Consistent with procedures
approved by the Board of Trustees and subject to the
following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other
institutional investors, provided that such loans do not
exceed 10% of the value of the Fund's total assets at the
time of the most recent loan. The borrower must deposit with
the Fund's custodian collateral with an initial market value
of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to
market daily to maintain collateral coverage of at least
102%. Such collateral shall consist of cash. The lending of
securities is a common practice in the securities industry.
The Fund engages in security loan arrangements with the
primary objective of increasing the Fund's income either
through investing the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there
are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail
financially.
Foreign Securities. The Fund will ordinarily purchase
foreign securities which are traded in the United States or
purchase American Depository Receipts ("ADRs"), which may be
sponsored or unsponsored, which are certificates issued by
U.S. banks representing the right to receive securities of a
foreign issuer deposited with that bank or a correspondent
bank. The Fund may, however, purchase the securities of
foreign issuers directly in foreign markets.
Investments may be in securities of foreign issuers, whether
located in developed or undeveloped countries, but
investments will not be made in any securities issued
without stock certificates or comparable stock documents.
Securities which are acquired by the Fund outside the United
States and which are publicly traded in the United States or
on a foreign securities exchange or in a foreign securities
market are not considered by the Fund to be an illiquid
asset so long as the Fund acquires and holds the security
with the intention of re-selling the security in the foreign
trading market, the Fund reasonably believes it can readily
dispose of the security for cash in the U.S. or foreign
market and current market quotations are readily available.
The Fund presently has no intention of investing more than
30% of its net assets in foreign securities not publicly
traded in the United States. The holding of foreign
securities, however, may be limited by the Fund to avoid
investment in certain Passive Foreign Investment Companies
("PFIC") and the imposition of a PFIC tax on the Fund
resulting from such investments.
Other Policies. It is the policy of the Fund that illiquid
securities (securities that cannot be disposed of within
seven days in the normal course of business at approximately
the amount at which the Fund has valued the securities) may
not constitute, at the time of purchase, more than 10% of
the value of the total net assets of the Fund.
The Fund is subject to a number of additional investment
restrictions, some of which may be changed only with the
approval of shareholders, which limit its activities to some
extent. For a list of these restrictions and more
information concerning the policies discussed herein, please
see the SAI.
RISK CONSIDERATIONS
HIGH YIELDING, FIXED-INCOME SECURITIES
The Fund may invest a substantial portion of its assets in
lower rated, fixed-income securities and unrated securities
of comparable quality. The market values of such securities
tend to reflect individual corporate developments to a
greater extent than do higher rated securities, which react
primarily to fluctuations in the general level of interest
rates. Such lower rated securities also tend to be more
sensitive to economic conditions than higher rated
securities. These lower rated fixedincome securities are
considered by S&P and Moody's, on balance, to be
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligation and will generally involve
more credit risk than securities in the higher rating
categories. Even securities rated BBB or Baa by S&P and
Moody's, ratings which are considered investment grade,
possess some speculative characteristics.
Companies that issue high yielding, fixed-income securities
are often highly leveraged and may not have more traditional
methods of financing available to them. Therefore, the risk
associated with acquiring the securities of such issuers is
generally greater than is the case with higher-rated
securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged
issuers of high yielding securities may experience financial
stress. During these periods, such issuers may not have
sufficient cash flow to meet their interest payment
obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific
corporate developments, or the issuer's inability to meet
specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by
the issuer may be significantly greater for the holders of
high yielding securities, because such securities are
generally unsecured and are often subordinated to other
creditors of the issuer. The default by an issuer of
securities held by the Fund will adversely affect the Fund
by lowering its net asset value (as the fair value of a
security generally declines prior to and at default) and by
decreasing the amount of income available to the Fund from
which dividends may be paid. In addition, if an issuer
defaults after the Fund has paid out dividends based upon
accrued income, reversal of such accrual may result in the
Fund having a return of capital to its shareholders.
On October 31, 1994, no securities in the Fund's portfolio
were in default on their contractual provisions.
The Fund may be required under the Code and Treasury
regulations to accrue income for income tax purposes on
defaulted obligations
and to distribute such income to the Fund's shareholders
even though the Fund is not currently receiving interest or
principal payments on such obligations. In order to generate
cash to satisfy any or all of these distribution
requirements, the Fund may be required to dispose of
portfolio securities that it otherwise would have continued
to hold or to use cash flows from other sources such as the
sale of Fund shares.
High yielding, fixed-income securities frequently have call
or buy-back features which permit an issuer to call or
repurchase the security from the Fund. Although such
securities are typically not callable for a period from
three to five years after their issuance, if a call were
exercised by the issuer during periods of declining interest
rates, the Fund would likely have to replace such called
security with a lower yielding security, thus decreasing the
net investment income to the Fund and dividends to
shareholders. The premature disposition of a high yielding
security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default
may also make it more difficult for the Fund to manage the
timing of its receipt of income, which may have tax
implications. Further information is included under
"Taxation of the Fund and Its Shareholders."
The Fund may have difficulty disposing of certain high
yielding securities because there may be a thin trading
market for a particular security at any given time. The
market for lower-rated fixed-income securities generally
tends to be concentrated among a smaller number of dealers
than is the case for securities which trade in a broader
secondary retail market. Generally, purchasers of these
securities are predominantly dealers and other institutional
buyers, rather than individuals.
To the extent a secondary trading market for high yielding,
fixedincome securities does exist, it is generally not as
liquid as the secondary market for higher-rated securities.
Reduced liquidity in the secondary market may have an adverse
impact on market price and the Fund's ability to dispose of
particular issues, when necessary, to meet the Fund's
liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain
securities may also make it more difficult for the Fund to
obtain market quotations based on actual trades for purposes
of valuing the Fund's portfolio. Current values for these
high yield issues are obtained from pricing services and/or a
limited number of dealers and may be based upon factors other
than actual sales. (See "Valuation of Fund Shares.")
The Fund is authorized to acquire high yielding, fixed-income
securities that are sold without registration under the
federal securities laws and therefore carry restrictions on
resale. While many recent high yielding securities have been
sold with registration rights, covenants and penalty
provisions for delayed registration, if the Fund is required
to sell such restricted securities before the securities have
been registered, it may be deemed an underwriter of such
securities as defined in the Securities Act of 1933, which
entails special responsibilities and liabilities. The Fund
may incur special costs in disposing of such securities;
however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities
during an initial underwriting. Such securities involve
special risks because they are new issues. The Fund has no
arrangement with its underwriters or any other person
concerning the
acquisition of such securities, and the investment manager
will carefully review the credit and other characteristics
pertinent to such new issues.
Factors adversely impacting the market value of high yielding
securities will adversely impact the Fund's net asset value.
For example, adverse publicity regarding lowerrated bonds,
which appeared during 1989 and 1990, along with highly
publicized defaults of some high yield issuers, and concerns
regarding a sluggish economy which continued in
1993, depressed the market for such securities. The Fund may
also incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal
or interest on its portfolio holdings. The Fund will rely on
the investment manager's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. In this
evaluation, the investment manager will take into
consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and
trends, its operating history, the quality of the issuer's
management and regulatory matters.
ASSET COMPOSITION TABLE
For the fiscal year ended October 31, 1994, the Fund's
portfolio contained 65.47% in convertible bonds and
convertible preferred stocks which had been rated below
investment grade (Ba or lower) by Moody's and in bonds which
had not been rated by any NRSRO but which were considered by
the investment manager to have comparable credit
characteristics. A credit rating by an NRSRO evaluates only
the safety of principal and interest of the security, and
does not consider the market value risk associated with an
investment in such a bond. It should be noted that current
ratings are not necessarily indicative of the ratings of
bonds at the time of purchase. The table below shows the
percentage invested in each of the specific rating
categories by Moody's and those that are not rated by any
NRSRO. The information was prepared based on a dollar
weighted average of the Fund's portfolio composition based
on month-end assets for each of the 12 months in the fiscal
year ended October 31, 1994. The Appendix to this Prospectus
includes a description of each rating category.
<TABLE>
<CAPTION>
PERCENTAGE OF BONDS PERCENTAGE OF
STOCKS RATINGS BY MOODY'S IN PORTFOLIO
IN PORTFOLIO
<C> <C>
<C>
Aaa 0.00% 0.00%
Aa 0.00% 0.00%
A 5.32% 4.29%
Baa 7.48% 9.44%
Ba 12.47% 5.09%
B 16.42% 15.79%
Caa 0.43% 0.00%
Ca 0.00% 0.00%
C 0.00% 0.00%
N/R* 12.64% 2.63%
*Bonds to which no specific equivalent rating have been
assigned by Moody's and/or S&P but which have been
determined by the investment manager to be consistent with
the Fund's objective without exposing the Fund to excessive
risk.
</TABLE>
FOREIGN SECURITIES
Investments in foreign securities where delivery takes
place outside the U.S. will involve risks that are
different from
investments in U.S. securities. These risks may include
future unfavorable political and economic developments,
possible withholding taxes, seizure of foreign deposits,
currency controls, higher transactional costs due to a lack
of negotiated commissions, or other governmental
restrictions which might affect the amount and types of
foreign investments made or the payment of principal or
interest on securities the Fund holds. In addition, there
may be less information available about these securities and
it may be more difficult to obtain or enforce a court
judgment in the event of a lawsuit. Fluctuations in currency
convertibility or exchange rates could result in investment
losses for the Fund. Investment in foreign securities may
also subject the Fund to losses due to nationalization,
expropriation or differing accounting practices and
treatments.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S
ACTIVITIES
The assets of the Fund are invested in portfolio securities.
If the securities owned by the Fund increase in value, the
value of the shares of the Fund which the shareholder owns
will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also
decline. In this way, shareholders participate in any change
in the value of the securities owned by the Fund.
In addition to the factors which affect the value of
individual securities, as described in the preceding
sections, a shareholder may anticipate that the value of
Fund shares will fluctuate with movements in the broader
equity and bond markets, as well.
To the extent the Fund's investments consist of debt
securities, changes in interest rates will affect the value
of the Fund's portfolio and thus its share price. Increased
rates of interest which frequently accompany higher
inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. To the extent
the Fund's investments consist of common stocks, a decline
in the market, expressed for example by a drop in the Dow
Jones Industrials or the Standard & Poor's 500 average or
any other equity based index, may also be reflected in
declines in the Fund's share price. History reflects both
increases and decreases in the prevailing rate of interest
and in the valuation of the market, and these may reoccur
unpredictably in the future.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the
overall management of the Trust and for electing the
officers of the Trust who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as
the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr.,
who own approximately 20% and 16%, respectively, of
Resources' outstanding shares. Resources is engaged in
various aspects of the financial services industry through
its various subsidiaries (the "Franklin Templeton Group").
Advisers acts as investment manager or administrator to 33
U.S. registered investment companies (111 separate series)
with aggregate assets of over $73 billion.
Pursuant to the management agreement, the Manager supervises
and implements the Fund's investment activities and provides
certain
administrative services and facilities which are necessary
to conduct the Fund's business.
During the fiscal year ended October 31, 1994, fees totaling
0.63% of the average monthly net assets of the Fund would
have accrued to Advisers. Total operating expenses,
including management fees, would have represented 1.03% of
the average net assets of the Fund. Pursuant to an agreement
by Advisers to limit its fees, the Fund paid management fees
totaling 0.55% of the average net assets of the Fund and
operating expenses totaling 0.95%. This arrangement may be
terminated by Advisers at any time.
Among the responsibilities of the Manager under the
management agreement is the selection of brokers and dealers
through whom transactions in the Fund's portfolio securities
will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more
than one broker is able to provide the best execution, the
Manager will consider the furnishing of quotations and of
other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of
shares of the Fund, as factors in selecting a broker.
Further information is included under "The Trust's Policies
Regarding Brokers Used on Portfolio Transactions" in the
SAI.
Shareholder accounting and many of the clerical functions
for the Fund are performed by Franklin/Templeton Investor
Services, Inc. ("Investor Services" or "Shareholder Services
Agent"), in its capacity as transfer agent and dividend
paying agent. Investor Services is a wholly-owned subsidiary
of Resources.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date"), the Fund
adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred
by Distributors or others in the promotion and distribution
of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and
other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution
or service fees paid to securities dealers or their firms or
others who have executed a servicing agreement with the
Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such
distribution expenses is 0.25% per annum of the average
daily net assets of the Fund, payable on a quarterly basis.
All expenses of distribution and marketing in excess of
0.25% per annum will be borne by Distributors, or others who
have incurred them, without reimbursement from the Fund. The
Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund,
Advisers or Distributors, to the extent such payments are
deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund
within the context of Rule 12b-1. The payments under the
Plan are included in the maximum operating expenses which
may be borne by the Fund.
In implementing the Plan, the Board of Trustees has
determined that the annual fees payable thereunder will be
equal to the sum of: (i) the amount obtained by multiplying
0.25% by the average daily net assets represented by shares
of the Fund that were
acquired by investors on or after the Effective Date ("New
Assets"), and (ii) the amount obtained by multiplying 0.15%
by the average daily net assets represented by shares of the
Fund that were acquired before the Effective Date ("Old
Assets"). Such fees will be paid to the current securities
dealer of record on the shareholder's account. In addition,
until such time as the maximum payment is reached on a
yearly basis, up to an additional 0.05% will be paid to
Distributors under the Plan. The payments to be made to
Distributors will be used by Distributors to defray other
marketing expenses that have been incurred in accordance
with the Plan, such as advertising.
The fee is a Fund expense so that all shareholders
regardless of when they purchased their shares will bear
Rule 12b-1 expenses at the same rate. That rate initially
will be at least 0.20% (0.15% plus 0.05%) of such average
daily net assets and, as Fund shares are sold on or after
the Effective Date, will increase over time. Thus, as the
proportion of Fund shares purchased on or after the
Effective Date increases in relation to outstanding Fund
shares, the expenses attributable to payments under the Plan
will also increase (but will not exceed 0.25% of average
daily net assets). While this is the currently anticipated
calculation for fees payable under the Plan, the Plan
permits the Fund's trustees to allow the Fund to pay a full
0.25% on all assets at any time. The approval of the Trust's
Board of Trustees would be required to change the method of
calculation of the payments to be made under the Plan.
For more information, please see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make
to its shareholders:
1. Income dividends. The Fund receives income in the form of
dividends, interest and other income derived from its
investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital
gains or losses in connection with sales or other
dispositions of its portfolio securities. Distributions by
the Fund derived from net short-term and net long-term
capital gains (after taking into account any net capital
loss carryovers) may generally be made once a year in
December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31, its
fiscal year end. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The
Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or
adjust the timing of these distributions for operational or
other reasons.
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without
prior notice to or approval by shareholders, the Fund's
current policy is to declare income dividends monthly for
shareholders of record generally on the first business day
preceding the 15th of the month, payable on or about the
last business day of that month. The amount of income
dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion
of the Board of Trustees. Fund shares are quoted exdividend
on the first business day following the record date
(generally the 15th day of the month or prior business day
depending on the record date). THE FUND DOES NOT PAY
"INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN
INVESTMENT IN ITS SHARES.
In order to be entitled to a dividend, an investor must have
acquired Fund shares prior to the close of business on the
record date. An investor considering purchasing Fund shares
shortly before the record date of a distribution should be
aware that because the value of the Fund's shares is based
directly on the amount of its net assets, rather than on the
principle of supply and demand, any distribution of income
or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution.
While a dividend or capital gain distribution received
shortly after purchasing shares represents, in effect, a
return of a portion of the shareholder's investment, it may
be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain
distributions, if any, will be automatically reinvested in
the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge)
on the dividend reinvestment date. Shareholders have the
right to change their election with respect to the receipt
of distributions by notifying the Fund, but any such change
will be effective only as to distributions for which the
record date is seven or more business days after the Fund
has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions
in the form of additional shares. This is a convenient way
to accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application
included with this Prospectus, a shareholder may direct the
selected distributions to another fund in the Franklin Group
of Funds(Registered Trademark) or the Templeton Funds, to
another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the
Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last
option is requested, the shareholder should allow at least
15 days for initial processing. Dividends which may be paid
in the interim will be sent to the address of record.
Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services
Department. Dividend and capital gain distributions are
eligible for investment in another fund in the Franklin
Group of Funds or the Templeton Funds at net asset value.
See "Purchases at Net Asset Value" under "How to Buy Shares
of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax
considerations which affect mutual funds and their
shareholders. Additional information on tax matters relating
to the Fund and its
shareholders is included in the section entitled "Additional
Information Regarding Taxation" in the SAI.
Each Fund of the Trust is treated as a separate entity for
federal income tax purposes. The Fund intends to continue to
qualify for treatment as a regulated investment company
under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to
the sources of its income and diversification of its assets,
the Fund will not be liable for federal income or excise
taxes.
For federal income tax purposes, any income dividends which
the shareholder receives from the Fund, as well as any
distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to
receive them in cash or in additional shares. Distributions
derived from the excess of net long-term capital gain over
net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has
owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For corporate investors, dividends from net investment
income will generally qualify in part for the corporate
dividends received deduction. The portion of the dividends
so qualified, however, depends on the aggregate qualifying
dividend income received by the Fund from domestic (U.S.)
sources. For the fiscal year ended October 31, 1994, 43.42%
of the income dividends paid by the Fund qualified for the
corporate dividends-received deduction, subject to certain
holding period and debt financing restrictions imposed under
the Code on the corporation claiming the deduction.
Pursuant to the Code, certain distributions which are
declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder
until the following January, will be treated as if received
by the shareholder on December 31 of the calendar year in
which they are declared.
Redemptions and exchanges of Fund shares are taxable events
on which a shareholder may realize a gain or loss. Any loss
incurred on the sale or exchange of Fund shares, held for
six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with
respect to such shares.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid and
will, promptly after the close of each calendar year, advise
them of the tax status for federal income tax purposes of
such dividends and distributions.
Shareholders who are not U.S. persons, for purposes of
federal income taxation, should consult with their financial
or tax advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by them
from the Fund and the application of foreign tax laws to
these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through
securities dealers which execute an agreement with
Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The
minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans
established by the Franklin Templeton Group. The Fund and
Distributors reserve the right to refuse any order for the
purchase of shares.
The Fund may impose a $10 charge for each returned item,
against any shareholder account which, in connection with
the purchase of Fund shares, submits a check or a draft
which is returned unpaid to the Fund.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is the net asset value per share plus a sales charge,
next computed (1) after the shareholder's securities dealer
receives the order which is promptly transmitted to the Fund
or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a
completed Shareholder Application accompanied by a
negotiable check). The sales charge is a variable percentage
of the offering price depending upon the amount of the sale.
On orders for 100,000 shares or more, the offering price
will be calculated to four decimal places. On orders for
less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net
asset value per share is included under the caption
"Valuation of Fund Shares."
Set forth below is a table of total sales charges or
underwriting commissions and dealer concessions.
<TABLE>
TOTAL SALES CHARGE
<CAPTION>
AS A AS A DEALER
PERCENTAGE PERCENTAGE CONCESSION AS
OF OF NET A
PERCENTAGE
SIZE OF TRANSACTION OFFERING AMOUNT OF
OFFERING
AT OFFERING PRICE PRICE INVESTED
PRICE*,***
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less 3.75% 3.90% 3.25%
than $250,000
$250,000 but less 2.75% 2.83% 2.50%
than $500,000
$500,000 but less 2.25% 2.30% 2.00%
than $1,000,000
$1,000,000 or more none none (see
below)**
* Financial institutions or their affiliated brokers may
receive an agency transaction fee in the percentages set
forth above. ** The following commissions will be paid by
Distributors, from its own resources, to securities dealers
who initiate and are responsible for purchases of $1
million or more: 1.00% on sales
of $1 million but less than $2 million, plus 0.80% on sales
of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. Dealer concession breakpoints
are reset every 12 months for purposes of additional
purchases.
*** At the discretion of Distributors, all sales charges may
at times be allowed to the securities dealer. If 90% or more
of the sales commission is allowed, such securities dealer
may be deemed to be an underwriter as that term is defined
in the Securities
Act of 1933, as amended.
</TABLE>
No front-end sales charge applies on investments of $1
million or more, but a contingent deferred sales charge of
1% is imposed on certain redemptions of all or a portion of
investments of $1 million or more within 12 months of the
calendar month following such investments ("contingency
period"). See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
The size of a transaction which determines the applicable
sales charge on the purchase of Fund shares is determined by
adding the amount of the shareholder's current purchase plus
the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the
funds in the Franklin Group of Funds(Registered Trademark)
and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the
Franklin Group of Funds except Franklin Valuemark Funds and
Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors
or its affiliates (although certain investments may not have
the same schedule of sales charges and/or may not be subject
to reduction) and (c) the U.S. mutual funds in the Templeton
Group of Funds except Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). (Franklin Funds and Templeton Funds
are collectively referred to as the "Franklin Templeton
Funds".) Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors, or one of its affiliates, may make payments,
out of its own resources, of up to 1% of the amount
purchased to securities dealers who initiate and are
responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA
rollovers), certain non-designated plans, certain trust
companies and trust departments of banks and certain
retirement plans of organizations with collective retirement
plan assets of $10 million or more. See definitions under
"Description of Special Net Asset Value Purchases" and as
set forth in the SAI.
Distributors, or one of its affiliates, out of its own
resources, may also provide additional compensation to
securities dealers in connection with sales of shares of the
Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers in connection with
conferences, sales or training programs for their employees,
seminars for the public, advertising, sales campaigns and/or
shareholder services and programs regarding one or more of
the Franklin Templeton Funds, and other dealer-sponsored
programs or events. In some instances, this compensation may
be made available only to certain securities dealers whose
representatives have sold or are expected to sell
significant amounts of shares of the Franklin Templeton
Funds. Compensation may include payment for travel expenses,
including lodging, incurred in connection with trips taken
by invited registered representatives and members of their
families to locations within or outside of the United States
for meetings or seminars of a business nature. Dealers may
not use sales of the Fund's shares to qualify for this
compensation to the extent such may be prohibited by the
laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the
Fund or its shareholders.
Certain officers and trustees of the Fund are also
affiliated
with Distributors. A detailed description is included in the
SAI.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which
provide for a reduced sales charge. To be certain to obtain
the reduction of the sales charge, the investor or the
dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In
determining whether a purchase qualifies for any of the
discounts, investments in any Franklin Templeton Investments
may be combined with those of the investor's spouse and
children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is
available, even though there may be a number of
beneficiaries of the account. In addition, an investment in
the Fund may qualify for a reduction in the sales charge
under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value
(whichever is higher) of existing investments in the
Franklin Templeton Investments may be combined with the
amount of the current purchase in determining the sales
charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for
a reduced sales charge on a purchase of shares of the Fund
by completing the Letter of Intent section of the
Shareholder Application (the "Letter of Intent" or
"Letter"). By completing the Letter, the investor expresses
an intention to invest during the next 13 months a specified
amount which if made at one time would qualify for a reduced
sales charge and grants to Distributors a security interest
in the reserved shares and irrevocably appoints Distributors
as attorney-in-fact with full power of substitution to
surrender for redemption any or all shares for the purpose
of paying any additional sales charge due. Purchases under
the Letter of Intent will conform with the requirements of
Rule 22d-1 under the 1940 Act. The investor or the
investor's securities dealer must inform Investor Services
or Distributors that this Letter is in effect each time a
purchase is made.
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH
ARE LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE
PURCHASES") ACKNOWLEDGES AND AGREES TO THE FOLLOWING
PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of
the total intended purchase will be reserved in shares of
the Fund, registered in the investor's name, to assure that
the full applicable sales charge will be paid if the
intended purchase is not completed. The reserved shares will
be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions
on the reserved shares will be paid as directed by the
investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. For more
information, see "Additional Information Regarding
Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of
the current purchase. For example, if members of the group
had previously invested and still held $80,000 of Fund
shares and now were
investing $25,000, the sales charge would be 3.75%.
Information concerning the current sales charge applicable
to a group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence
for more than six months, (ii) has a purpose other than
acquiring Fund shares at a discount and (iii) satisfies
uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, be available
to arrange for group meetings between representatives of the
Fund or Distributors and the members, agree to include sales
and other materials related to the Fund in its publications
and mailings to members at reduced or no cost to
Distributors, and seek to arrange for payroll deduction or
other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such
time as the investor notifies the Fund and the investor's
employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the
payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time
the money reaches the Fund. The investment in the Fund will
be made at the offering price per share determined on the
day that both the check and payroll deduction data are
received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition
of either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, directors,
trustees and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2)
companies exchanging shares with or selling assets pursuant
to a merger, acquisition or exchange offer; (3) insurance
company separate accounts for pension plan contracts; (4)
accounts managed by the Franklin Templeton Group; (5)
shareholders of Templeton Institutional Funds, Inc.
reinvesting redemption proceeds from that fund, under an
employee benefit plan qualified under section 401 of the
Code, in shares of the Fund; (6) certain unit investment
trusts and unit holders of such trusts reinvesting their
distributions from the trusts in the Fund; (7) registered
securities dealers and their affiliates, for their
investment account only; and (8) registered personnel and
employees of securities dealers and by their spouses and
family members, in accordance with the internal policies and
procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by
persons who have redeemed, within the previous 120 days,
their shares of the Fund or another of the Franklin
Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on
redemption. An investor may reinvest an amount not exceeding
the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed
and subsequently repurchased, a new contingency period will
begin. Shares of the Fund redeemed in connection with an
exchange into another fund (see "Exchange Privilege") are
not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of
shares of the Fund must be received by the Fund or the
Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures.
Reinvestment at net asset value may also be handled by a
securities dealer or other financial institution, who may
charge the shareholder a fee for this service. The
redemption is a taxable transaction but reinvestment without
a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If
there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within
a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax
section of this Prospectus and the SAI.
Dividends and capital gains received in cash by the
shareholder may also be used to purchase shares of the Fund
or another of the Franklin Templeton Funds at net asset
value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such
distribution. To exercise this privilege, a written request
to reinvest the distribution must accompany the purchase
order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions
in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by investors who have, within the past 60 days, redeemed an
investment in an unaffiliated mutual fund which charged the
investor a contingent deferred sales charge upon redemption
and which has investment objectives similar to those of the
Fund.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by broker-dealers who have entered into a supplemental
agreement with Distributors, or by registered investment
advisers affiliated with such broker-dealers, on behalf of
their clients who are participating in a comprehensive fee
program (sometimes known as a wrap fee program).
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by anyone who has taken a distribution from an existing
retirement plan already invested in the Franklin Templeton
Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such
distribution. In order to exercise this privilege, a written
order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust
Company"), the Fund or Investor Services, within 120 days
after the plan distribution. A prospectus outlining the
investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll
free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by any state, county, or city, or any
instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment
laws from paying a sales charge or commission in connection
with the purchase of shares of any registered management
investment company ("an eligible governmental authority").
SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors
considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net
asset
value is made through a securities dealer who has executed a
dealer agreement with Distributors, Distributors or one of
its affiliates may make a payment, out of its own resources,
to such securities dealer in an amount not to exceed 0.25%
of the amount invested. Contact Franklin's Institutional
Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by certain designated retirement plans, including
profit sharing, pension, 401(k) and simplified employee
pension plans ("designated plans"), subject to minimum
requirements with respect to number of employees or amount
of purchase, which may be established by Distributors.
Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13
month period in the Fund or in any of the Franklin
Templeton Investments totals at least $1,000,000. Employee
benefit plans not designated above or qualified under
Section 401 of the Code ("non-designated plans") may be
afforded the same privilege if they meet the above
requirements as well as the uniform criteria for qualified
groups previously described under "Group Purchases" which
enable Distributors to realize economies of scale in its
sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trust companies and bank trust departments for funds over
which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are
subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors.
Currently, those criteria require that the amount invested
or to be invested during the subsequent 13-month period in
the Fund or any of the Franklin Templeton Investments must
total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds
received by the close of business on the next business day
following such order.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trustees or other fiduciaries purchasing securities for
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without
regard to where such assets are currently invested.
Refer to the SAI for further information.
GENERAL
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling
Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND
IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or
employer-
sponsored retirement plans involving tax-deferred
investments. The Fund may be used as an investment vehicle
for an existing retirement plan, or the Trust company may
provide the plan documents and serve as custodian or
trustee. A plan document must be adopted for a plan to be in
existence.
The Trust Company, an affiliate of Distributors, can serve
as custodian or trustee for retirement plans. Brochures for
the Trust Company plans contain important information
regarding eligibility, contribution and deferral limits and
distribution requirements. Please note that an application
other than the one contained in this Prospectus must be used
to establish a retirement plan account with the Trust
Company. To obtain a retirement plan brochure or
application, call toll free 1800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan
accounts. Specific forms are required to be completed for
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax
or benefits and pension plan consultants before choosing a
retirement plan. In addition, retirement plan investors
should consider consulting their investment representatives
or advisers concerning investment decisions within their
plans.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS
SECTION MAY NOT BE AVAILABLE DIRECTLY FROM THE FUND TO
SHAREHOLDERS WHOSE SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR
NETWORKED ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING
CORPORATION ("NSCC") (SEE THE SECTION CAPTIONED "ACCOUNT
REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and
capital gain distributions, are generally credited to an
account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining
shares in uncertificated form (also known as "plan balance")
minimizes the risk of loss or theft of a share certificate.
A lost, stolen or destroyed certificate cannot be replaced
without obtaining a sufficient indemnity bond. The cost of
such a bond, which is generally borne by the shareholder,
can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if
requested in writing by the shareholder or by the securities
dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that
period and after each other transaction which affects the
shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including
the number of shares in "plan balance" for the account of
the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be
able to arrange to make additional purchases of shares
automatically on a monthly basis by electronic funds
transfer from a checking
account, if the bank which maintains the account is a member
of the Automated Clearing House, or by preauthorized checks
drawn on the shareholder's bank account. A shareholder may,
of course, terminate the program at any time. The
Shareholder Application included with this Prospectus
contains the requirements applicable to this program. In
addition, shareholders may obtain more information
concerning this program from their securities dealers or
from Distributors.
The market value of the Fund's shares is subject to
fluctuation. Before undertaking any plan for systematic
investment, the investor should keep in mind that such a
program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided
that the net asset value of the shares held by the
shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal
Plan. The minimum amount which the shareholder may withdraw
is $50 per withdrawal transaction although this is merely
the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject
to mandatory distribution requirements are not subject to
the $50 minimum. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder
establishes a plan, any capital gain distributions and
income dividends paid by the Fund will be reinvested for the
shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of
shares at net asset value on the day of the transaction
(which is generally the first business day of the month in
which the payment is scheduled) with payment generally
received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may
direct the selected withdrawals to another of the Franklin
Templeton Funds, to another person, or directly to a
checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to
the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total
plan balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a
sale for federal income tax purposes. Because the amount
withdrawn under the plan may be more than the shareholder's
actual yield or income, part of the payment may be a return
of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the
additional purchases. The shareholder should ordinarily not
make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time
such a plan is in effect. A Systematic Withdrawal Plan may
be terminated on written notice by the shareholder or the
Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the
account, or upon the Fund's receipt of notification of the
death or incapacity of the shareholder. Shareholders may
change the amount (but not below the specified minimum) and
schedule of withdrawal payments, or suspend one such
payment, by giving written notice to Investor Services at
least seven business days prior to the end of the month
preceding a scheduled payment. Share certificates may not be
issued while a Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual
funds with various investment objectives and policies. The
shares of most of these mutual funds are offered to the
public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the
Fund shares may be exchanged for shares of other Franklin
Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such
fund's stated eligibility requirements and investment
minimums. Investors should review the prospectus of the fund
they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations
on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges. Exchanges may
be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of
the written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD,
IF ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY
CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(REGISTERED TRADEMARK) SYSTEM (DAY OR
NIGHT) AT 1800/247-1753. IF THE SHAREHOLDER DOES NOT WISH
THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, THE FUND OR
INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to
effect exchanges from the Fund into an identically
registered account in one of the other available Franklin
Templeton Funds. The Telephone Exchange Privilege is
available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The
Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are
genuine. Please refer to "Telephone Transactions
Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be
difficult to implement and the TeleFACTS(Registered
Trademark) option may not be available. In this event,
shareholders should follow the other exchange procedures
discussed in this section, including
the procedures for processing exchanges through securities
dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the
Fund's shares, Investor Services will accept exchange orders
by telephone or by other means of electronic transmission
from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be
effective only for uncertificated shares on deposit in the
shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a
fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject to
a contingent deferred sales charge in the original fund
purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will
be imposed. The contingency period will be tolled (or
stopped) for the period such shares are exchanged into and
held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
Exchanges are made on the basis of the net asset values of
the funds involved, except as set forth below. Exchanges of
shares of the Fund which were purchased without a sales
charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless
the investment on which no sales charge was paid was
transferred in from a fund on which the investor paid a
sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a
higher sales charge will be charged the difference, unless
the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests
the exchange of the total value of the Fund account,
declared but unpaid income dividends and capital gain
distributions will be transferred to the fund being
exchanged into and will be invested at net asset value.
Because the exchange is considered a redemption and purchase
of shares, the shareholder may realize a gain or loss for
federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding
the possible tax consequences of such an exchange is
included in the tax section in this Prospectus and in the
SAI.
There are differences among the Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the
shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the
Fund pursuant to the exchange privilege, the Fund might have
to liquidate portfolio securities it might otherwise hold
and incur the additional costs related to such transactions.
On the other hand, increased use of the exchange privilege
may result in periodic large inflows of money. If this
should occur, it is the general policy of the Fund to
initially invest this money in short-term, interest-bearing
money market instruments, unless it is felt that attractive
investment opportunities consistent with the Fund's
investment objectives exist immediately. Subsequently, this
money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as
orderly a manner as is possible when attractive investment
opportunities arise.
The Exchange Privilege may be modified or discontinued by
the Fund at any time upon 60 days' written notice to
shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may
accomplish exchanges directly. Certain restrictions may
apply, however, to other types of retirement plans. See
"Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market
timing services to purchase or redeem shares based on
predetermined market indicators ("Timing Accounts") will be
charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective
prospectuses, certain funds do not accept or may place
differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose
transactions seem to follow a timing pattern who: (i) makes
an exchange request out of the Fund within two weeks of an
earlier exchange request out of the Fund, or (ii) makes more
than two exchanges out of the Fund per calendar quarter, or
(iii) exchanges shares equal in value to at least $5
million, or more than 1% of the Fund's net assets. Accounts
under common ownership or control, including accounts
administered so as to redeem or purchase shares based upon
certain predetermined market indicators, will be aggregated
for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of
exchange requests by any Timing Account, person, or group
if, in the Manager's judgment, the Fund would be unable to
invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be
adversely affected. A shareholder's purchase exchanges may
be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive
to the Fund and therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order
for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and
receive from the Fund the value of the shares. Shares may be
redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of
this Prospectus, and any share certificates which have been
issued for the shares being redeemed, properly endorsed and
in order for transfer. The shareholder will then receive
from the Fund the value of the shares based upon the net
asset value per share next computed after the written
request in proper form is received by Investor Services.
Redemption requests received after the time at which the net
asset value is calculated (1:00 p.m. Pacific time) each day
that the New York Stock Exchange (the "Exchange") is open
for business will receive the price calculated on the
following business day. Shareholders are requested to
provide a telephone number(s) where they may be reached
during business hours, or in the evening if preferred.
Investor Services' ability to contact a shareholder promptly
when necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE
GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE
FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone
other than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any
address other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in
excess of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based
on the transfer instructions, including, for example,
when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple
owners have a dispute or give inconsistent instructions
to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered
owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the
subject of divorce proceedings, or (f) the authority of
a representative of a corporation, partnership,
association, or other entity has not been established
to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the
Securities Exchange Act of 1934. Generally, eligible
guarantor institutions include (1) national or state
banks, savings associations, savings and loan
associations, trust companies, savings banks,
industrial loan companies and credit unions; (2)
national securities exchanges, registered securities
associations and clearing agencies; (3) securities
dealers which are members of a national securities
exchange or a clearing agency or which have minimum net
capital of $100,000; or (4) institutions that
participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature
guarantee medallion program. A notarized signature will
not be sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be
accompanied by the share certificate and a share
assignment form signed by the registered shareholders
exactly as the account is registered,
with the signature(s) guaranteed as referenced above.
Shareholders are advised, for their own protection, to
send the share certificate and assignment form in
separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court
jurisdiction require the following documentation to be
in proper form:
Corporation - (1) Signature guaranteed letter of instruction
from the authorized officer(s) of the corporation and
(2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction
from a general partner and (2) pertinent pages from the
partnership agreement identifying the general partners
or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from
the trustee(s) and (2) a copy of the pertinent pages of
the trust document listing the trustee(s) or a
Certification for Trust if the trustee(s) are not
listed on the account registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents
and the applicable state law since these accounts have
varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in
proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"),
included with this Prospectus, may redeem shares of the
Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions
Restricted Accounts." INFORMATION MAY BE OBTAINED BY
WRITING TO THE FUND OR INVESTOR SERVICES AT THE ADDRESS
SHOWN ON THE COVER OR BY CALLING 1-800/632-2301. THE
FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE
PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY
TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE
RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER
"TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with the completed Agreement on
file, redemptions of uncertificated shares or shares
which have previously been deposited with the Fund or
Investor Services may be made for up to $50,000 per day
per Fund account. Telephone redemption requests
received before 1:00 p.m. Pacific time on any business
day will be processed that same day. The redemption
check will be sent within seven days, made payable to
all the registered owners on the account, and will be
sent only to the address of record. Redemption requests
by telephone will not be accepted within 30 days
following an address change by telephone. In that case,
a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments,
government entities, and qualified retirement plans
which qualify to purchase shares at net asset value
pursuant to the terms of this Prospectus) which wish to
execute redemptions in excess of $50,000 must complete
an Institutional Telephone Privileges Agreement which
is available from Franklin's Institutional
Services Department by telephoning 1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities
dealers who have entered into a dealer or similar
agreement with Distributors. This is known as a
repurchase. The only difference between a normal
redemption and a repurchase is that if the shareholder
redeems shares through a dealer, the redemption price
will be the net asset value next calculated after the
shareholder's securities dealer receives the order
which is promptly transmitted to the Fund, rather than
on the day the Fund receives the shareholder's written
request in proper form. These documents, as described
in the preceding section, are required even if the
shareholder's securities dealer has placed the
repurchase order. After receipt of a repurchase order
from the securities dealer, the Fund will still require
a signed letter of instruction and all other documents
set forth above. A shareholder's letter should
reference the Fund, the account number, the fact that
the repurchase was ordered by a securities dealer and
the securities dealer's name. Details of the dealer
ordered trade, such as trade date, confirmation number,
and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period
within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund
receives all documents required to complete ("settle")
the repurchase in proper form. The redemption proceeds
will not earn dividends or interest during the time
between receipt of the securities dealer's repurchase
order and the date the redemption is processed upon
receipt of all documents necessary to settle the
repurchase. Thus, it is in a shareholder's best
interest to have the required documentation completed
and forwarded to the Fund as soon as possible. The
shareholder's securities dealer may charge a fee for
handling the order. The SAI contains more information
on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers
on investments of $1 million or more, a contingent
deferred sales charge of 1% applies to redemptions of
those investments within the contingency period of 12
months of the calendar month following their purchase.
The charge is 1% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the total cost of such
shares, and is retained by Distributors. In determining
if a charge applies, shares not subject to a contingent
deferred sales charge are deemed to be redeemed first,
in the following order: (i) shares representing amounts
attributable to capital appreciation of those shares
held less than 12 months; (ii) shares purchased with
reinvested dividends and capital gain distributions;
and (iii) other shares held longer than 12 months; and
followed by any shares held less than 12 months, on a
"first in, first out" basis.
The contingent deferred sales charge is waived for:
exchanges; account fees; distributions to participants
in Trust Company retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free
returns of excess contributions to employee benefit
plans; distributions from employee benefit plans,
including those due to plan termination or plan
transfer; redemptions through a Systematic Withdrawal
Plan set up prior to February 1, 1995 and, for
Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net
asset value (3% quarterly, 6% semiannually or 12%
annually); and
redemptions initiated by the Fund due to a shareholder's
account falling below the minimum specified account
size. In addition to the waiver referred to above,
shares of participants in Trust Company retirement plan
accounts will, in the event of death, disability or
attainment of age 59 1/2, no longer be subject to the
contingent deferred sales charge.
Requests for redemptions for a specified dollar amount,
unless otherwise specified by the shareholder, will
result in additional shares being redeemed to cover any
applicable contingent deferred sales charge while
requests for redemption of a specific number of shares
will result in the applicable contingent deferred sales
charge being deducted from the total dollar amount
redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used
to purchase Fund shares, which may take up to 15 days
or more. Although the use of a certified or cashier's
check will generally reduce this delay, shares
purchased with these checks will also be held pending
clearance. Shares purchased by federal funds wire are
available for immediate redemption. In addition, the
right of redemption may be suspended or the date of
payment postponed if the Exchange is closed (other than
customary closing) or upon the determination of the SEC
that trading on the Exchange is restricted or an
emergency exists, or if the SEC permits it, by order,
for the protection of shareholders. Of course, the
amount received may be more or less than the amount
invested by the shareholder, depending on fluctuations
in the market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion
of certain additional forms to ensure compliance with
Internal Revenue Service ("IRS") regulations. To
liquidate a retirement plan account, a shareholder or
securities dealer may call Franklin's Retirement Plans
Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from
such plans to a participant under age 59 1/2, unless
the distribution meets one of the exceptions set forth
in the Code.
OTHER
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services
Department or the securities dealer may call Franklin's
Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative
of record, if any, may be able to execute various
transactions by calling Investor Services at 1-800/632
2301.
All shareholders will be able to: (i) effect a change in
address, (ii) change a dividend option (see "Restricted
Accounts" below), (iii) transfer Fund shares in one
account to another identically registered account in
the Fund, and (iv) exchange Fund shares as described in
this Prospectus by telephone. In addition, shareholders
who complete and file an Agreement as described under
"How to Sell Shares of the Fund - Redemptions by
Telephone" will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by
telephone are genuine. These will include: recording
all telephone calls requesting account activity by
telephone, requiring that the caller provide certain
personal and/or account information requested by the
telephone service agent at the time of the call for the
purpose of establishing the caller's identification,
and sending a confirmation statement on redemptions to
the address of record each time account activity is
initiated by telephone. So long as the Fund and
Investor Services follow instructions communicated by
telephone which were reasonably believed to be genuine
at the time of their receipt, neither they nor their
affiliates will be liable for any loss to the
shareholder caused by an unauthorized transaction.
Shareholders are, of course, under no obligation to
apply for or accept telephone transaction privileges.
In any instance where the Fund or Investor Services is
not reasonably satisfied that instructions received by
telephone are genuine, the requested transaction will
not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur
because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To
assure compliance with all applicable regulations,
special forms are required for any distribution,
redemption, or dividend payment. While the telephone
exchange privilege is extended to Franklin Templeton
IRA and 403(b) retirement accounts, certain
restrictions may apply to other types of retirement
plans. Changes to dividend options must also be made in
writing.
To obtain further information regarding distribution or
transfer procedures, including any required forms,
retirement account shareholders may call to speak to a
Retirement Plan Specialist at 1-800/527-2020 for
Franklin accounts or 1-800/354-9191 (press "2" when
prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will
be difficult to execute because of heavy telephone
volume. In such situations, shareholders may wish to
contact their investment representative for assistance,
or to send written instructions to the Fund as detailed
elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for
any losses resulting from the inability of a
shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days'
written notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as
of 1:00 p.m. Pacific time each day that the Exchange is
open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid"
(net asset value) and "ask" (offering price, which
includes the maximum sales charge of the Fund).
The net asset value per share of the Fund is determined in
the following manner: The aggregate of all liabilities,
including, without limitation, the current market value
of any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves is
deducted from the aggregate gross value of all assets,
and the
difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are
valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date.
Portfolio securities listed on a securities exchange or on
the NASDAQ National Market System for which market
quotations are readily available are valued at the last
quoted sale price of the day or, if there is no such
reported sale, within the range of the most recent quoted
bid and ask prices. Over-the-counter portfolio securities
for which market quotations are readily available are valued
within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative
market as determined by the Manager. Portfolio securities
underlying actively traded call options are valued at their
market price as determined above. The current market value
of any option held by the Fund is its last sale price on the
relevant exchange prior to the time when assets are valued.
Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices
if such valuation is believed to fairly reflect the
contract's market value. Other securities for which market
quotations are readily available are valued at the current
market price, which may be obtained from a pricing service,
based on a variety of factors, including recent trades,
institutional size trading in similar types of securities
(considering yield, risk and maturity) and/or developments
related to specific issues. Securities and other assets for
which market prices are not readily available are valued at
fair value as determined following procedures approved by
the Board of Trustees. With the approval of trustees, the
Fund may utilize a pricing service, bank or securities
dealer to perform any of the above described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's
account should be directed to Investor Services at the
address shown on the back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current
price, yield or performance information specific to a fund
in the Franklin Funds by calling the automated Franklin
TeleFACTS(Registered Trademark) system (day or night) at 1
800/247-1753. Information about the Fund may be accessed by
entering Fund Code 37 followed by the # sign, when requested
to do so by the automated operator. The TeleFACTS system is
also available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to
speak directly with a representative, the following is a
list of the various Franklin departments, telephone numbers
and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH
FRIDAY) <S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00
p.m. Dealer Services 1-800/524-4040 6:00 a.m. to
5:00 p.m. Fund Information 1-800/DIAL BEN 6:00 a.m.
to 8:00 p.m.
8:30 a.m. to 5:00
p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00
p.m. TDD (hearing impaired) 1-800/851-0637 6:00 a.m. to
5:00 p.m. </TABLE>
In order to ensure that the highest quality of service is
being provided, telephone calls placed to or by
representatives in Franklin's service departments may be
accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions
of
total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or
risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of
$1,000 invested at the maximum public offering price
(offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent
applicable, through the end of the most recent calendar
quarter, assuming reinvestment of all distributions. The
Fund may also furnish total return quotations for other
periods, or based on investments at various sales charge
levels or at net asset value. For such purposes total return
equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.
Current yield reflects the income per share earned by the
Fund's portfolio investments; it is calculated by dividing
the Fund's net investment income per share during a recent
30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield, which is calculated according to a formula prescribed
by the SEC (see the SAI), is not indicative of the dividends
or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate,
which may be quoted to shareholders. The current
distribution rate is computed by dividing the total amount
of dividends per share paid by the Fund during the past 12
months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the
amount of dividend payout or a fundamental change in
investment policies, it might be appropriate to annualize
the dividends paid during the period such policies were in
effect, rather than using the dividends during the past 12
months. The current distribution rate differs from the
current yield computation because it may include
distributions to shareholders from sources other than
dividends and interest, such as premium income from option
writing and short-term capital gain, and is calculated over
a different period of time.
In each case, performance figures are based upon past
performance, reflect all recurring charges against Fund
income
and will assume the payment of the maximum sales charge on
the purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment
results of the Fund, like all other investment companies,
will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn
in the future or what the Fund's yield, distribution rate or
total return may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports
containing audited financial statements of the Trust,
including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically
sent to shareholders. Copies may be obtained by investors or
shareholders, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page
of this Prospectus.
Additional information on Fund performance is included in
the Fund's Annual Report to Shareholders and the SAI.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on
December 16, 1986. The Trust is authorized to issue an
unlimited number of shares of beneficial interest, with a
par value of $.01 per share, in various series. All shares
have one vote and, when issued, are fully paid,
nonassessable and redeemable.
Shares have no preemptive or subscription rights, and are
fully transferable. There are no conversion rights; however,
holders of shares of the Fund may reinvest all or any
portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in
"Exchange Privilege." All shares have equal voting, dividend
and liquidation rights.
VOTING RIGHTS
Shares of the Fund have noncumulative voting rights which
means that in all elections of trustees, the holders of more
than 50% of the shares voting can elect 100% of the trustees
if they choose to do so and, in such event, the holders of
the remaining shares voting will not be able to elect any
person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders'
meetings. The Trust may, however, hold a special meeting for
such purposes as changing fundamental investment
restrictions, approving a new management agreement or any
other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be
called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares
entitled to vote at the meeting. Shareholders may receive
assistance in communicating with other shareholders in
connection with the election or removal of trustees such as
that provided in Section 16(c) of the 1940 Act. The Board of
Trustees may from time to time establish other funds of the
Trust, the assets and liabilities of which will be separate
and distinct from any other fund. Shares of each fund vote
separately as to issues affecting that fund, or the Trust,
unless otherwise permitted by the 1940 Act.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value,
shares of any shareholder whose account has a value of less
than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of
shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided
advance notice is given to the shareholder. More information
is included in the SAI.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do
not earn interest or any other income during the time such
checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss to the shareholder
caused by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check,
draft or wire. The Fund has no facility to receive, or pay
out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's
intentions as to ownership. Where there are two co-owners on
the account, the account will be registered as "Owner 1" and
"Owner 2"; the "or" designation is not used except for money
market fund accounts. If co-owners wish to have the ability
to redeem or convert on the signature of only one owner, a
limited power of attorney may be used.
Accounts should not be registered in the name of a minor,
either as sole or co-owner of the account. Transfer or
redemption for such an account may require court action to
obtain release of the funds until the minor reaches the
legal age of majority. The account should be registered in
the name of one "Adult" as custodian for the benefit of the
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for"
should only be used if the account is being established
pursuant to a legal, valid trust document. Use of such a
designation in the absence of a legal trust document may
cause difficulties and require court action for transfer or
redemption of the funds.
Shares, whether in certificate form or not, registered as
joint tenants or "Jt Ten" shall mean "as joint tenants with
rights of survivorship" and not "as tenants in common."
Except as indicated, a shareholder may transfer an account
in the Fund carried in "street" or "nominee" name by the
shareholder's securities dealer to a comparably registered
Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have
executed dealer agreements on file with Distributors. Unless
a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and
will so inform the shareholder's delivering securities
dealer. To effect the transfer, a shareholder should
instruct the securities dealer to transfer the account to a
receiving securities dealer and sign any documents required
by the securities dealer(s) to evidence consent to the
transfer. Under current procedures the account transfer may
be processed by the delivering securities dealer and the
Fund after the Fund receives authorization in proper form
from the shareholder's delivering securities dealer. In the
future it may
be possible to effect such transfers electronically through
the services of the NSCC.
The Fund may conclusively accept instructions from an owner
or the owner's nominee listed in publicly available nominee
lists, regardless of whether the account was initially
registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of
record on an investor's account, the investor will be deemed
to have authorized the use of electronic instructions on the
account, including, without limitation, those initiated
through the services of the NSCC, to have adopted as
instruction and signature any such electronic instructions
received by the Fund and the Shareholder Services Agent, and
to have authorized them to execute the instructions without
further inquiry. At the present time, such services which
are available, or which are anticipated to be made available
in the near future, include the NSCC's "Networking,"
"Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment,
or by calling Franklin's Fund Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund
may be required to report to the IRS any taxable dividend,
capital gain distribution, or other reportable payment
(including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt
shareholders who have not provided a correct taxpayer
identification number ("TIN") and made certain required
certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the
IRS or a securities dealer notifies the Fund that the number
furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account
for any person failing to provide a TIN along with the
required certifications and (2) close an account by
redeeming its shares in full at the then current net asset
value upon receipt of notice from the IRS that the TIN
certified as correct by the shareholder is in fact incorrect
or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a
certified TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day-
today management of the Fund's portfolio: Edward Jamieson
since inception and Mitchell Cone since January 1994.
Edward Jamieson
Senior Vice President of Advisers
Mr. Jamieson holds a Bachelor of Arts degree in sociology
from Bucknell University and a master's degree in accounting
and finance from the University of Chicago Graduate School
of Business. He has been with Advisers since 1987 and for
the two years prior thereto, he was treasurer of Beatrice
Consumer Products, Inc. and an executive with Pepsico,
Inc.'s Corporate Treasury where he served as Director of
International Treasury. He is a member of several securities
industry-related committees
and associations.
Mitchell Cone
Portfolio Manager of Advisers
Mr. Cone holds a Bachelor of Arts degree in
economics/sociology from the University of California,
Berkeley. He has been with Advisers since 1988. He has been
in the securities industry since 1985 and is a member of
several securities industry-related committees and
associations.
APPENDIX
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa - Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk
and are generally referred to as "gilt-edged." Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various
protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable
investment attributes and are to be considered as upper
medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment
sometime in the future.
Baa - Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected
nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have
predominantly speculative elements; their future cannot be
considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this
class.
B - Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS:
AAA - This is the highest rating assigned by S&P to a debt
obligation and indicates an extremely strong capacity to pay
principal and interest.
AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong and, in the majority of instances, they differ from
AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions.
BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they
normally exhibit protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay principal and interest for
bonds in this category than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded,
on balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. BB indicates
the lowest degree of speculation and CC the highest degree
of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
D - Debt rated D is in default and payment of interest
and/or repayment of principal is in arrears.
FRANKLIN EQUITY INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX
7777 SAN MATEO, CA 94403-7777 1-
800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open
end management investment company consisting of both
diversified and non-diversified series. Each series of the
Trust in effect represents a separate fund with its own
investment objective and policies with varying possibilities
for income or capital appreciation, and subject to varying
market risks. Through the different series, the Trust
attempts to satisfy different investment objectives.
This Prospectus pertains only to the Franklin Equity Income
Fund (the "Fund"), formerly known as the Franklin Special
Equity Income Fund, a separate diversified series of the
Trust. The Fund has as its objective to maximize total return
through emphasis on high current income and capital
appreciation, consistent with reasonable risk. The Fund seeks
to achieve this objective primarily through investing in
common and preferred stocks with above average dividend
yields. Of course, there can be no assurance that the Fund's
objective will be achieved.
This Prospectus is intended to set forth in a clear and
concise manner information about the Fund that a prospective
investor should know before investing. After reading the
Prospectus, it should be retained for future reference; it
contains information about the purchase and sale of shares
and other items which a prospective investor will find useful
to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information ("SAI") concerning the
Fund and other series of the Trust, dated March 1, 1995, as
may be amended from time to time, provides a further
discussion of certain areas in this Prospectus and other
matters which may be of interest to some investors. It has
been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown
above.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT
AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE
UNDERWRITER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
PAGE Expense Table
Financial Highlights
About the Trust
Investment Objective and
EPolicies of the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
Eand Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund
Ein Connection with Retirement Plans
EInvolving Tax-Deferred Investments
Other Programs and Privileges EAvailable
to Fund Shareholders Exchange Privilege
How to Sell Shares of the Fund Telephone
Transactions
Valuation of Fund Shares
How to Get Information
ERegarding an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
ETaxpayer IRS Certifications
Portfolio Operations
<TABLE>
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a
shareholder will bear directly or indirectly in connection
with an investment in the Fund. These figures are based on
aggregate operating expenses of the Fund (before fee waivers
and expense reductions) for the fiscal year ended October
31, 1994.
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
E(as a percentage of offering price) 4.50%
Deferred Sales Charge NONE*
Exchange Fee (per transaction)
$5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
0.63%*** 12b-1 Fees
0.21%+ Other Expenses:
EEShareholder Servicing Costs 0.06%
EEReports to Shareholders 0.08%
EEOther 0.08%
Total Other Expenses 0.22%
Total Fund Operating Expenses
1.06%***
* Investments of $1 million or more are not subject to a
frontend sales charge; however, a contingent deferred sales
charge of 1% is imposed on certain redemptions within 12
months of the calendar month following such investments.
See "How to Sell Shares of the Fund - Contingent Deferred
Sales Charge."
** $5.00 fee imposed only on Timing Accounts as described
under "Exchange Privilege." All other exchanges are
processed without a fee.
*** Represents the amount that would have been payable to
the investment manager absent a fee reduction by the
investment manager. The investment manager, however, agreed
in advance to waive a portion of its management fees and to
assume responsibility for making payments to offset certain
operating expenses otherwise payable by the Fund. With this
reduction, management fees and total operating expenses
represented 0.45% and 0.88%, respectively, of the average
net assets of the Fund. + Annualized. Actual Rule 12b-1 fees
incurred by the Fund for the six months ended October 31,
1994 were .11%. Consistent with National Association of
Securities Dealers, Inc.'s rules, it is possible that the
combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the
economic equivalent of the maximum front-end sales charges
permitted under those same rules. See "Plan of Distribution"
under "Management of the Fund" in this Prospectus.
Investors should be aware that the above table is not
intended to reflect in precise detail the fees and expenses
associated with an individual's own investment in the Fund.
Rather the table has been provided only to assist investors
in gaining a more complete understanding of fees, charges
and expenses. For a more detailed discussion of these
matters, investors should refer to the appropriate sections
of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example
illustrates the expenses, including the front-end sales
charge, that apply to a $1,000 investment in the Fund over
various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. <CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<C> <C> <C> <C>
$55 $77 $101 $169
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING
EXPENSES, BEFORE FEE WAIVERS OR EXPENSE REDUCTIONS, SHOWN
ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE
SHOWN. The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment
in the Fund. See "Management of the Fund" for a description
of the Fund's expenses. In addition, federal regulations
require the example to assume an annual return of 5%, but
the Fund's actual return may be more or less than 5%.
</TABLE>
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial
highlights for a share of the Fund throughout the periods
from the effective date of registration (March 15, 1988) to
January 31, 1993, for the nine-month period ended October
31, 1993 and for the fiscal year ended October 31, 1994. The
information for each of the five fiscal years in the period
ended October 31, 1994 has been audited by Coopers & Lybrand
L.L.P., independent auditors, whose audit report appears in
the financial statements in the Fund's SAI. The remaining
figures, which are also audited, are not covered by the
auditors' current report. See the discussion "Reports to
Shareholders" under "General Information."
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE+
- ----------------------------------------------------------------------------------------------------------
NET ASSET NET REALIZED DISTRIBUTIONS NET ASSETS
VALUES AT NET & UNREALIZED TOTAL FROM FROM NET DISTRIBUTIONS VALUES
PERIOD BEGINNING INVESTMENT GAINS(LOSSES) INVESTMENT INVESTMENT FROM TOTAL AT END
ENDED OF YEAR INCOME ON SECURITIES OPERATIONS INCOME CAPITAL GAIN DISTRIBUTIONS OF YEAR
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989(1) $10.00 $.56 $ .887 $1.447 $(.370) $(.077) $(.447) $11.00
1990 11.00 .75 .527 1.277 (.655) (.092) (.747) 11.53
1991 11.53 .72 (.803) (.083) (.736) (.071) (.807) 10.64
1992 10.64 .42 1.967 2.387 (.660) (.057) (.717) 12.31
1993 12.31 .66 1.307 1.967 (.682) (.135) (.817) 13.46
1993(2) 13.46 .60 1.435 2.035 (.495) (.090) (.585) 14.91
1994(3) 14.91 .62 (0.358) .262 (.725) (.307) (1.032) 14.14
</TABLE>
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------
RATIO OF RATIO OF NET
NET ASSETS EXPENSES INVESTMENT
AT END TO AVERAGE INCOME PORTFOLIO
PERIOD TOTAL OF YEAR NET ASSETS TO AVERAGE TURNOVER
ENDED RETURN++ (IN 000'S) (SEE NOTE 6)** NET ASSETS RATE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1989(1) 14.61% $ 2,527 --% 5.78%* 11.34%
1990 11.43 7,221 -- 6.23 33.11
1991 (.92) 10,808 .18 6.60 26.99
1992 22.76 16,144 .25 5.77 40.59
1993 16.23 26,092 .25 5.18 31.05
1993(2) 15.27 42,177 .25* 5.86* 19.33
1994(3) 1.83 92,763 .77 4.53 39.51
</TABLE>
(1) For the period March 15, 1988 (effective date of registration) to January
31, 1989.
(2) For the nine months ended October 31, resulting from a change in fiscal
year from January 31.
(3) For the year ended October 31, 1994.
* Annualized.
+ Selected data for a share of capital stock outstanding throughout the period.
++ Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge, and assumes
reinvestment of dividends at the maximum offering price and capital gains,
if any, at net asset value. Effective May 1, 1994, with the implementation of
the Rule 12b-1 distribution plan, as discussed in this Prospectus, the sales
charge on reinvested dividends was eliminated.
** During the periods indicated, Franklin Advisers, Inc., the investment
manager, agreed in advance to waive a portion of its management fees and
made payments of other expenses incurred by the Fund. Had such action not
been taken, the ratios of operating expenses to average net assets would have
been as follows:
1989(1)................ .73%*
1990................... .83
1991................... .83
1992................... .84
1993................... .81
1993(2)................ .87*
1994(3)................ .95*
ABOUT THE TRUST
The Trust is an open-end management investment company, or
mutual fund, organized as a Massachusetts business trust on
December 16, 1986 and registered with the SEC under the
Investment Company Act of 1940 (the "1940 Act"). The Trust
currently consists of six series, each of which issues a
separate series of the Trust's shares and maintains a
totally separate investment portfolio.
Shares of the Fund may be purchased (minimum investment of
$100 initially and $25 thereafter) at the current public
offering price which is equal to the Fund's net asset value
(see "Valuation of Fund Shares") plus a sales charge not
exceeding 4.5% of the offering price. See "How to Buy Shares
of the Fund."
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
The investment objective of the Fund is to maximize its
total return through emphasis on high current income and
long-term capital appreciation, consistent with reasonable
risk. The objective is a fundamental policy of the Fund and
may not be changed without shareholder approval.
The Fund pursues its investment objective by investing at
least 65% of its total assets (except when maintaining a
temporary defensive position) in a broadly diversified
portfolio of common and preferred stocks, including
convertibles, offering current dividend yields above the
average of the market defined by the Standard & Poor's 400
and 500 Indices. The balance of the Fund's net assets may be
invested in other securities which, in the aggregate, are
considered to be consistent with the Fund's investment
objective. Such other investments may include fixedincome
securities convertible into common and preferred stocks,
covered call options, put options, United States ("U.S.")
government securities, securities of foreign issuers,
corporate bonds, high grade commercial paper, bankers'
acceptances and other short-term instruments. There is, of
course, no assurance that the Fund's objective will be
achieved.
When maintaining a temporary defensive position, the Fund
may invest any portion of its assets in U.S. government
securities, high grade commercial paper, bankers'
acceptances, and variable interest rate corporate or bank
notes.
CURRENT INVESTMENT STRATEGY
The Fund seeks to attain its fundamental investment
objective by investing primarily in common and preferred
stocks of major companies with high current dividend yields
relative to the market.
This emphasis on a stock's current dividend yield is based
upon the investment philosophy that dividend income is
generally a significant contributor to the returns available
from investing in stocks over the long term and that
dividend income is often more consistent than capital
appreciation as a source of investment return. Moreover, the
price volatility of stocks with relatively higher dividend
yields tends to be less than stocks that pay out little
dividend income, affording the Fund the potential for
greater principal stability.
The Fund evaluates the common stock dividend yields of many
financially strong companies as compared to the average
dividend yield of the general stock market defined by the
Standard & Poor's 400 and 500 Indices. This results in a
unique relative yield range for each company which in turn
provides a discipline for determining whether a stock is
attractive for purchase or sale.
Because high relative yield as defined above is frequently
accompanied by a lower stock price, the Fund seeks to buy a
stock when its relative yield is high. Conversely, it seeks
to sell a stock when its yield is low relative to its
history, which may be caused by an increase in the price of
the stock. The Fund may then reinvest the proceeds into
other high relative yielding issues. This approach may allow
the Fund to take advantage of capital appreciation
opportunities presented by quality stocks that are
temporarily out of favor with the market and which are
subsequently "rediscovered."
In addition to offering above average yields, securities
selected for investment by this strategy may provide some of
the following characteristics consistent with the Fund's
fundamental objective: above average dividend growth
prospects; low price to normalized earnings (projected
earnings under normal operating conditions), to cash flow,
to book value and/or to realizable liquidation value.
The Fund's investment objective of maximizing total return
is a fundamental policy which may not be changed without
prior shareholder approval. The above described investment
strategy is the current approach used by the Fund to attempt
to achieve its objective; it is not a fundamental policy of
the Fund and is subject to change at the discretion of the
Trust's trustees and without prior shareholder approval.
OTHER INVESTMENT POLICIES OF THE FUND
Convertible Securities. The Fund may invest in securities
including corporate bonds, notes and preferred stocks that
are convertible into common stock or other securities which
provide an opportunity for equity participation. These
securities are convertible at a stated price within a
specified period of time and are generally senior to common
stocks in a corporation's capital structure, although they
are usually subordinated to similar nonconvertible
securities. Convertible securities provide a fixed-income
stream and the opportunity, through their conversion
feature, to participate in the capital appreciation
resulting from a market price advance in the convertible
security's underlying common stock. As with a fixed-income
security, a convertible security tends to increase in market
value when interest rates decline and tends to decrease in
value when interest rates rise. The price of a convertible
security is also influenced by the market value of the
security's underlying common stock and tends to increase as
the market value of the underlying stock rises, whereas it
tends to decrease as the
market value of the underlying stock declines. As a result
of the Fund's investment in convertible securities and other
equity securities, the value of the Fund's shares and the
dividends per share paid by the Fund may fluctuate.
The Fund may also invest in convertible preferred stocks
that offer enhanced yield features, such as Preferred Equity
Redemption Cumulative Stock ("PERCS"), which provide an
investor, such as the Fund, with the opportunity to earn
higher dividend income than is available on a company's
common stock. A PERCS is a preferred stock which generally
features a mandatory conversion date, as well as a capital
appreciation limit which is usually expressed in terms of a
stated price. Most PERCS expire three years from the date of
issue, at which time they are exchangeable for the issuer's
common stock or cash, at the option of the issuer. Under a
typical arrangement, if after three years the issuer's
common stock is trading at a price below that set by the
capital appreciation limit, each PERCS would convert to one
share of common stock. If, however, the issuer's common
stock is trading at a price above that set by the capital
appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that
fractional share of common stock received by the PERCS'
holder is determined by dividing the price set by the
capital appreciation limit of the PERCS by the market price
of the issuer's common stock. Some PERCS provide that they
can be called immediately if the issuer's common stock is
trading at or above a specified level.
An investment in PERCS or other similar convertible
securities may involve additional risks. The Fund may have
difficulty disposing of such securities because there may be
a thin trading market for a particular security at any given
time. Reduced liquidity may have an adverse impact on market
price and the Fund's ability to dispose of particular
securities, when necessary, to meet the Fund's liquidity
needs or in response to a specific economic event, such as a
deterioration in the creditworthiness of an issuer. Reduced
liquidity in the secondary market for certain securities may
also make it more difficult for the Fund to obtain market
quotations based on actual trades for purposes of valuing
the Fund's portfolio. The Fund, however, intends to acquire
securities believed by the investment manager to be liquid
although, as with any investment, there are no assurances
that this will be achieved.
There are other convertible securities, including, but not
limited to, Dividend Enhancement Convertible Stock,
Perpetual Equity Participation Shares and Automatically
Convertible Equity Securities in which the Fund invests,
which are similar to the foregoing described convertible
securities. There may be additional types of convertible
securities which are also similar to the foregoing described
convertible securities, in which the Fund may invest in the
future to the extent such investments are consistent with
the Fund's investment objective and policies.
Fixed-Income Debt Securities. The Fund may invest in fixed
income debt securities up to a maximum of 35% of the Fund's
total assets consistent with the Fund's investment
objective. In seeking securities which meet the Fund's
investment objective and current investment strategy, the
Fund will acquire only debt securities which are rated B or
better by Standard & Poor's Corporation ("S&P") or Ba or
better by Moody's Investors Service ("Moody's") or debt
securities which are unrated but which are judged to be of
comparable quality. Instruments rated B by S&P or Ba by
Moody's generally lack characteristics of desirable
investments and are judged to have predominantly speculative
elements. Further details on these ratings are included in
the Appendix to
the SAI. Rather than relying principally on the ratings
assigned by rating services, however, the investment
analysis of debt securities being considered for the Fund's
portfolio may also include, among other things,
consideration of relative values based on such factors as
anticipated cash flow, interest coverage, asset coverage,
earnings prospects, the experience and managerial strength
of the issuer, responsiveness to changes in interest rates
and business conditions, debt maturity schedules and
borrowing requirements and the issuer's changing financial
condition and public recognition thereof.
The Fund may also invest in securities which are obligations
of the U.S. government or its agencies or instrumentalities.
Such U.S. government securities include, but are not limited
to, U.S. Treasury bonds, notes and bills, Treasury
certificates of indebtedness and securities issued by
instrumentalities of the U.S. government.
To the extent that the Fund's portfolio may at any
particular time consist of debt securities, changes in the
level of interest rates, among other things, are likely to
affect the value of the Fund's holdings and thus the value
of a shareholder's investment.
Options on Equity Securities. When emphasizing high current
income to achieve its investment objective of maximizing
total return, the Fund may write covered call options on
securities it actually owns, which are listed for trading on
a national securities exchange, and it may also purchase
listed call options.
Call options are short-term contracts (generally having a
duration of nine months or less) which give the purchaser of
the option the right to buy and obligates the writer to sell
the underlying security at the exercise price at any time
during the option period, regardless of the market price of
the underlying security. The purchaser of an option pays a
cash premium, which typically reflects, among other things,
the relationship of the exercise price to the market price
and the volatility of the underlying security, the remaining
term of the option, supply and demand factors and interest
rates.
The Fund may also purchase put options on common stock that
it owns or may acquire through the conversion or exchange of
other securities to protect against a decline in the market
value of the underlying security or to protect the
unrealized gain in an appreciated security in its portfolio
without actually selling the security. A put option gives
the holder the right to sell the underlying security at the
option exercise price at any time during the option period.
The Fund may pay for a put either separately or by paying a
higher price for securities which are purchased subject to a
put, thus increasing the cost of the securities and reducing
the yield otherwise available from the same securities. For
more information on options, please see "The Investment
Objective and Policies of Each Fund - Options" in the SAI.
To the extent that the Fund does invest in options, it may
be limited by the requirements of the Internal Revenue Code
of 1986, as amended (the "Code"), for qualification as a
regulated investment company. Such investments may also be
subject to special tax rules that may affect the amount,
character and timing of income earned by the Fund and
distributed to shareholders. For more information, see the
tax section of the SAI.
Repurchase Agreements. The Fund may engage in repurchase
transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed
upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer
of securities with an initial market value, including
accrued interest, equal to at least 102% of the dollar
amount invested by the Fund in each agreement, with the
value of the underlying security marked to market daily to
maintain coverage of at least 100%. A default by the seller
might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in
liquidating the collateral. The Fund, however, intends to
enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are
deemed creditworthy by the Fund's investment manager. A
repurchase agreement is deemed to be a loan by the Fund
under the 1940 Act. The U.S. government security subject to
resale (the collateral) will be held on behalf of the Fund
by a custodian approved by the Trust's trustees and will be
held pursuant to a written agreement.
Borrowing. The Fund may not borrow money or mortgage or
pledge any of its assets except that it may borrow from
banks for temporary or emergency purposes up to 5% of its
total assets and pledge up to 5% of its total assets in
connection therewith.
Loans of Portfolio Securities. Consistent with procedures
approved by the Board of Trustees and subject to the
following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other
institutional investors, provided that such loans do not
exceed 10% of the value of the Fund's total assets at the
time of the most recent loan. The borrower must deposit with
the Fund's custodian collateral with an initial market value
of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to
market daily to maintain collateral coverage of at least
102%. Such collateral shall consist of cash. The lending of
securities is a common practice in the securities industry.
The Fund engages in security loan arrangements with the
primary objective of increasing the Fund's income either
through investing the cash collateral in short-term interest
bearing obligations or by receiving a loan premium from the
borrower. Under the securities loan agreement, the Fund
continues to be entitled to all dividends or interest on any
loaned securities. As with any extension of credit, there
are risks of delay in recovery and loss of rights in the
collateral should the borrower of the security fail
financially.
Foreign Securities. The Fund will ordinarily purchase
foreign securities which are traded in the U.S. or purchase
American Depositary Receipts ("ADRs") which are certificates
issued by U.S. banks representing the right to receive
securities of a foreign issuer deposited with that bank or a
correspondent bank. The Fund, however, may purchase the
securities of foreign issuers directly in foreign markets.
Investments in foreign securities where delivery takes place
outside the U.S. will involve risks that are different from
investments in U.S. securities. These risks may include
future unfavorable political and economic developments,
possible withholding taxes, seizure of foreign deposits,
currency controls, higher transactional costs due to a lack
of negotiated commissions, or other governmental
restrictions which might affect the amount and types of
foreign investments made or the payment of principal or
interest on securities the Fund holds. In addition, there
may be less information available about these
securities and it may be more difficult to obtain or enforce
a court judgment in the event of a lawsuit. Fluctuations in
currency convertibility or exchange rates could result in
investment losses for the Fund.
Investment in foreign securities may also subject the Fund
to losses due to nationalization, expropriation or differing
accounting practices and treatments. Investments may be in
securities of foreign issuers, whether located in developed
or undeveloped countries, but investments will not be made
in any securities issued without stock certificates or
comparable stock documents. Securities which are acquired by
the Fund outside the U.S. and which are publicly traded in
the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be
illiquid assets so long as the Fund acquires and holds the
securities with the intention of reselling them in the
foreign trading market, the Fund reasonably believes it can
readily dispose of the securities for cash in the U. S. or
foreign market and current market quotations are readily
available. The Fund may invest up to 30% of its net assets
in foreign securities not publicly traded in the U.S.
Illiquid Investments. It is the policy of the Fund that
illiquid securities (securities that cannot be disposed of
within seven days in the normal course of business at
approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase,
more than 10% of the value of the total net assets of the
Fund.
The Fund is subject to a number of additional investment
restrictions, some of which may be changed only with the
approval of shareholders, which limit its activities to some
extent. For a list of these restrictions and more
information concerning the policies discussed herein, please
see the SAI.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S
ACTIVITIES
The assets of the Fund are invested in portfolio securities.
If the securities owned by the Fund increase in value, the
value of the shares of the Fund which the shareholder owns
will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also
decline. In this way, shareholders participate in any change
in the value of the securities owned by the Fund.
In addition to the factors which affect the value of
individual securities, as described in the preceding
sections, a shareholder may anticipate that the value of
Fund shares will fluctuate with movements in the broader
equity and bond markets, as well.
To the extent the Fund's investments consist of debt
securities, changes in interest rates will affect the value
of the Fund's portfolio and thus its share price. Increased
rates of interest which frequently accompany higher
inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. To the extent
the Fund's investments consist of common stocks, a decline
in the market, expressed for example by a drop in the Dow
Jones Industrials or the Standard & Poor's 500 average or
any other equity based index, may also be reflected in
declines in the Fund's share price. History reflects both
increases and decreases in the prevailing rate of interest
and in the valuation of the market, and these may reoccur
unpredictably in the future.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the
overall management of the Trust and for electing the
officers of the Trust who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as
the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr.,
who own approximately 20% and 16%, respectively, of
Resources' outstanding shares. Resources is engaged in
various aspects of the financial services industry through
its various subsidiaries (the "Franklin Templeton Group").
Advisers acts as investment manager or administrator to 33
U.S. registered investment companies (111 separate series)
with aggregate assets of over $73 billion.
Pursuant to the management agreement, the Manager supervises
and implements the Fund's investment activities and provides
certain administrative services and facilities which are
necessary to conduct the Fund's business.
During the fiscal year ended October 31, 1994, fees totaling
0.63% of the average monthly net assets of the Fund would
have accrued to Advisers. Total operating expenses,
including management fees, would have represented 1.06% of
the average net assets of the Fund. Pursuant to an agreement
by Advisers to limit its fees, the Fund paid management fees
totaling 0.45% of the average net assets of the Fund and
operating expenses totaling 0.88%. This arrangement may be
terminated by the investment manager at any time.
Among the responsibilities of the Manager under the
management agreement is the selection of brokers and dealers
through whom transactions in the Fund's portfolio securities
will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more
than one broker is able to provide the best execution, the
Manager will consider the furnishing of quotations and of
other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of
shares of the Fund, as factors in selecting a broker.
Further information is included under "The Trust's Policies
Regarding Brokers Used on Portfolio Transactions" in the
SAI.
Shareholder accounting and many of the clerical functions
for the Fund are performed by Franklin/Templeton Investor
Services, Inc. ("Investor Services" or "Shareholder Services
Agent"), in its capacity as transfer agent and dividend
paying agent. Investor Services is a wholly-owned subsidiary
of Resources.
PLAN OF DISTRIBUTION
Effective May 1, 1994 (the "Effective Date"), the Fund
adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, the Fund may
reimburse Distributors or others for all expenses incurred
by Distributors or others in the promotion and distribution
of the Fund's shares. Such expenses may include, but are not
limited to, the printing of prospectuses and reports used
for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and
other distribution-related expenses, including a prorated
portion of Distributors' overhead expenses attributable to
the distribution of Fund shares, as well as any distribution
or service fees paid to securities dealers or their
firms or others who have executed a servicing agreement with
the Fund, Distributors or its affiliates. The maximum amount
which the Fund may pay to Distributors or others for such
distribution expenses is 0.25% per annum of the average
daily net assets of the Fund, payable on a quarterly basis.
All expenses of distribution and marketing in excess of
0.25% per annum will be borne by Distributors, or others who
have incurred them, without reimbursement from the Fund. The
Plan also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund,
Advisers or Distributors, to the extent such payments are
deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund
within the context of Rule 12b-1. The payments under the
Plan are included in the maximum operating expenses which
may be borne by the Fund.
In implementing the Plan, the Board of Trustees has
determined that the annual fees payable thereunder will be
equal to the sum of: (i) the amount obtained by multiplying
0.25% by the average daily net assets represented by shares
of the Fund that were acquired by investors on or after the
Effective Date ("New Assets"), and (ii) the amount obtained
by multiplying 0.15% by the average daily net assets
represented by shares of the Fund that were acquired before
the Effective Date ("Old Assets"). Such fees will be paid to
the current securities dealer of record on the shareholder's
account. In addition, until such time as the maximum payment
is reached on a yearly basis, up to an additional 0.05% will
be paid to Distributors under the Plan. The payments to be
made to Distributors will be used by Distributors to defray
other marketing expenses that have been incurred in
accordance with the Plan, such as advertising.
The fee is a Fund expense so that all shareholders
regardless of when they purchased their shares will bear
Rule 12b-1 expenses at the same rate. That rate initially
will be at least 0.20% (0.15% plus 0.05%) of such average
daily net assets and, as Fund shares are sold on or after
the Effective Date, will increase over time. Thus, as the
proportion of Fund shares purchased on or after the
Effective Date increases in relation to outstanding Fund
shares, the expenses attributable to payments under the Plan
will also increase (but will not exceed 0.25% of average
daily net assets). While this is the currently anticipated
calculation for fees payable under the Plan, the Plan
permits the Trust's trustees to allow the Fund to pay a full
0.25% on all assets at any time. The approval of the Trust's
Board of Trustees would be required to change the method of
calculation of the payments to be made under the Plan.
For more information, please see the SAI.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make
to its shareholders:
1. Income dividends. The Fund receives income in the form of
dividends, interest and other income derived from its
investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2. Capital gain distributions. The Fund may derive capital
gains or losses in connection with sales or other
dispositions of its portfolio securities. Distributions by
the Fund derived from net short-term and net long-term
capital gains (after taking into
account any net capital loss carryovers) may generally be
made once a year in December to reflect any net short-term
and net long-term capital gains realized by the Fund as of
October 31, its fiscal year end. These distributions, when
made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution
derived from net short-term and net long-term capital gains
in any year or adjust the timing of these distributions for
operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without
prior notice to or approval by shareholders, the Fund's
current policy is to declare income dividends monthly for
shareholders of record generally on the first business day
preceding the 15th of the month, payable on or about the
last business day of that month. The amount of income
dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion
of the Board of Trustees. Fund shares are quoted exdividend
on the first business day following the record date
(generally the 15th day of the month or prior business day
depending on the record date). THE FUND DOES NOT PAY
"INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON AN
INVESTMENT IN ITS SHARES.
In order to be entitled to a dividend, an investor must have
acquired Fund shares prior to the close of business on the
record date. An investor considering purchasing Fund shares
shortly before the record date of a distribution should be
aware that because the value of the Fund's shares is based
directly on the amount of its net assets, rather than on the
principle of supply and demand, any distribution of income
or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution.
While a dividend or capital gain distribution received
shortly after purchasing shares represents, in effect, a
return of a portion of the shareholder's investment, it may
be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain
distributions, if any, will be automatically reinvested in
the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge)
on the dividend reinvestment date. Shareholders have the
right to change their election with respect to the receipt
of distributions by notifying the Fund, but any such change
will be effective only as to distributions for which the
record date is seven or more business days after the Fund
has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions
in the form of additional shares. This is a convenient way
to accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application
included with this Prospectus, a shareholder may direct the
selected distributions
to another fund in the Franklin Group of Funds(Registered
Trademark) or the Templeton Funds, to another person, or
directly to a checking account. If the bank at which the
account is maintained is a member of the Automated Clearing
House, the payments may be made automatically by electronic
funds transfer. If this last option is requested, the
shareholder should allow at least 15 days for initial
processing. Dividends which may be paid in the interim will
be sent to the address of record. Additional information
regarding automated fund transfers may be obtained from
Franklin's Shareholder Services Department. Dividend and
capital gain distributions are eligible for investment in
another fund in the Franklin Group of Funds or the Templeton
Funds at net asset value. See "Purchases at Net Asset Value"
under "How to Buy Shares of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax
considerations which affect mutual funds and their
shareholders. Additional information on tax matters relating
to the Fund and its shareholders is included in the section
entitled "Additional Information Regarding Taxation" in the
SAI.
Each fund of the Trust is treated as a separate entity for
federal income tax purposes. The Fund intends to continue to
qualify for treatment as a regulated investment company
under Subchapter M of the Code. By distributing all of its
income and meeting certain other requirements relating to
the sources of its income and diversification of its assets,
the Fund will not be liable for federal income or excise
taxes.
For federal income tax purposes, any income dividends which
the shareholder receives from the Fund, as well as any
distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to
receive them in cash or in additional shares. Distributions
derived from the excess of net long-term capital gain over
net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has
owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
For corporate investors, dividends from net investment
income will generally qualify in part for the corporate
dividendsreceived deduction. The portion of the dividends so
qualified, however, depends on the aggregate qualifying
dividend income received by the Fund from domestic (U.S.)
sources. For the fiscal year ended October 31, 1994, 96.56%
of the income dividends paid by the Fund qualified for the
corporate dividends-received deduction, subject to certain
holding period and debt financing restrictions imposed under
the Code on the corporation claiming the deduction. These
restrictions are discussed in the SAI.
Pursuant to the Code, certain distributions which are
declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder
until the following January, will be treated as if received
by the shareholder on December 31 of the calendar year in
which they are declared.
Redemptions and exchanges of Fund shares are taxable events
on which a shareholder may realize a gain or loss. Any loss
incurred on the sale or exchange of Fund shares, held for
six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with
respect to such shares.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid and
will, promptly after the close of each calendar year, advise
them of the tax status for federal income tax purposes of
such dividends and distributions.
Shareholders who are not U.S. persons for purposes of
federal income taxation should consult with their financial
or tax advisors regarding the applicability of U.S.
withholding or other taxes to distributions received by them
from the Fund and the application of foreign tax laws to
these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through
securities dealers which execute an agreement with
Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The
minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans
established by the Franklin Templeton Group. The Fund and
Distributors reserve the right to refuse any order for the
purchase of shares.
The Fund may impose a $10 charge for each returned item,
against any shareholder account which, in connection with
the purchase of Fund shares, submits a check or a draft
which is returned unpaid to the Fund.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is the net asset value per share plus a sales charge,
next computed (1) after the shareholder's securities dealer
receives the order which is promptly transmitted to the Fund
or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a
completed Shareholder Application accompanied by a
negotiable check). The sales charge is a variable percentage
of the offering price depending upon the amount of the sale.
On orders for 100,000 shares or more, the offering price
will be calculated to four decimal places. On orders for
less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net
asset value per share is included under the caption
"Valuation of Fund Shares."
Set forth below is a table of total sales charges or
underwriting commissions and dealer concessions.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER SIZE
OF AS A AS A CONCESSION
TRANSACTION PERCENTAGE PERCENTAGE AS A
PERCENTAGE
OF OFFERING OF NET AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED
PRICE*,***
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less
than $250,000 3.75% 3.90% 3.25%
$250,000 but less
than $500,000 2.75% 2.83% 2.50%
$500,000 but less
than $1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more none none (see
below)**
* Financial institutions or their affiliated brokers may
receive an agency transaction fee in the percentages set
forth above. ** The following commissions will be paid by
Distributors, from its own resources, to securities dealers
who initiate and are responsible for purchases of $1
million or more: 1.00% on sales
of $1 million but less than $2 million, plus 0.80% on sales
of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. Dealer concession breakpoints
are reset every 12 months for purposes of additional
purchases.
*** At the discretion of Distributors, all sales charges may
at times be allowed to the securities dealer. If 90% or more
of the sales commission is allowed, such securities dealer
may be deemed to be an underwriter as that term is defined
in the Securities Act of 1933, as amended.
</TABLE>
No front-end sales charge applies on investments of $1
million or more, but a contingent deferred sales charge of
1% is imposed on certain redemptions of all or a portion of
investments of $1 million or more within 12 months of the
calendar month following such investments ("contingency
period"). See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
The size of a transaction which determines the applicable
sales charge on the purchase of Fund shares is determined by
adding the amount of the shareholder's current purchase plus
the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the
funds in the Franklin Group of Funds(Registered Trademark)
and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the
Franklin Group of Funds except Franklin Valuemark Funds and
Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors
or its affiliates (although certain investments may not have
the same schedule of sales charges and/or may not be subject
to reduction) and (c) the U.S. mutual funds in the Templeton
Group of Funds except Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). (Franklin Funds and Templeton Funds
are collectively referred to as the "Franklin Templeton
Funds".) Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors, or one of its affiliates, may make payments,
out of its own resources, of up to 1% of the amount
purchased to securities dealers who initiate and are
responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA
rollovers), certain non-designated plans, certain trust
companies and trust departments of banks and certain
retirement plans of organizations with collective retirement
plan assets of $10 million or more. See definitions under
"Description of Special Net Asset Value Purchases" and as
set forth in the SAI.
Distributors, or one of its affiliates, out of its own
resources, may also provide additional compensation to
securities dealers in
connection with sales of shares of the Franklin Templeton
Funds. Compensation may include financial assistance to
securities dealers in connection with conferences, sales or
training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder
services and programs regarding one or more of the Franklin
Templeton Funds and other dealer-sponsored programs or
events. In some instances, this compensation may be made
available only to certain securities dealers whose
representatives have sold or are expected to sell
significant amounts of shares of the Franklin Templeton
Funds. Compensation may include payment for travel expenses,
including lodging, incurred in connection with trips taken
by invited registered representatives and members of their
families to locations within or outside of the United States
for meetings or seminars of a business nature. Dealers may
not use sales of the Fund's shares to qualify for this
compensation to the extent such may be prohibited by the
laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the
Fund or its shareholders.
Certain officers and trustees of the Fund are also
affiliated with Distributors. A detailed description is
included in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which
provide for a reduced sales charge. To be certain to obtain
the reduction of the sales charge, the investor or the
securities dealer should notify Distributors at the time of
each purchase of shares which qualifies for the reduction.
In determining whether a purchase qualifies for any of the
discounts, investments in any of the Franklin Templeton
Investments may be combined with those of the investor's
spouse and children under the age of 21. In addition, the
aggregate investments of a trustee or other fiduciary
account (for an account under exclusive investment
authority) may be considered in determining whether a
reduced sales charge is available, even though there may be
a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a
reduction in the sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value
(whichever is higher) of existing investments in the
Franklin Templeton Investments may be combined with the
amount of the current purchase in determining the sales
charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for
a reduced sales charge on a purchase of shares of the Fund
by completing the Letter of Intent section of the
Shareholder Application (the "Letter of Intent" or
"Letter"). By completing the Letter, the investor expresses
an intention to invest during the next 13 months a specified
amount which, if made at one time, would qualify for a
reduced sales charge and grants to Distributors a security
interest in the reserved shares and irrevocably appoints
Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares
for the purpose of paying any additional sales charge due.
Purchases under the Letter of Intent will conform with the
requirements of Rule 22d-1 under the 1940 Act. The investor
or the investor's securities dealer must inform Investor
Services or Distributors that this Letter is in effect each
time a purchase is made
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH
ARE
LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE
PURCHASES") ACKNOWLEDGES AND AGREES TO THE FOLLOWING
PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of
the total intended purchase will be reserved in shares of
the Fund, registered in the investor's name, to assure that
the full applicable sales charge will be paid if the
intended purchase is not completed. The reserved shares will
be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions
on the reserved shares will be paid as directed by the
investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been
completed or the higher sales charge paid. For more
information, see "Additional Information Regarding
Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of
the current purchase. For example, if members of the group
had previously invested and still held $80,000 of Fund
shares and now were investing $25,000, the sales charge
would be 3.75%. Information concerning the current sales
charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence
for more than six months, (ii) has a purpose other than
acquiring Fund shares at a discount and (iii) satisfies
uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, be available
to arrange for group meetings between representatives of the
Fund or Distributors and the members, agree to include sales
and other materials related to the Fund in its publications
and mailings to members at reduced or no cost to
Distributors, and seek to arrange for payroll deduction or
other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such
time as the investor notifies the Fund and the investor's
employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the
payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time
the money reaches the Fund. The investment in the Fund will
be made at the offering price per share determined on the
day that both the check and payroll deduction data are
received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition
of either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, directors,
trustees and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members; (2)
companies exchanging shares with or selling assets pursuant
to a merger, acquisition or exchange offer; (3) insurance
company separate accounts for pension plan contracts; (4)
accounts managed by the Franklin Templeton Group; (5)
shareholders of Templeton Institutional Funds, Inc.
reinvesting redemption proceeds from that fund, under an
employee benefit plan qualified under section 401 of the
Code, in shares of the Fund; (6) certain unit investment
trusts and unit holders
of such trusts reinvesting their distributions from the
trusts in the Fund; (7) registered securities dealers and
their affiliates, for their investment account only; and (8)
registered personnel and employees of securities dealers and
by their spouses and family members, in accordance with the
internal policies and procedures of the employing securities
dealer.
Shares of the Fund may be purchased at net asset value by
persons who have redeemed, within the previous 120 days,
their shares of the Fund or another of the Franklin
Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on
redemption. An investor may reinvest an amount not exceeding
the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed
and subsequently repurchased, a new contingency period will
begin. Shares of the Fund redeemed in connection with an
exchange into another fund (see "Exchange Privilege") are
not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of
shares of the Fund must be received by the Fund or the
Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other
financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the
amount of gain or loss recognized and the tax basis of the
shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in
the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a
reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the
shareholder may also be used to purchase shares of the Fund
or another of the Franklin Templeton Funds at net asset
value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such
distribution. To exercise this privilege, a written request
to reinvest the distribution must accompany the purchase
order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions
in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by investors who have, within the past 60 days, redeemed an
investment in an unaffiliated mutual fund which charged the
investor a contingent deferred sales charge upon redemption
and which has investment objectives similar to those of the
Fund.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by broker-dealers who have entered into a supplemental
agreement with Distributors, or by registered investment
advisers affiliated with such broker-dealers, on behalf of
their clients who are participating in a comprehensive fee
program (sometimes known as a wrap fee program).
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by anyone who has taken a distribution from an existing
retirement plan already invested in the Franklin Templeton
Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such
distribution. In order to
exercise this privilege, a written order for the purchase of
shares of the Fund must be received by Franklin Templeton
Trust Company (the "Trust Company"), the Fund or Investor
Services, within 120 days after the plan distribution. A
prospectus outlining the investment objectives and policies
of a fund in which the shareholder wishes to invest may be
obtained by calling toll free at 1-800/DIAL BEN (1-800/342
5236).
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by any state, county, or city, or any
instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment
laws from paying a sales charge or commission in connection
with the purchase of shares of any registered management
investment company (an "eligible governmental authority").
SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors
considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net
asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors
or one of its affiliates may make a payment, out of its own
resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by certain designated retirement plans, including
profit sharing, pension, 401(k) and simplified employee
pension plans ("designated plans"), subject to minimum
requirements with respect to number of employees or amount
of purchase, which may be established by Distributors.
Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13
month period in the Fund or in any of the Franklin
Templeton Investments totals at least $1,000,000. Employee
benefit plans not designated above or qualified under
Section 401 of the Code ("non-designated plans") may be
afforded the same privilege if they meet the above
requirements as well as the uniform criteria for qualified
groups previously described under "Group Purchases" which
enable Distributors to realize economies of scale in its
sales efforts and sales related expenses.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trust companies and bank trust departments for funds over
which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are
subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors.
Currently, those criteria require that the amount invested
or to be invested during the subsequent 13-month period in
the Fund or any of the Franklin Templeton Investments must
total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds
received by the close of business on the next business day
following such order.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trustees or other fiduciaries purchasing securities for
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without
regard to where such assets are currently invested.
Refer to the SAI for further information.
GENERAL
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling
Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND IN
CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or employer
sponsored retirement plans involving tax-deferred
investments. The Fund may be used as an investment vehicle
for an existing retirement plan, or the Trust Company may
provide the plan documents and serve as custodian or
trustee. A plan document must be adopted for a retirement
plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve
as custodian or trustee for retirement plans. Brochures for
the Trust Company plans contain important information
regarding eligibility, contribution and deferral limits and
distribution requirements. Please note that an application
other than the one contained in this Prospectus must be used
to establish a retirement plan account with the Trust
Company. To obtain a retirement plan brochure or
application, call toll free 1800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan
accounts. Specific forms are required to be completed for
distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax
or benefits and pension plan consultants before choosing a
retirement plan. In addition, retirement plan investors
should consider consulting their investment representatives
or advisers concerning investment decisions within their
plans.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS
SECTION MAY NOT BE AVAILABLE DIRECTLY FROM THE FUND TO
SHAREHOLDERS WHOSE SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR
NETWORKED ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING
CORPORATION ("NSCC") (SEE THE SECTION CAPTIONED "ACCOUNT
REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and
capital gain distributions, are generally credited to an
account in the
name of an investor on the books of the Fund, without the
issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes
the risk of loss or theft of a share certificate. A lost,
stolen or destroyed certificate cannot be replaced without
obtaining a sufficient indemnity bond. The cost of such a
bond, which is generally borne by the shareholder, can be 2%
or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested in
writing by the shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that
period and after each other transaction which affects the
shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including
the number of shares in "plan balance" for the account of
the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be
able to arrange to make additional purchases of shares
automatically on a monthly basis by electronic funds
transfer from a checking account, if the bank which
maintains the account is a member of the Automated Clearing
House, or by preauthorized checks drawn on the shareholder's
bank account. A shareholder may, of course, terminate the
program at any time. The Shareholder Application included
with this Prospectus contains the requirements applicable to
this program. In addition, shareholders may obtain more
information concerning this program from their securities
dealer or from Distributors.
The market value of the Fund's shares is subject to
fluctuation. Before undertaking any plan for systematic
investment, the investor should keep in mind that such a
program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided
that the net asset value of the shares held by the
shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal
Plan. The minimum amount which the shareholder may withdraw
is $50 per withdrawal transaction, although this is merely
the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject
to mandatory distribution requirements are not subject to
the $50 minimum. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder
establishes a plan, any capital gain distributions and
income dividends paid by the Fund will be reinvested for the
shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of
shares at net asset value on the day of the transaction
(which is generally the first business day of the month in
which the payment is scheduled) with payment generally
received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may
direct the selected withdrawals to another of the Franklin
Templeton Funds, to another person, or directly to a
checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to
the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total
plan balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a
sale for federal income tax purposes. Because the amount
withdrawn under the plan may be more than the shareholder's
actual yield or income, part of the payment may be a return
of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the
additional purchases. The shareholder should ordinarily not
make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time
such a plan is in effect. A Systematic Withdrawal Plan may
be terminated on written notice by the shareholder or the
Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's
receipt of notification of the death or incapacity of the
shareholder. Shareholders may change the amount (but not
below the specified minimum) and schedule of withdrawal
payments, or suspend one such payment, by giving written
notice to Investor Services at least seven business days
prior to the end of the month preceding a scheduled payment.
Share certificates may not be issued while a Systematic
Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual
funds with various investment objectives and policies. The
shares of most of these mutual funds are offered to the
public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes,
Fund shares may be exchanged for shares of other Franklin
Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such
fund's stated eligibility requirements and investment
minimums. Investors should review the prospectus of the fund
they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations
on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges. Exchanges may
be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of
the written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD,
IF ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY
CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(REGISTERED TRADEMARK) SYSTEM (DAY OR
NIGHT) AT 1800/247-1753. IF THE SHAREHOLDER DOES NOT WISH
THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, THE FUND OR
INVESTOR SERVICES SHOULD BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to
effect exchanges from the Fund into an identically
registered account in one of the other available Franklin
Templeton Funds. The Telephone Exchange Privilege is
available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The
Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are
genuine. Please refer to "Telephone Transactions
Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be
difficult to implement and the TeleFACTS option may not be
available. In this event, shareholders should follow the
other exchange procedures discussed in this section,
including the procedures for processing exchanges through
securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the
Fund's shares, Investor Services will accept exchange orders
by telephone or by other means of electronic transmission
from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be
effective only for uncertificated shares on deposit in the
shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a
fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject to
a contingent deferred sales charge in the original fund
purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will
be imposed. The contingency period will be tolled (or
stopped) for the period such shares are exchanged into and
held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
Exchanges are made on the basis of the net asset values of
the funds involved, except as set forth below. Exchanges of
shares of the Fund which were purchased without a sales
charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless
the investment on which no sales charge was paid was
transferred in from a fund on which the investor paid a
sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a
higher sales charge will be charged the difference, unless
the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests
the exchange of the total value of the Fund account,
declared but unpaid income dividends and capital gain
distributions will be transferred to the fund being
exchanged into and will be invested at net asset value.
Because the exchange is considered a
redemption and purchase of shares, the shareholder may
realize a gain or loss for federal income tax purposes.
Backup withholding and information reporting may also apply.
Information regarding the possible tax consequences of such
an exchange is included in the tax section in this
Prospectus and in the SAI.
There are differences among the Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the
shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the
Fund pursuant to the exchange privilege, the Fund might have
to liquidate portfolio securities it might otherwise hold
and incur the additional costs related to such transactions.
On the other hand, increased use of the exchange privilege
may result in periodic large inflows of money. If this
should occur, it is the general policy of the Fund to
initially invest this money in short-term, interest-bearing
money market instruments, unless it is felt that attractive
investment opportunities consistent with the Fund's
investment objective exist immediately. Subsequently, this
money will be withdrawn from such short-
term money market instruments and invested in portfolio
securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The Exchange Privilege may be modified or discontinued by
the Fund at any time upon 60 days' written notice to
shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may
accomplish exchanges directly. Certain restrictions may
apply, however, to other types of retirement plans. See
"Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market
timing services to purchase or redeem shares based on
predetermined market indicators ("Timing Accounts") will be
charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective
prospectuses, certain funds do not accept or may place
differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose
transactions seem to follow a timing pattern who: (i) makes
an exchange request out of the Fund within two weeks of an
earlier exchange request out of the Fund, or (ii) makes
more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges shares equal in value to at
least $5 million, or more than 1% of the Fund's net assets.
Accounts under common ownership or control, including
accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of
exchange requests by any Timing Account, person, or group
if, in
the Manager's judgment, the Fund would be unable to invest
effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be
restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the
Fund's assets. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive
to the Fund and therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order
for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and
receive from the Fund the value of the shares. Shares may be
redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of
this Prospectus, and any share certificates which have been
issued for the shares being redeemed, properly endorsed and
in order for transfer. The shareholder will then receive
from the Fund the value of the shares based upon the net
asset value per share next computed after the written
request in proper form is received by Investor Services.
Redemption requests received after the time at which the net
asset value is calculated (1:00 p.m. Pacific time) each day
that the New York Stock Exchange (the "Exchange") is open
for business will receive the price calculated on the
following business day. Shareholders are requested to
provide a telephone number(s) where they may be reached
during business hours, or in the evening if preferred.
Investor Services' ability to contact a shareholder promptly
when necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE
GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE
FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone
other than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any
address other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in
excess of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based on
the transfer instructions, including, for example, when (a)
the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c)
the Fund has been notified of an adverse claim, (d) the
instructions received by the Fund are given by an agent, not
the actual registered owner, (e) the Fund determines that
joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the
authority of a representative of a corporation, partnership,
association, or other entity has not been
established to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the
Securities Exchange Act of 1934. Generally, eligible
guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust
companies, savings banks, industrial loan companies and
credit unions; (2) national securities exchanges, registered
securities associations and clearing agencies; (3)
securities dealers which are members of a national
securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that
participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee
medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied
by the share certificate and a share assignment form signed
by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced
above. Shareholders are advised, for their own protection,
to send the share certificate and assignment form in
separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court
jurisdiction require the following documentation to be in
proper form:
Corporation - (1) Signature guaranteed letter of instruction
from the authorized officer(s) of the corporation and (2) a
corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction
from a general partner and (2) pertinent pages from the
partnership agreement identifying the general partners or a
certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from
the trustee(s) and (2) a copy of the pertinent pages of the
trust document listing the trustee(s) or a Certification for
Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents
and the applicable state law since these accounts have
varying requirements, depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper
form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"),
included with this Prospectus, may redeem shares of the Fund
by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts."
INFORMATION MAY BE OBTAINED BY WRITING TO THE FUND OR
INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY
CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL
EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS
GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS
DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION
PROCEDURES."
For shareholder accounts with the completed Agreement on
file, redemptions of uncertificated shares or shares which
have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00
p.m. Pacific time on any business day will be processed that
same day. The redemption check will be sent within seven
days, made payable to all the registered owners on the
account, and will be sent only to the address of record.
Redemption requests by telephone will not be accepted within
30 days following an address change by telephone. In that
case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments,
government entities, and qualified retirement plans which
qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department
by telephoning 1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities dealers who
have entered into a dealer or similar agreement with
Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is
that if the shareholder redeems shares through a securities
dealer, the redemption price will be the net asset value
next calculated after the shareholder's securities dealer
receives the order which is promptly transmitted to the
Fund, rather than on the day the Fund receives the
shareholder's written request in proper form. These
documents, as described in the preceding section, are
required even if the shareholder's securities dealer has
placed the repurchase order. After receipt of a repurchase
order from the securities dealer, the Fund will still
require a signed letter of instruction and all other
documents set forth above. A shareholder's letter should
reference the Fund, the account number, the fact that the
repurchase was ordered by a securities dealer and the
securities dealer's name. Details of the dealerordered
trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of
the redemption. The seven-day period within which the
proceeds of the shareholder's redemption will be sent will
begin when the Fund receives all documents required to
complete ("settle") the repurchase in proper form. The
redemption proceeds will not earn dividends or interest
during the time between receipt of the securities dealer's
repurchase order and the date the redemption is processed
upon receipt of all documents necessary to settle the
repurchase. Thus, it is in a shareholder's best interest to
have the required documentation completed and forwarded to
the Fund as soon as possible. The shareholder's securities
dealer may charge a fee for handling the order. The SAI
contains more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers
on investments of $1 million or more, a contingent deferred
sales charge of 1% applies to redemptions of those
investments within the contingency period of 12 months of
the calendar month following their purchase. The charge is
1% of the lesser of the value of the shares redeemed
(exclusive of reinvested dividends
and capital gain distributions) or the total cost of such
shares, and is retained by Distributors. In determining if a
charge applies, shares not subject to a contingent deferred
sales charge are deemed to be redeemed first, in the
following order: (i) shares representing amounts
attributable to capital appreciation of those shares held
less than 12 months; (ii) shares purchased with reinvested
dividends and capital gain distributions; and (iii) other
shares held longer than 12 months; and followed by any
shares held less than 12 months, on a "first in, first out"
basis.
The contingent deferred sales charge is waived for:
exchanges; account fees; distributions to participants in
Trust Company retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of
excess contributions to employee benefit plans;
distributions from employee benefit plans, including those
due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to
February 1, 1995 and, for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's
net asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to a
shareholder's account falling below the minimum specified
account size. In addition to the waiver referred to above,
shares of participants in Trust Company retirement plan
accounts will, in the event of death, disability or
attainment of age 59 1/2, no longer be subject to the
contingent deferred sales charge.
Requests for redemptions for a specified dollar amount,
unless otherwise specified by the shareholder, will result
in additional shares being redeemed to cover any applicable
contingent deferred sales charge while requests for
redemption of a specific number of shares will result in the
applicable contingent deferred sales charge being deducted
from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used to
purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these
checks will also be held pending clearance. Shares purchased
by federal funds wire are available for immediate
redemption. In addition, the right of redemption may be
suspended or the date of payment postponed if the Exchange
is closed (other than customary closing) or upon the
determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it,
by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount invested
by the shareholder, depending on fluctuations in the market
value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion
of certain additional forms to ensure compliance with
Internal Revenue Service ("IRS") regulations. To liquidate a
retirement plan account, a shareholder or securities dealer
may call Franklin's Retirement Plans Department to obtain
the necessary forms.
Tax penalties will generally apply to any distribution from
such plans to a participant under age 59 1/2, unless the
distribution meets one of the exceptions set forth in the
Code.
OTHER
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services
Department or the securities dealer may call Franklin's
Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative
of record, if any, may be able to execute various
transactions by calling Investor Services at 1-800/632-2301.
All shareholders will be able to: (i) effect a change in
address, (ii) change a dividend option (see "Restricted
Accounts" below), (iii) transfer Fund shares in one account
to another identically registered account in the Fund, and
(iv) exchange Fund shares as described in this Prospectus by
telephone. In addition, shareholders who complete and file
an Agreement as described under "How to Sell Shares of the
Fund - Redemptions By Telephone" will be able to redeem
shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by
telephone are genuine. These will include: recording all
telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or
account information requested by the telephone service agent
at the time of the call for the purpose of establishing the
caller's identification, and sending a confirmation
statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the
Fund and Investor Services follow instructions communicated
by telephone which were reasonably believed to be genuine at
the time of their receipt, neither they nor their affiliates
will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under
no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction
will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur
because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To
assure compliance with all applicable regulations, special
forms are required for any distribution, redemption, or
dividend payment. While the telephone exchange privilege is
extended to Franklin Templeton IRA and 403(b) retirement
accounts, certain restrictions may apply to other types of
retirement plans. Changes to dividend options must also be
made in writing.
To obtain further information regarding distribution or
transfer procedures, including any required forms,
retirement account shareholders may call to speak to a
Retirement Plan Specialist at 1-800/527-2020 for Franklin
accounts or 1-800/354-9191 (press "2" when prompted to do
so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will be
difficult to execute because of heavy telephone volume. In
such situations, shareholders may wish to contact their
investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this
Prospectus.
Neither the Fund nor Investor Services will be liable for
any losses resulting from the inability of a shareholder to
execute a telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written
notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as
of 1:00 p.m. Pacific time each day that the Exchange is open
for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and
"ask" (offering price, which includes the maximum sales
charge of the Fund).
The net asset value per share of the Fund is determined in
the following manner: The aggregate of all liabilities,
including, without limitation, the current market value of
any outstanding options written by the Fund, accrued
expenses and taxes and any necessary reserves is deducted
from the aggregate gross value of all assets, and the
difference is divided by the number of shares of the Fund
outstanding at the time. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are
valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date.
Portfolio securities listed on a securities exchange or on
the NASDAQ National Market System for which market
quotations are readily available are valued at the last
quoted sale price of the day or, if there is no such
reported sale, within the range of the most recent quoted
bid and ask prices. Over-the-counter portfolio securities
for which market quotations are readily available are valued
within the range of the most recent bid and ask prices as
obtained from one or more dealers that make markets in the
securities. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange are
valued according to the broadest and most representative
market as determined by the Manager. Portfolio securities
underlying actively traded call options are valued at their
market price as determined above. The current market value
of any option held by the Fund is its last sale price on the
relevant exchange prior to the time when assets are valued.
Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued
within the range of the current closing bid and ask prices
if such valuation is believed to fairly reflect the
contract's market value. Other securities for which market
quotations are readily available are valued at the current
market price, which may be obtained from a pricing service,
based on a variety of factors, including recent trades,
institutional size trading in similar types of securities
(considering yield, risk and maturity) and/or developments
related to specific issues. Securities and other assets for
which market prices are not readily available are valued at
fair value as determined following procedures approved by
the Board of Trustees. With the approval of trustees, the
Fund may utilize a pricing service, bank or securities
dealer to perform any of the above described functions.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's
account should be directed to Investor Services at the
address shown on the back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current
price, yield or performance information specific to a fund
in the Franklin Funds by calling the automated Franklin
TeleFACTS system (day or night) at 1-800/247-1753.
Information about the Fund may be accessed by entering Fund
Code 39 followed by the # sign, when requested to do so by
the automated operator. The TeleFACTS system is also
available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to
speak directly with a representative, the following is a
list of the various Franklin departments, telephone numbers
and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
<TABLE>
<CAPTION>
HOURS OF OPERATION
(PACIFIC TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH
FRIDAY)
<S> <C> <C>
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
</TABLE>
In order to ensure that the highest quality of service is
being provided, telephone calls placed to or by
representatives in Franklin's service departments may be
accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions of
total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or
risk.
Average annual total return figures, as prescribed by the
SEC, represent the average annual percentage change in value
of $1,000 invested at the maximum public offering price
(offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent
applicable, through the end of the most recent calendar
quarter, assuming reinvestment of all distributions. The
Fund may also furnish total return quotations for other
periods or based on investments at various sales charge
levels or at net asset value. For such purposes total return
equals the total of all income and capital gain paid to
shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.
Current yield reflects the income per share earned by the
Fund's portfolio investments; it is calculated by dividing
the Fund's net investment income per share during a recent
30-day period by
the maximum public offering price on the last day of that
period and annualizing the result.
Yield, which is calculated according to a formula prescribed
by the SEC (see the SAI), is not indicative of the dividends
or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate,
which may be quoted to shareholders. The current
distribution rate is computed by dividing the total amount
of dividends per share paid by the Fund during the past 12
months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the
amount of dividend payout or a fundamental change in
investment policies, it might be appropriate to annualize
the dividends paid during the period such policies were in
effect, rather than using the dividends during the past 12
months. The current distribution rate differs from the
current yield computation because it may include
distributions to shareholders from sources other than
dividends and interest, such as premium income from option
writing and short-term capital gain, and is calculated over
a different period of time.
In each case, performance figures are based upon past
performance, reflect all recurring charges against Fund
income and will assume the payment of the maximum sales
charge on the purchase of shares. When there has been a
change in the sales charge structure, the historical
performance figures will be restated to reflect the new
rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus,
performance figures should not be considered to represent
what an investment may earn in the future or what the Fund's
yield, distribution rate or total return may be in any
future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports
containing audited financial statements of the Trust,
including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically
sent to shareholders. Copies may be obtained by investors or
shareholders, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page
of this Prospectus.
Additional information on Fund performance is included in
the Fund's Annual Report to Shareholders and the SAI.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on
December 16, 1986. The Trust is authorized to issue an
unlimited number of shares of beneficial interest, with a
par value of $.01 per share, in various series. All shares
have one vote and, when issued, are fully paid,
nonassessable and redeemable.
Shares have no preemptive or subscription rights and are
fully transferable. There are no conversion rights; however,
holders of shares of the Fund may reinvest all or any
portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in
"Exchange Privilege." All shares have equal voting, dividend
and liquidation rights.
VOTING RIGHTS
Shares of the Fund have noncumulative voting rights which
means that in all elections of trustees, the holders of more
than 50% of the shares voting can elect 100% of the trustees
if they choose to do so and, in such event, the holders of
the remaining shares voting will not be able to elect any
person or persons to the Board of Trustees.
The Trust does not intend to hold annual shareholders'
meetings. The Trust may, however, hold a special meeting for
such purposes as changing fundamental investment
restrictions, approving a new management agreement or any
other matters which are required to be acted on by
shareholders under the 1940 Act. A meeting may also be
called by a majority of the Board of Trustees or by
shareholders holding at least ten percent of the shares
entitled to vote at the meeting. Shareholders may receive
assistance in communicating with other shareholders in
connection with the election or removal of trustees such as
that provided in Section 16(c) of the 1940 Act. The Board of
Trustees may from time to time establish other funds of the
Trust, the assets and liabilities of which will be separate
and distinct from any other fund. Shares of each fund vote
separately as to issues affecting that fund, or the Trust,
unless otherwise permitted by the 1940 Act.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value,
shares of any shareholder whose account has a value of less
than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of
shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided
advance notice is given to the shareholder. More information
is included in the SAI.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do
not earn interest or any other income during the time such
checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss to the shareholder
caused by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check,
draft or wire. The Fund has no facility to receive, or pay
out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's
intentions as to ownership. Where there are two co-owners on
the account, the account will be registered as "Owner 1" and
"Owner 2"; the "or" designation is not used except for money
market fund accounts. If co-owners wish to have the ability
to redeem or convert on the signature of only one owner, a
limited power of attorney may be used.
Accounts should not be registered in the name of a minor,
either as sole or co-owner of the account. Transfer or
redemption for such an account may require court action to
obtain release of the funds until the minor reaches the
legal age of majority. The account should be registered in
the name of one "Adult" as custodian for the benefit of the
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for"
should only be used if the account is being established
pursuant to a
legal, valid trust document. Use of such a designation in
the absence of a legal trust document may cause difficulties
and require court action for transfer or redemption of the
funds.
Shares, whether in certificate form or not, registered as
joint tenants or "Jt Ten" shall mean "as joint tenants with
rights of survivorship" and not "as tenants in common."
Except as indicated, a shareholder may transfer an account
in the Fund carried in "street" or "nominee" name by the
shareholder's securities dealer to a comparably registered
Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have
executed dealer agreements on file with Distributors. Unless
a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and
will so inform the shareholder's delivering securities
dealer. To effect the transfer, a shareholder should
instruct the securities dealer to transfer the account to a
receiving securities dealer and sign any documents required
by the securities dealer(s) to evidence consent to the
transfer. Under current procedures the account transfer may
be processed by the delivering securities dealer and the
Fund after the Fund receives authorization in proper form
from the shareholder's delivering securities dealer. In the
future it may be possible to effect such transfers
electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner
or the owner's nominee listed in publicly available nominee
lists, regardless of whether the account was initially
registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of
record on an investor's account, the investor will be deemed
to have authorized the use of electronic instructions on the
account, including, without limitation, those initiated
through the services of the NSCC, to have adopted as
instruction and signature any such electronic instructions
received by the Fund and the Shareholder Services Agent, and
to have authorized them to execute the instructions without
further inquiry. At the present time, such services which
are available, or which are anticipated to be made available
in the near future, include the NSCC's "Networking,"
"Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment,
or by calling Franklin's Fund Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund
may be required to report to the IRS any taxable dividend,
capital gain distribution, or other reportable payment
(including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt
shareholders who have not provided a correct taxpayer
identification number ("TIN") and made certain required
certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the
IRS or a securities dealer notifies the Fund that the number
furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account
for any person failing to provide a TIN along with the
required certifications and (2) close an account by
redeeming its shares
in full at the then-current net asset value upon receipt of
notice from the IRS that the TIN certified as correct by the
shareholder is in fact incorrect or upon the failure of a
shareholder who has completed an "awaiting TIN"
certification to provide the Fund with a certified TIN
within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day
today management of the Fund's portfolio; Frank Felicelli
and Howard M. McEldowney since its inception and Doug Barton
since July 1991.
Doug Barton
Portfolio Manager
Franklin Advisers, Inc.
Mr. Barton, a Chartered Financial Analyst, has a Master in
Business Administration from California State University in
Hayward and a Bachelor of Science degree from California
State University in Chico. Mr. Barton joined Franklin in
July 1988.
Frank Felicelli
Executive Vice President
Franklin Management, Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. Felicelli, a Chartered Financial Analyst, has a
Master in Business Administration from Golden Gate
University and a Bachelor of Arts in economics from the
University of Illinois. Mr. Felicelli has been in the
industry since 1980 and with Franklin since 1986. He is a
member of several securities industry-related committees
and associations.
Howard M. McEldowney
President
Franklin Management Inc.
and Portfolio Manager
Franklin Advisers, Inc.
Mr. McEldowney has a Master in Business Administration
from Columbia University School of Business and a
Bachelor of Arts degree from Harvard University. Mr.
McEldowney has been in the industry since 1964 and with
Franklin since April 1984.
FRANKLIN ADJUSTABLE U.S. GOVERNMENT SECURITIES
FUND FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open
end management investment company consisting of both
diversified and non-diversified separate series. Each series
of the Trust in effect represents a separate fund with its
own investment objectives and policies, with varying
possibilities for income or capital appreciation, and subject
to varying market risks. Through the different series, the
Trust attempts to satisfy different investment objectives.
This Prospectus pertains only to the Franklin Adjustable U.S.
Government Securities Fund (the "Fund"), a diversified
series, which seeks a high level of current income,
consistent with lower volatility of principal. THE FUND,
UNLIKE MOST FUNDS WHICH INVEST DIRECTLY IN SECURITIES, SEEKS
TO ACHIEVE THIS OBJECTIVE BY INVESTING ALL OF ITS ASSETS IN
THE U.S. GOVERNMENT ADJUSTABLE RATE MORTGAGE PORTFOLIO (THE
"PORTFOLIO"), A SEPARATE SERIES OF ADJUSTABLE RATE SECURITIES
PORTFOLIOS WHOSE INVESTMENT OBJECTIVE IS THE SAME AS THAT OF
THE FUND. The Portfolio in turn invests primarily in mortgage-
backed securities created from pools of adjustable rate
mortgages which are issued or guaranteed by the U.S.
government, its agencies or instrumentalities. The Fund is
designed for individuals as well as certain institutional
investors. There can, of course, be no assurance that the
Fund's objective will be achieved.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
This Prospectus is intended to set forth in a clear and
concise manner information about the Fund that a prospective
investor should know before investing. After reading the
Prospectus, it should be retained for future reference; it
contains information about the purchase and sale of shares
and other items which the prospective investor will find
useful to have.
A Statement of Additional Information ("SAI") concerning the
Trust, the Fund and another series of the Trust, dated March
1, 1995, as may be amended from time to time, provides a
further discussion of certain areas in this Prospectus and
other matters which may be of interest to some investors. It
has been filed with the Securities and Exchange Commission
("SEC") and is incorporated herein by reference. A copy is
available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown
above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT
AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE
UNDERWRITER.
CONTENTS PAGE
Expense Table
Financial Highlights
About the Fund
Investment Objective and Policies
of the Fund
Administration of the Fund
Distributions to Shareholders
Taxation of the Fund and
Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund
in Connection with Retirement Plans
Involving Tax-Deferred Investments
Other Programs and Privileges
Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding
an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
Taxpayer IRS Certifications
Portfolio Operations
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a
shareholder will bear directly or indirectly in connection
with an investment in the Fund. These figures are based on
aggregate operating expenses of the Fund, before fee waivers
and expense reductions, for the fiscal year ended October
31, 1994, and include the expenses of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 2.25%
Deferred Sales Charge NONE*
Exchange Fee (per transaction)
$5.00**
*Investments of $1 million or more are not subject to a
front-end sales charge, but a contingent deferred sales
charge of 1% is imposed on certain redemptions within 12
months of the calendar month following such investments. See
"How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
**$5.00 fee only imposed on Timing Accounts as described
under "Exchange Privilege." All other exchanges are without
charge.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Portfolio Management Fees
0.40%*** Fund Administration Fees
0.10%
12b-1 Fees
0.22%**** Other Expenses of the Portfolio 0.02%
Other Expenses of the Fund 0.08%
Total Other Expenses
0.10% Total Fund Operating Expenses
0.82%***
***The Fund's administrator and the Portfolio's investment
manager agreed in advance to waive in advance the
Portfolio's management fee. With this reduction, the Fund's
total operating expenses, including the Fund's proportionate
share of Portfolio expenses, were 0.42% of the Fund's
average net assets. This arrangement may be terminated by
Advisers at any time.
****Consistent with National Association of Securities
Dealers, Inc.'s rules, it is possible that the combination
of front-end sales charges and Rule 12b-1 fees could cause
long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted
under those same rules.
Investors should be aware that the preceding table is not
intended to reflect in precise detail the fees and expenses
associated with an individual's own investment in the Fund.
Rather, the table has been provided only to assist investors
in gaining a more complete understanding of fees, charges
and expenses. For a more detailed discussion of these
matters, investors should refer to the appropriate sections
of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example
illustrates the expenses, including the initial sales
charge, that apply to a $1,000 investment in the Fund over
various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted
in the table above, the Fund charges no redemption fees:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$31 $48 $67 $122
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING
EXPENSES OF THE FUND, BEFORE FEE WAIVERS OR EXPENSE
REDUCTIONS, AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE EXPENSES WHICH MAY BE MORE OR LESS THAN THOSE SHOWN.
The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment
in the Fund. In addition, federal regulations require the
example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.
The above table summarizes the aggregate fees and expenses
incurred by both the Fund and the Portfolio. The Board of
Trustees of the Trust considered the aggregate fees and
expenses to be paid by both the Fund and the Portfolio under
the Fund's policy of investing all of its assets in shares
of the Portfolio, and such fees and expenses the Fund would
have paid if it continued to invest directly in mortgage
backed securities. Because this arrangement enables eligible
institutional investors, including the Fund and other
investment companies, to pool their assets, which may be
expected to result in the achievement of a variety of
operating economies, the Board concluded that the aggregate
expenses of the Fund and the Portfolio were expected to be
lower than the expenses that would be incurred by the Fund
if it continued to invest directly in mortgage-backed
securities, although there is no guarantee or assurance that
asset growth and lower expenses will be recognized. Advisers
has agreed to limit expenses so that in no
event will shareholders of the Fund incur higher expenses
than if it continued to invest directly in mortgage-backed
securities. Further information regarding the Fund's and the
Portfolio's fees and expenses is included under
"Administration of the Fund."
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial
highlights or a share of the Fund throughout the periods
from the effective date of registration (April 15, 1987)
to January 31, 1993, for the nine-month period from
February 1, 1993 to October 31, 1993, and for the fiscal
year ended October 31, 1994. The information for each of
the five fiscal years ended October 31, 1994, has been
audited by Coopers & Lybrand L.L.P., independent auditors,
whose audit report appears in the financial statements in
the Trust's SAI. The remaining figures, which are also
audited, are not covered by the auditor's current report.
See the discussion "Reports to Shareholders" under "General
Information."
<TABLE>
<CAPTION>
Per Share Operating Performance+
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets Net Realized Distributions Net Assets
Values at Net or Unrealized Total From From Net Distributions Values
Year Beginning Investment Gains (Losses) Investment Investment From Total at End
Ended of Year Income on Securities Operations Income Capital Gains Distributions of Year
- ----- ---------- ---------- -------------- ---------- ------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1988(1) $10.00 $.08 $ .09 $.17 $ - $ - $ - $10.17
1989 10.17 .82 (.229) .591 (.691) - (.691) 10.07
1990 10.07 .94 .034 .974 (.994) - (.994) 10.05
1991 10.05 .88 .066 .946 (1.006) - (1.006) 9.99
1992 9.99 .74 .027 .767 (.777) - (.777) 9.98
1993 9.98 .51 (.105) .405 (.522) (.003) (.525) 9.86
1993(2) 9.86 .28 (.086) .194 (.284) - (.284) 9.77
1994(3) 9.77 .35 (.606) (.256) (.314) - (.314) 9.20
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
- -----------------------------------------------------------------------------
Ratio of Net
Net Assets Ratio of Investment
at End Expenses Income Portfolio
Total of Year to Average to Average Turnover
Refund++ (in 000's) Net Assets** Net Assets Rate
-------- ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
1988(1) 1.7% $ 1,803 -%* 8.88%* .39%
1989 5.99 45,250 .44 7.92 48.39
1990 10.16 82,257 .39 9.03 76.32
1991 9.91 1,173,486 .30 8.23 96.50
1992 7.96 3,513,415 .37 7.10 30.89
1993 4.16 2,971,424 .36 5.10 30.36
1993(2) 1.99 1,813,504 .38* 3.92* 6.97
1994(3) (2.65) 700,617 .40 3.67 5.99
</TABLE>
(1) For the period October 6, 1987 (effective date of registration) to
January 31, 1988.
(2) For the nine months ended October 31, resulting from a change in fiscal
year from January 31.
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends and capital gains at net asset value.
**During the periods indicated, the Fund's administrator agreed in advance to
waive a portion of its administration fees and made payments of other expenses
incurred by the Fund. Had such action not been taken, the ratios of operating
expenses to average net assets would have been as follows:
<TABLE>
<S> <C>
Franklin Adjustable U.S.
Government Securities Fund
1988(1)................... .87%*
1989...................... .96
1990...................... .87
1991...................... .82
1992...................... .48
1993(2)................... .38 *
</TABLE>
The combined ratio of expenses to average net assets of the Fund and
the Portfolio is as follows:
After Fee Before Fee
Reduction Reduction
1992(1)................... .68% .89%
1993...................... .66 .80%
1993(2)................... .65* .79*
1994 .... .............. .42 .82
ABOUT THE FUND
The Trust, which was organized as a Massachusetts business
trust on December 16, 1986, is an open-end management
investment company, or mutual fund, and has registered with
the SEC under the Investment Company Act of 1940 (the "1940
Act"). The Fund and the additional separate diversified and
non-diversified series of the Trust each issue a separate
series of shares of beneficial interest. From inception
until March 13, 1990, the Fund was known as the Franklin
Adjustable Rate Mortgage Fund. The Board of Trustees changed
the name of the Fund to its current name on that date.
Shares of the Fund may be purchased (minimum investment of
$100 initially and $25 thereafter) at the current public
offering price which is equal to the Fund's net asset value
(see "Valuation of Fund Shares") plus a sales charge not
exceeding 2.25% of the offering price. See "How to Buy
Shares of the Fund."
INVESTMENT OBJECTIVE AND
POLICIES OF THE FUND
The investment objective of the Fund is to seek a high level
of current income, consistent with lower volatility of
principal. The Fund pursues its investment objective by
investing all of its assets in the Portfolio which has the
same investment objective and policies as the Fund. The
Portfolio is a separate diversified series of the Adjustable
Rate Securities Portfolios, an open-end management
investment company managed by Franklin Advisers, Inc.
("Advisers"). Shares of the Portfolio are acquired by the
Fund at net asset value with no sales charge. Accordingly,
an investment in the Fund is an indirect investment in the
Portfolio.
The Portfolio pursues its objective by investing primarily
(at least 65% of its total assets) in adjustable rate
mortgage securities ("ARMS") or other securities
collateralized by or representing an interest in mortgages
(collectively, "mortgage securities"), which have interest
rates which reset at periodic intervals. All such mortgage
securities in which the Fund, through the Portfolio, invests
will be issued or guaranteed by the United States ("U.S.")
government, its agencies or instrumentalities. In addition
to these mortgage securities, the Fund may invest through
the Portfolio up to 35% of its total assets in (1) notes,
bonds and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks,
Federal National Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC"), and Small Business
Administration, (2) obligations of or guaranteed by the full
faith and credit of the United States and repurchase
agreements collateralized by such obligations, and (3) time
and savings deposits in commercial or savings banks or in
institutions whose accounts are insured by the FDIC.
There is, of course, no assurance that the Fund's investment
objective will be achieved. As the value of the Portfolio's
portfolio securities fluctuate, the Portfolio's net asset
value per share will also fluctuate.
THE ADVANTAGES OF INVESTING IN THE FUND
The Fund enables its shareholders to invest easily in the
mortgage securities which are issued or guaranteed by the
U.S. government, its agencies or instrumentalities by
allowing an initial investment of as low as $100. Any such
guarantee will extend to the payment of interest and
principal due on the mortgage securities and will not
provide any protection from fluctuations in the market value
of such mortgage securities. The Fund believes that by
investing in the Portfolio, which in turn invests primarily
in mortgage securities which provide for variable rates of
interest, it will achieve a higher, more consistent and less
volatile net asset value than is characteristic of mutual
funds that invest primarily in mortgage securities paying a
fixed rate of interest.
The dividends from the Fund's net investment income are
declared and distributed monthly. Some change in the net
asset value per share during the month may be expected due
to the accumulation of undistributed income and the pay out
of such income once a month as a dividend (see "Valuation of
Fund Shares"). Principal payments received on the
Portfolio's mortgage securities will be reinvested by the
Portfolio in other securities. Such securities may have a
higher or lower yield than the mortgage securities already
held by the Portfolio, depending upon market conditions. An
investment in the Fund provides liquidity for the investor
who may redeem shares of the Fund at current net asset value
at any time in accordance with procedures described under
the caption "How to Sell Shares of the Fund" in this
Prospectus. An investment in the Fund may be a permissible
investment for national banks, federal credit unions,
federally chartered savings and loan associations, and some
state savings and loan associations. Any regulated
institution considering an investment in the Fund should
refer to the applicable laws and regulations governing its
operations in order to determine if the Fund is a
permissible investment. Municipal investors considering
investment of proceeds of bond offerings into the Fund
should consult with expert counsel to determine the effect,
if any, of various payments made by the Fund, Advisers or
the Fund's principal underwriter on arbitrage rebate
calculations.
SPECIAL INFORMATION REGARDING THE FUND'S
MASTER/FEEDER FUND STRUCTURE
The investment objectives of both the Fund and the Portfolio
are fundamental and may not be changed without shareholder
approval. The investment policies described herein include
those followed by the Portfolio in which the Fund invests.
The Fund's investment of all of its assets in the Portfolio
was previously approved by shareholders of the Fund.
Information on administration and expenses is included under
"Administration of the Fund." See the SAI for further
information regarding the Fund's and the Portfolio's
investment restrictions.
An investment in the Fund may be subject to certain risks
due to the Fund's structure, such as the potential that upon
redemption by other shareholders in the Portfolio, the
Fund's expenses may increase or the economies of scale which
have been achieved as a result of the structure may be
diminished. Institutional investors in the Portfolio that
have a greater pro rata ownership interest in the Portfolio
than the Fund could have effective voting control over the
operation of the Portfolio. Further, in the event that the
shareholders of the Fund do not approve a proposed future
change in the Fund's objective or fundamental policies,
which has been approved for the Portfolio, the Fund may be
forced to withdraw its investment from the Portfolio and
seek another investment company with the same objective and
policies. In addition, the Fund may withdraw its investment
in the Portfolio at any time, if the Board of Trustees of
the Trust considers that it is in the best interests of the
Fund to do so. Upon any such withdrawal, the Board of
Trustees of the Trust would consider what action to take,
including the investment of all of the assets of the Fund in
another pooled investment entity having the same investment
objective and policies as the Fund or the hiring of an
investment adviser to manage the Fund's investments. Such
circumstances may cause an increase in Fund expenses.
Further, the Fund's structure is a relatively new format,
which often results in certain operational and other
complexities. The Franklin organization was one of the first
mutual fund complexes in the country to implement such a
structure, and the trustees do not believe that the
additional complexities outweigh the benefits to be gained
by shareholders.
The Franklin Group of Funds(Registered Trademark) has
another fund which may invest in the Portfolio and which is
designed for institutional investors only. It is possible
that in the future other funds may be created which may
likewise invest in the Portfolio or existing funds may be
restructured so that they may invest in the Portfolio. The
Fund or Distributors will forward to any interested
shareholder additional information, including a prospectus
and statement of additional information, if requested,
regarding such other investment companies through which they
may make investments in the Portfolio. For further
information, please refer to "Organization" under "General
Information." Any such fund may be offered with the same or
different sales charge structure and Rule 12b-1 fees; thus,
an investor in such fund may experience a different return
from an investor in another investment company which invests
exclusively in the Portfolio. Investors interested in
obtaining information about such funds may contact the
departments listed under "How to Get Information Regarding
an Investment in the Fund."
Whenever the Fund, as an investor in the Portfolio, is asked
to vote on a matter relating to the Portfolio, the Trust, on
behalf of the Fund, will hold a meeting of the Fund's
shareholders and will cast its votes in the same proportions
as the Fund's shareholders have voted.
THE CHARACTERISTICS OF THE MORTGAGE SECURITIES
IN WHICH THE PORTFOLIO INVESTS
ADJUSTABLE RATE MORTGAGE SECURITIES. ARMS, like traditional
mortgage securities, interest in pools of mortgage loans.
Most mortgage securities are pass-through securities, which
means that they provide investors with payments consisting
of both principal and interest as mortgages in the
underlying mortgage pool are paid off by the borrower. The
dominant issuers or guarantors of mortgage securities today
are GNMA, FNMA, and FHLMC. GNMA creates mortgage securities
from pools of government guaranteed or insured (Federal
Housing Authority or Veterans Administration)
mortgages originated by mortgage bankers, commercial banks,
and savings and loan associations. FNMA and FHLMC issue
mortgage securities from pools of conventional and federally
insured and/or guaranteed residential mortgages obtained
from various entities, including savings and loan
associations, savings banks, commercial banks, credit
unions, and mortgage bankers.
The adjustable interest rate feature of the mortgages
underlying the mortgage securities in which the Portfolio
invests generally will act as a buffer to reduce sharp
changes in the Portfolio's net asset value in response to
normal interest rate fluctuations. As the interest rates on
the mortgages underlying the Portfolio's investments are
reset periodically, yields of portfolio securities will
gradually align themselves to reflect changes in market
rates so that the market value of the Portfolio's portfolio
securities will remain relatively stable as compared to
fixed-rate instruments and should cause the net asset value
of the Fund to fluctuate less significantly than it would if
the Portfolio invested in more traditional long-term, fixed
rate debt securities. During periods of rising interest
rates, changes in the coupon rate lag behind changes in the
market rate, resulting in possibly a lower net asset value
until the coupon resets to market rates. Thus, investors
could suffer some principal loss if they sold their shares
of the Fund before the interest rates on the underlying
mortgages are adjusted to reflect current market rates.
During periods of extreme fluctuation in interest rates, the
Fund's net asset value will fluctuate as well. Since most
mortgage securities in the Portfolio's portfolio will
generally have annual reset caps of 100 to 200 basis points,
short-term fluctuation in interest rates above these levels
could cause such mortgage securities to "cap out" and to
behave more like longterm, fixed-rate debt securities.
Unlike fixed-rate mortgages, which generally decline in
value during periods of rising interest rates, adjustable
rate mortgage securities allow the Portfolio to participate
in increases in interest rates through periodic adjustments
in the coupons of the underlying mortgage, resulting in both
higher current yields and lower price fluctuations.
Furthermore, if prepayments of principal are made on the
underlying mortgages during periods of rising interest
rates, the Portfolio generally will be able to reinvest such
amounts in securities with a higher current rate of return.
The Portfolio, however, will not benefit from increases in
interest rates to the extent that interest rates rise to the
point where they cause the current coupon of adjustable rate
mortgage securities held as investments by the Portfolio to
exceed the maximum allowable annual or lifetime reset limits
(or "cap rates") for a particular mortgage. Also, the
Portfolio's net asset value could vary to the extent that
current yields on mortgage-backed securities are different
than market yields during interim periods between coupon
reset dates.
During periods of declining interest rates, of course, the
coupon rates may readjust downward, resulting in lower
yields to the Fund. Further, because of this feature, the
value of ARMS is unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate
instruments. As with other mortgage backed securities,
interest rate declines may result in accelerated prepayment
of mortgages and the proceeds from such prepayments must be
reinvested at lower prevailing interest rates.
One additional difference between ARMS and fixed-rate
mortgages is that for certain types of ARMS, the rate of
amortization of principal, as well as interest payments, can
and does change in accordance with movements in a
particular, pre-specified,
published interest rate index. The amount of interest due to
an ARMS holder is calculated by adding a specified
additional amount, the "margin," to the index, subject to
limitations or "caps" on the maximum and minimum interest
that is charged to the mortgagor during the life of the
mortgage or to maximum and minimum changes to that interest
rate during a given period. It is these special
characteristics which are unique to adjustable rate
mortgages that the Fund believes make them attractive
investments in seeking to accomplish the Fund's objective.
Many mortgage securities which are issued or guaranteed by
GNMA, FHLMC, or FNMA ("Certificates") are called passthrough
Certificates because a pro rata share of both
regular interest and principal payments (less GNMA's,
FHLMC's, or FNMA's fees and any applicable loan servicing
fees), as well as unscheduled early prepayments on the
underlying mortgage pool, are passed through monthly to the
holder of the Certificate (i.e., the Portfolio). The
principal and interest on GNMA securities are guaranteed by
GNMA which guarantee is backed by the full faith and credit
of the U. S. government. FNMA guarantees full and timely
payment of all interest and principal, while FHLMC
guarantees timely payment of interest and ultimate
collection of principal. Mortgage securities issued or
guaranteed by FNMA and FHLMC are not backed by the full
faith and credit of the U.S. government; however, they are
generally considered to offer minimal credit risks. The
yields provided by these mortgage securities have
historically exceeded the yields on other types of U.S.
government securities with comparable maturities in large
measure due to the prepayment risk. (See "Risks of Mortgage
Securities.")
COLLATERALIZED MORTGAGE OBLIGATIONS("CMOs"). The Portfolio
may also invest in CMOs issued and guaranteed by U.S.
government agencies or instrumentalities. A CMO is a
mortgage-backed security that separates mortgage pools into
short-, medium- and long-term components. Each component
pays a fixed rate of interest at regular intervals. These
components enable an investor such as the Portfolio to more
accurately predict the pace at which principal is returned.
The Portfolio will not invest in privately issued CMOs
except to the extent that it invests in the securities of
entities that are instrumentalities of the U.S. government.
CMOs purchased by the Portfolio may be:
(1) collateralized by pools of mortgages in which each
mortgage
is guaranteed as to payment of principal and interest by an
agency or instrumentality of the U.S. government;
(2) collateralized by pools of mortgages in which payment
of principal and interest are guaranteed by the issuer and
the guarantee is collateralized by U.S. government
securities; or
(3) securities in which the proceeds of the issuance are
invested in mortgage securities and payment of the principal
and interest are supported by the credit of an agency or
instrumentality of the U.S. government.
RESETS. The interest rates paid on the ARMS and CMOs in
which the Portfolio invests generally are readjusted at
intervals of one year or less to an increment over some
predetermined interest rate index. There are three main
categories of indices: those based on U.S. Treasury
securities and those derived from a calculated measure such
as a cost of funds index or a moving average of mortgage
rates. Commonly utilized indices include the one, three- and
five-year constant maturity Treasury rates, the three-month
Treasury bill rate, the 180-day Treasury bill rate, rates on
longer-term Treasury securities, the 11th District Federal
Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-, three-, six-month or one-year London
Interbank Offered Rate (LIBOR), the prime rate of a specific
bank, or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index, tend to
lag behind changes in market rate levels and tend to be
somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages which
collateralize the ARMS and CMOs in which the Portfolio
invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential
borrower may change up or down (1) per reset or adjustment
interval, and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by
limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate
changes. These payment caps may result in negative
amortization.
STRIPPED MORTGAGE SECURITIES. The Portfolio may also invest
in stripped mortgage securities, which are derivative
multiclass mortgage securities. The stripped mortgage
securities in which the Portfolio may invest will be issued
and guaranteed by agencies or instrumentalities of the U.S.
government. Stripped mortgage securities have greater market
volatility than other types of mortgage securities in which
the Portfolio invests.
Stripped mortgage securities are usually structured with two
classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A
common type of stripped mortgage security will have one
class receiving some of the interest and most of the
principal from the mortgage assets, while the other class
will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive
all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an
IO class is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal
payments (including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the Fund's yield to
maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the
Portfolio may fail to fully recoup its initial investment in
these securities even if the securities are rated in the
highest rating categories, AAA or Aaa, by Standard & Poor's
Corporation or Moody's Investors Service, respectively.
Stripped mortgage securities are purchased and sold by
institutional investors through several investment banking
firms acting as brokers or dealers. As these securities were
only recently developed, traditional trading markets have
not yet been established for all such securities.
Accordingly, some of these securities may generally be
illiquid. The staff of the SEC (the "Staff") has indicated
that only government-issued IO or PO securities backed by
fixed-rate mortgages may be deemed to be liquid, if
procedures with respect to determining liquidity are
established by a fund's board. The Board of Trustees may, in
the future, adopt procedures which would permit the Fund to
acquire, hold, and treat as liquid government-issued IO and
PO securities. At the present time, however, all such
securities will continue to be treated as illiquid and will,
together with any other illiquid investments, not exceed 10%
of the Fund's net assets. Such position may be changed in
the future, without notice to shareholders, in response to
the Staff's continued reassessment of this matter as well as
to changing market conditions.
RISKS OF MORTGAGE SECURITIES
The mortgage securities in which the Portfolio principally
invests differ from conventional bonds in that principal is
paid back over the life of the mortgage security rather than
at maturity. As a result, the holder of the mortgage
securities (i.e., the Portfolio) receives monthly scheduled
payments of principal and interest and may receive
unscheduled principal payments representing prepayments on
the underlying mortgages. When the holder reinvests the
payments and any unscheduled prepayments of principal it
receives, it may receive a rate of interest which is lower
than the rate on the existing mortgage securities. For this
reason, mortgage securities may be less effective than other
types of U.S. government securities as a means of "locking
in" long-term interest rates.
The market value of mortgage securities, like other U.S.
government securities, will generally vary inversely with
changes in market interest rates, declining when interest
rates rise and rising when interest rates decline. Mortgage
securities, while having less risk of a decline during
periods of rapidly rising rates, may also have less
potential for capital appreciation than other investments of
comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. In
addition, to the extent mortgage securities are purchased at
a premium, mortgage foreclosures and unscheduled principal
prepayments may result in some loss of the holder's
principal investment to the extent of the premium paid. On
the other hand, if mortgage securities are purchased at a
discount, both a scheduled payment of principal and an
unscheduled prepayment of principal will increase current
and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be
taxable as ordinary income.
OTHER INVESTMENT POLICIES OF THE PORTFOLIO
(AND THE FUND)
REPURCHASE AGREEMENTS. The Portfolio may engage in
repurchase transactions in which the Portfolio purchases a
U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction
requires the collateralization of the seller's obligation by
the transfer of securities with an initial market value,
including accrued interest, equal to at least 102% of the
dollar amount invested by the Portfolio in each agreement,
with the value of the underlying security marked to market
daily to maintain coverage of at least 100%. The repurchase
agreements in which the Portfolio may invest are limited to
those agreements having terms of one year or less. A default
by the seller might cause the Portfolio to experience a loss
or delay in the liquidation of the collateral securing the
repurchase agreement. The Portfolio might also incur
disposition costs in liquidating the collateral. The
Portfolio, however, intends to enter into repurchase
agreements only with financial institutions such as broker
dealers and banks which are deemed creditworthy by the
Portfolio's investment manager. A repurchase agreement is
deemed to be a loan by the Portfolio under the 1940 Act. The
U.S. government security subject to resale (the collateral)
will be held on behalf of the Portfolio by a custodian
approved by the Portfolio's Board and will be held pursuant
to a written agreement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio
may purchase U.S. government obligations on a "when-issued"
or "delayed delivery" basis. These transactions are
arrangements under which the Portfolio purchases securities
with payment and
delivery scheduled for a future time, generally in 30 to 60
days. Purchases of U.S. government securities on a when
issued or delayed delivery basis are subject to market
fluctuation and are subject to the risk that the value or
yields at delivery may be more or less than the purchase
price or the yields available when the transaction was
entered into. Although the Portfolio will generally purchase
U.S. government securities on a when-issued basis with the
intention of acquiring such securities, it may sell such
securities before the settlement date if it is deemed
advisable. When the Portfolio is the buyer in such a
transaction, it will maintain, in a segregated account with
its custodian, cash or high-grade marketable securities
having an aggregate value equal to the amount of such
purchase commitments until payment is made. To the extent
the Portfolio engages in whenissued and delayed delivery
transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with the
Portfolio's investment objective and policies, and not for
the purpose of investment leverage. In when-issued and
delayed delivery transactions, the Portfolio relies on the
seller to complete the transaction. The other party's
failure may cause the Portfolio to miss a price or yield
considered advantageous. Securities purchased on a when
issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. The Portfolio
is not subject to any percentage limit on the amount of its
assets which may be invested in when-issued purchase
obligations.
MORTGAGE DOLLAR ROLLS. The Portfolio may enter into mortgage
"dollar rolls" in which the Portfolio sells mortgage-backed
securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar
(name, type, coupon and maturity) securities on a specified
future date. During the roll period, the Portfolio forgoes
principal and interest paid on the mortgage-backed
securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price
for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the
initial sale. A covered roll is a specific type of dollar
roll for which there is an offsetting cash position or a
cash equivalent security position.
ILLIQUID INVESTMENTS. It is the policy of the Fund that
illiquid securities (securities that cannot be disposed of
within seven days in the normal course of business at
approximately the amount at which the Fund has valued the
securities and includes, among other things, repurchase
agreements of more than seven days duration) may not
constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund.
OTHER PERMITTED INVESTMENTS. Other investments permitted by
the Portfolio include: obligations of the U.S. government;
notes, bonds, and discount notes of the following U.S.
government agencies or instrumentalities: Federal Home Loan
Banks, FNMA, GNMA, FHLMC, Small Business Administration; and
time and savings deposits (including fixed or adjustable
rate certificates of deposit) in commercial or savings banks
or in institutions whose accounts are insured by the FDIC.
The Portfolio's investments in savings deposits are
generally deemed to be illiquid and will, together with any
other illiquid investments, not exceed 10% of the
Portfolio's total net assets. The Portfolio's investments in
time deposits will not exceed 10% of its total assets.
TEMPORARY DEFENSIVE POSITIONS. When maintaining a temporary
defensive position, the Portfolio may invest its assets,
without limit, in U.S. government securities, certificates
of deposit of banks having total assets in excess of $5
billion, and repurchase
agreements.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of additional investment
restrictions, some of which have been adopted as fundamental
policies of the Fund and may be changed only with the
approval of a majority of the outstanding voting securities
of the Fund. A list of these restrictions and more
information concerning the policies are discussed in the
SAI.
HOW SHAREHOLDERS PARTICIPATE IN THE
RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in the Portfolio, the
assets of which are continuously being invested in portfolio
securities. If the securities owned by the Portfolio
increase in value, the value of the Fund shares which the
shareholder owns will increase. If the securities owned by
the Portfolio decrease in value, the value of the
shareholder's shares will also decline. In this way,
shareholders participate in any change in the value of the
securities owned by the Portfolio.
In addition to the factors which affect the value of
individual securities, as described in the preceding
sections, a shareholder may anticipate that the value of
Portfolio shares will fluctuate with movements in the
broader equity and bond markets, as well. In particular,
changes in interest rates will affect the value of the
Portfolio's holdings and thus its share price. Increased
rates of interest which frequently accompany higher
inflation and/or a growing economy are likely to have a
negative effect on the value of Portfolio shares. History
reflects both increases and decreases in the prevailing rate
of interest and these may reoccur unpredictably in the
future.
ADMINISTRATION OF THE FUND
The Board of Trustees has the primary responsibility for the
overall management of the Trust and the Fund and for
electing the officers of the Trust who are responsible for
administering the day-to-day operations of all series of the
Trust. The officers and trustees of the Trust are also
officers and trustees of the Adjustable Rate Securities
Portfolios. For information concerning the officers and
trustees of the Trust and the Adjustable Rate Securities
Portfolios, see "Trustees and Officers" in the SAI. The
Board of Trustees, with all disinterested trustees as well
as the interested trustees voting in favor, has adopted
written procedures designed to deal with potential conflicts
of interest which may arise from having the same persons
serving on each trust's Board of Trustees. The procedures
call for an annual review of the Fund's relationship with
the Portfolio, and in the event a conflict is deemed to
exist, the Board of Trustees may take action, up to and
including the establishment of a new Board of Trustees. The
Board of Trustees has determined that there are no conflicts
of interest presented by this arrangement at the present
time. Further information is included in the SAI.
Advisers serves as the Fund's administrator and as the
Portfolio's investment manager. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr.,
who own approximately 20% and 16%, respectively, of
Resources' outstanding shares. Resources is engaged in
various aspects of the financial services industry through
its various subsidiaries (the "Franklin Templeton Group").
Advisers acts as investment
manager or administrator to 33 U.S. registered investment
companies (111 separate series) with aggregate assets of
over $73 billion.
Pursuant to the administration agreement, Advisers provides
the Fund with various administrative, statistical and other
services which are necessary to conduct the Fund's business.
Pursuant to the management agreement with the Portfolio,
Advisers supervises and implements the Portfolio's
investment activities and provides certain administrative
services and facilities which are necessary to conduct the
Portfolio's business.
Fund shareholders will bear a portion of the Portfolio's
operating expenses, including its management fee, to the
extent that the Fund, as a shareholder of the Portfolio,
bears such expenses. The portion of the Portfolio's expenses
borne by the Fund is dependent upon the number of other
shareholders of the Portfolio, if any.
Advisers may, but is not obligated to, agree in advance to
waive all or any portion of the management fee due from the
Portfolio or the administration fee due from the Fund.
During the fiscal year ended October 31, 1994,
administration fees totaling 0.10% of the Fund's daily net
assets, were paid to Advisers. The Fund's proportionate
share of the Portfolio's management fees was 0.40%.
Advisers, however, waived the Portfolio's management fee.
Total operating expenses including administration fees and
the Fund's proportionate share of the Portfolio's expenses,
would have totaled 0.82%.After fee waivers, total operating
expenses of the Fund, including its proportionate share of
the Portfolio's operating expenses, totaled 0.42%. See
"Expense Table" at the front of the Prospectus.
It is not anticipated that the Portfolio or the Fund will
incur a significant amount of brokerage expenses because
adjustable rate securities are generally traded on a "net"
basis, that is, in principal transactions without the
addition or deduction of brokerage commissions. To the
extent that the Portfolio does participate in transactions
involving brokerage commissions, it is Advisers'
responsibility to select brokers through which such
transactions will be effected.
Shareholder accounting and many of the clerical functions
for the Fund are performed by Franklin/Templeton Investor
Services, Inc. ("Investor Services" or "Shareholder Services
Agent") in its capacity as transfer agent and dividendpaying
agent. Investor Services is a wholly-owned subsidiary of
Resources.
PLAN OF DISTRIBUTION
The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act whereby it may
reimburse Distributors or others for expenses actually
incurred by Distributors or others in the promotion and
distribution of the Fund's shares, including but not limited
to, the printing of prospectuses and reports used for sales
purposes, expenses of preparation and distribution of sales
literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion
of Distributors' overhead expenses attributable to the
distribution of Fund shares, and fees paid to dealers or
others as a distribution or service fee for servicing
shareholders of the Fund. The maximum amount which the Fund
may pay to Distributors or others for such distribution
expenses is 0.25% per annum of the average daily net assets
of the Fund, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.25% per annum will
be borne by Distributors or others who have incurred them,
without reimbursement from the Fund. The Plan also covers
any payments to or by the Fund, Distributors, or other
parties on behalf of the Fund or Distributors, to the extent
such payments are deemed to be for the financing of any
activity primarily intended to result in the sale of shares
issued by the Fund within the context of Rule 12b-1. The
payments under the Plan are included in the maximum
operating expenses which may be borne by the Fund.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make
to its shareholders:
1. INCOME DIVIDENDS. The Fund receives income primarily in
the form of income dividends paid by the Portfolio. This
income, less the expenses incurred in the Fund's operations,
is its net investment income from which income dividends may
be distributed. Thus, the amount of dividends paid per share
may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital
gains or losses in connection with sales or other
dispositions of its portfolio securities. Distributions by
the Fund derived from net short-term and net long-term
capital gains (after taking into account any net capital
loss carryovers) may generally be made once a year in
December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31. These
distributions, when made, will generally be fully taxable to
the Fund's shareholders. The Fund may make more than one
distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these
distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without
prior notice to or approval by shareholders, the Fund's
current policy is to declare income dividends monthly for
shareholders of record generally on the first business day
preceding the 15th of the month, payable on or about the
last business day of the month. The amount of income
dividend payments by the Fund is dependent upon the amount
of net income received by the Fund from the Portfolio (and
the amount of income received by the Portfolio from its
investments), is not guaranteed and is subject to the
discretion of the Board of Trustees. Fund shares are quoted
exdividend on the first business day following the record
date. The Fund does not pay "interest" or guarantee any
fixed rate of return on an investment in its shares.
In order to be entitled to a dividend, an investor must have
acquired Fund shares prior to the close of business on the
record date. An investor considering purchasing Fund shares
shortly before the record date of a distribution should be
aware that because the value of the Fund's shares is based
directly on the amount of its net assets, rather than on the
principle of supply and demand, any distribution of income
or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution.
While a dividend or capital gain distribution received
shortly after purchasing shares represents, in effect, a
return of a portion of the shareholder's investment, it may
be taxable as dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain
distributions, if any, will be automatically reinvested in
the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge)
on the dividend reinvestment date. Shareholders have the
right to change their election with respect to the receipt
of distributions by notifying the Fund, but any such change
will be effective only as to distributions for which the
record date is seven or more business days after the Fund
has been notified. See the SAI for more information. Many of
the Fund's shareholders receive their distributions in the
form of additional shares. This is a convenient way to
accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application
included with this Prospectus, a shareholder may direct the
selected distributions to another fund in the Franklin Group
of Funds(Registered Trademark) or the Templeton Funds, to
another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the
Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last
option is requested, the shareholder should allow at least
15 days for initial processing. Dividends which may be paid
in the interim will be sent to the address of record.
Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services
Department. Dividend and capital gain distributions are
eligible for investment in another fund in the Franklin
Group of Funds(Registered Trademark) or the Templeton Funds
at net asset value. See "Purchases at Net Asset Value" under
"How to Buy Shares of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax
considerations that affect mutual funds and their
shareholders. Additional information on tax matters relating
to the Fund and its shareholders is included in the section
entitled "Additional Information Regarding Taxation" in the
SAI.
The Fund is treated as a separate entity for federal income
tax purposes. The Fund has elected and qualified to be
treated as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the
"Code"). By distributing all of its net investment income
and net realized short-term and long-term capital gain for a
fiscal year in accordance with the timing requirements
imposed by the Code and by meeting certain other
requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable
for federal income or excise taxes.
For federal income tax purposes, any income dividends which
the shareholder receives from the Fund, as well as any
distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to
receive them in cash or in additional shares. Distributions
derived from the excess of net long-term capital gain over
net short-term capital loss are treated as long-term capital
gain regardless of the length of
time the shareholder has owned Fund shares and regardless of
whether such distributions are received in cash or in
additional shares.
None of the distributions paid by the Fund for the fiscal
year ended October 31, 1994, qualified for the corporate
dividendsreceived deduction and it is not expected that
distributions for the current fiscal year will so qualify.
Pursuant to the Code, certain distributions which are
declared in October, November or December, but which, for
operational reasons, may not be paid to the shareholder
until the following January, will be treated as if received
by the shareholder on December 31 of the calendar year in
which they are declared.
Redemptions and exchanges of Fund shares are taxable events
on which a shareholder may realize a gain or loss. Any loss
incurred on sale or exchange of the Fund's shares, held for
six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with
respect to such shares. Shareholders should consult with
their tax advisors concerning the tax rules applicable to
the redemption and exchange of Fund shares. The Fund will
inform shareholders of the source of their dividends and
distributions at the time they are paid and will promptly
after the close of each calendar year advise shareholders of
the tax status for federal income tax purposes of such
dividends and distributions.
While many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by
the Fund from direct obligations of the U.S. government,
none of the distributions of the Fund during fiscal year
ending October 31, 1994 qualified for such tax-free
treatment. Investments in mortgage-backed securities
(including GNMA, FNMA and FHLMC securities) and repurchase
agreements collateralized by U.S. government securities do
not qualify as direct federal obligations in most states.
Shareholders should consult with their own tax advisors with
respect to the applicability of state and local intangible
property or income taxes to their shares of the Fund and
distributions and redemption proceeds received from the
Fund.
Shareholders who are not U.S. persons for purposes of
federal income taxation should consult with their financial
or tax advisors regarding the applicability of U.S.
withholding taxes to distributions received by them from the
Fund and the application of foreign tax laws to these
distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through
securities dealers which execute an agreement with
Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The
minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans
established by the Franklin Templeton Group. The Fund and
Distributors reserve the right to refuse any order for the
purchase of shares.
The Fund may impose a $10 charge for each returned item,
against
any shareholder account which, in connection with the
purchase of Fund shares, submits a check or a draft which is
returned unpaid to the Fund.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is the net asset value per share, plus a sales charge,
next computed (1) after the shareholder's securities dealer
receives the order which is promptly transmitted to the
Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a
completed Shareholder Application accompanied by a
negotiable check). The sales charge is a variable percentage
of the offering price, depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering
price will be calculated to four decimal places. On orders
for less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net
asset value per share is included under the caption
"Valuation of Fund Shares."
Set forth below is a table of total sales charges or
underwriting commissions and dealer concessions:
TOTAL SALES CHARGE
D
E
A
L
E
R
CONCESSION
AS A AS A
AS A PERCENTAGE
PERCENTAGE
PERCENTAGE OF NET OF
OFFERING
SIZE OF TRANSACTION OF OFFERING AMOUNT
PRICE*, ***
AT OFFERING PRICE PRICE INVESTED
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than $250,000 1.75% 1.78% 1.50%
$250,000 but less than $500,000 1.25% 1.26% 1.00%
$500,000 but less than $1,000,000 1.00% 1.00% 0.85%
$1,000,000 or more none none (see
below)**
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth
above.
**The following commissions will be paid by Distributors,
out of its own resources, to securities dealers who initiate
and are responsible for purchases of $1 million or more:
0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus
0.25% on sales of $50 million but less than $100 million,
plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all sales charges may
at times be allowed to the securities dealer. If 90% or more
of the sales commission is allowed, such securities dealer
may be deemed to be an underwriter as that term is defined
in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1
million or more, but a contingent deferred sales charge of
1% is imposed on certain redemptions of all or a portion of
an investment of $1 million or more within 12 months of the
calendar month following such investments ("contingency
period"). See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
The size of a transaction which determines the applicable
sales charge on the purchase of Fund shares is determined by
adding the amount of the shareholder's current purchase plus
the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the
funds in the Franklin Group of Funds(Registered Trademark)
and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the
Franklin Group of Funds except Franklin Valuemark Funds and
Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors
or its affiliates (although certain investments may not have
the same schedule of sales charges and/or may not be subject
to reduction) and (c) the U.S. mutual funds in the Templeton
Group of Funds except Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). (Franklin Funds and Templeton Funds
are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors, or one of its affiliates, may make payments,
out of its own resources, of up to 0.75% of the amount
purchased to securities dealers who initiate and are
responsible for purchases made at net asset value by non
designated retirement plans, and up to 1% of the amount
purchased to securities dealers who initiate and are
responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA
rollovers), certain trust company and trust departments of
banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more.
See definitions under "Description of Special Net Asset
Value Purchases" and as set forth in the SAI.
Distributors or one of its affiliates, out of its own
resources, may also provide additional compensation to
securities dealers in connection with sales of shares of the
Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers in connection with
conferences, sales or training programs for their employees,
seminars for the public, advertising, sales campaigns and/or
shareholder services and programs regarding one or more of
the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may
be made available only to certain securities dealers whose
representatives have sold or are expected to sell
significant amounts of shares of the Franklin Templeton
Funds. Compensation may include payment for travel expenses,
including lodging, incurred in connection with trips taken
by invited registered representatives and members of their
families to locations within or outside of the United States
for meetings or seminars of a business nature. Dealers may
not use sales of the Fund's shares to qualify for this
compensation to the extent such may be prohibited by the
laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the
Fund or its shareholders.
Certain officers and trustees of the Fund are also
affiliated with Distributors. A detailed description is
included in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which
provide for a reduced sales charge. To be certain to obtain
the reduction
of the sales charge, the investor or the dealer should
notify Distributors at the time of each purchase of shares
which qualifies for the reduction. In determining whether a
purchase qualifies for any of the discounts, investments in
any Franklin Templeton Investments may be combined with
those of the investor's spouse and children under the age of
21. In addition, the aggregate investments of a trustee or
other fiduciary account (for an account under exclusive
investment authority) may be considered in determining
whether a reduced sales charge is available, even though
there may be a number of beneficiaries of the account.
In addition, an investment in the Fund may qualify for a
reduction in the sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value
(whichever is higher) of existing investments in the
Franklin Templeton Investments may be combined with the
amount of the current purchase in determining the sales
charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for
a reduced sales charge on a purchase of shares of the Fund
by completing the Letter of Intent section of the
Shareholder Application (the "Letter of Intent" or
"Letter"). By completing the Letter, the investor expresses
an intention to invest during the next 13 months a specified
amount which, if made at one time, would qualify for a
reduced sales charge, grants to Distributors a security
interest in the reserved shares and irrevocably appoints
Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares
for the purpose of paying any additional sales charge due.
Purchases under the Letter will conform with the
requirements of Rule 22d-1 under the 1940 Act. The investor
or the investor's securities dealer must inform Investor
Services or Distributors that this Letter is in effect each
time a purchase is made.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING
PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of
the total intended purchase will be reserved in shares of
the Fund, registered in the investor's name, to assure that
the full applicable sales charge will be paid if the
intended purchase is not completed. The reserved shares will
be included in the total shares owned as reflected on
periodic statements; income and capital gain distributions
on the reserved shares will be paid as directed by the
investor. The reserved shares will not be available for
disposal by the investor until the Letter of Intent has been
completed, or the higher sales charge paid. For more
information, see "Additional Information Regarding
Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of
the current purchase. For example, if members of the group
had previously invested and still held $80,000 of Fund
shares and now were investing $25,000, the sales charge
would be 1.75%. Information concerning the current sales
charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence
for
more than six months, (ii) has a purpose other than
acquiring Fund shares at a discount, and (iii) satisfies
uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, be available
to arrange for group meetings between representatives of the
Fund or Distributors and the members, agree to include sales
and other materials related to the Fund in its publications
and mailings to members at reduced or no cost to
Distributors, and seek to arrange for payroll deduction or
other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such
time as the investor notifies the Fund and the investor's
employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the
payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time
the money reaches the Fund. The investment in the Fund will
be made at the offering price per share determined on the
day that both the check and payroll deduction data are
received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition
of either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, trustees,
directors and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members including any
subsequent payments made by such parties after cessation of
employment; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer;
(3) insurance company separate accounts for pension plan
contracts; (4) accounts managed by the Franklin Templeton
Group; (5) Shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund under an
employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the
Fund; (6) certain unit investment trusts and unit holders of
such trusts reinvesting their distributions from the trusts
in the Fund; (7) registered securities dealers and their
affiliates, for their investment account only, and (8)
registered personnel and employees of securities dealers and
by their spouses and family members, in accordance with the
internal policies and procedures of the employing securities
dealer.
Shares of the Fund may be purchased at net asset value by
persons who have redeemed, within the previous 120 days,
their shares of the Fund or another of the Franklin
Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on
redemption. An investor may reinvest an amount not exceeding
the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares
redeemed, a new contingency period will begin. Shares of the
Fund redeemed and subsequently repurchased in connection
with an exchange into another fund (see "Exchange
Privilege") are not considered "redeemed" for this
privilege. In order to exercise this privilege, a written
order for the purchase of shares of the Fund must be
received by the Fund or the Fund's Shareholder Services
Agent within 120 days after the redemption. The 120 days,
however, do not begin to run on redemption proceeds placed
immediately after redemption in a Franklin Bank Certificate
of Deposit ("CD") until the CD (including any rollover)
matures. Reinvestment at net asset value may also be handled
by a securities dealer or other financial institution, who
may charge
the shareholder a fee for this service. The redemption is a
taxable transaction but reinvestment without a sales charge
may affect the amount of gain or loss recognized and the tax
basis of the shares reinvested. If there has been a loss on
the redemption, the loss may be disallowed if a reinvestment
in the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a
reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the
shareholder may also be used to purchase shares of the Fund
or another of the Franklin Templeton Funds at net asset
value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such
distribution. To exercise this privilege, a written request
to reinvest the distribution must accompany the purchase
order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions
in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by investors who have, within the past 60 days, redeemed an
investment in an unaffiliated mutual fund which charged the
investor a contingent deferred sales charge upon redemption
and which has investment objectives similar to those of the
Fund.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by registered investment advisors and/or their affiliated
brokerdealers who have entered into a supplemental agreement
with Distributors, on behalf of their clients who are
participating in a comprehensive fee program (sometimes
known as a wrap fee program).
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by anyone who has taken a distribution from an existing
retirement plan already invested in the Franklin Templeton
Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such
distribution. In order to exercise this privilege a written
order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust
Company"), the Fund or Investor Services, within 120 days
after the plan distribution. A prospectus outlining the
investment objectives and policies of a fund in which the
shareholder wishes to invest may be obtained by calling toll
free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by any state, county, or city, or any
instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment
laws from paying a sales charge or commission in connection
with the purchase of shares of any registered management
investment company ("an eligible governmental authority").
SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors
considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net
asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors
or one of its
affiliates may make a payment, out of their own resources,
to such securities dealer in an amount not to exceed 0.25%
of the amount invested. Contact Franklin's Institutional
Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by certain designated retirement plans, including
profit sharing, pension, 401(k) and simplified employee
pension plans ("designated plans"), subject to minimum
requirements with respect to number of employees or amount
of purchase, which may be established by Distributors.
Currently those criteria require that the employer
establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13
month period in the Fund or in any of the Franklin Templeton
Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of
the Code ("non-designated plans") may be afforded the same
privilege if they meet the above requirements as well as the
uniform criteria for qualified groups previously described
under "Group Purchases" which enable Distributors to realize
economies of scale in its sales efforts and sales related
expenses.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trust companies and bank trust departments for funds over
which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are
subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors.
Currently, those criteria require that the amount invested
or to be invested during the subsequent 13-month period in
this Fund or any of the Franklin Templeton Investments must
total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds
received by the close of business on the next business day
following such order.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trustees or other fiduciaries purchasing securities for
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without
regard to where such assets are currently invested.
Refer to the SAI for further information.
GENERAL
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling
Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND IN CONNECTION WITH RETIREMENT
PLANS INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or employer
sponsored retirement plans involving tax-deferred
investments. The Fund may be used as an investment vehicle
for an existing retirement plan, or Franklin Templeton Trust
Company ( the "Trust
Company") may provide the plan documents and serve as
custodian or trustee. A plan document must be adopted for a
retirement plan to be in existence.The Trust Company, an
affiliate of Distributors, can serve as custodian or trustee
for retirement plans. Brochures for the Trust Company plans
contain important information regarding eligibility,
contribution and deferral limits and distribution
requirements. Please note that an application other than the
one contained in this Prospectus must be used to establish a
retirement plan account with the Trust Company. To obtain a
retirement plan brochure or application, call toll free 1
800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan
accounts. Specific forms are required to be completed for
distributions from Franklin Templeton Trust Company
retirement plans.
Individuals and plan sponsors should consult with legal, tax
or benefits and pension plan consultants before choosing a
retirement plan. In addition, retirement plan investors
should consider consulting their investment representatives
or adviserrs concerning investment decisions within their
plans.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS
SECTION MAY NOT BE AVAILABLE DIRECTLY FROM THE FUND TO
SHAREHOLDERS WHOSE SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR
NETWORKED ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING
CORPORATION ("NSCC"), (SEE THE SECTION CAPTIONED "ACCOUNT
REGISTRATIONS" IN THIS PROSPECTUS.)
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and
capital gain distributions, are generally credited to an
account in the name of an investor on the books of the Fund,
without the issuance of a share certificate.
Maintaining shares in uncertificated form (also known as
"plan balance") minimizes the risk of loss or theft of a
share certificate. A lost, stolen or destroyed certificate
cannot be replaced without obtaining a sufficient indemnity
bond. The cost of such a bond, which is generally borne by
the shareholder, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be
issued if requested in writing by the shareholder or by the
securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that
period and after each other transaction which affects the
shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including
the number of shares in "plan balance" for the account of
the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be
able to arrange to make additional purchases of shares
automatically on a monthly basis by electronic funds
transfer from a checking account, if the bank which
maintains the account is a member of the Automated Clearing
House, or by preauthorized checks drawn on
the shareholder's bank account. A shareholder may, of
course, terminate the program at any time. The Shareholder
Application included with this Prospectus contains the
requirements applicable to this program. In addition,
shareholders may obtain more information concerning this
program from their securities dealers or from Distributors.
The market value of the Fund's shares is subject to
fluctuation. Before undertaking any plan for systematic
investment, the investor should keep in mind that such a
program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided
that the net asset value of the shares held by the
shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal
Plan. The minimum amount which the shareholder may withdraw
is $50 per withdrawal transaction, although this is merely
the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject
to mandatory distribution requirements are not subject to
the $50 minimum. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder
establishes a plan, any capital gain distributions and
income dividends paid by the Fund will be reinvested for the
shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of
shares at net asset value on the day of the transaction
(which is generally the first business day of the month in
which the payment is scheduled) with payment generally
received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may
direct the selected withdrawals to another of the Franklin
Templeton Funds, to another person, or directly to a
checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to
the address of record. Liquidation of shares may reduce or
possibly exhaust the shares in the shareholder's account, to
the extent withdrawals exceed shares earned through
dividends and distributions, particularly in the event of a
market decline. If the withdrawal amount exceeds the total
plan balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a
sale for federal income tax purposes. Because the amount
withdrawn under the plan may be more than the shareholder's
actual yield or income, part of the payment may be a return
of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the
additional purchases. The shareholder should ordinarily not
make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time
such a plan is in effect. A Systematic Withdrawal Plan may
be terminated on written notice by the shareholder or the
Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's
receipt of notification of the death or incapacity of the
shareholder. Shareholders may change the
amount (but not below the specified minimum) and schedule of
withdrawal payments or suspend one such payment by giving
written notice to Investor Services at least seven business
days prior to the end of the month preceding a scheduled
payment. Share certificates may not be issued while a
Systematic Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual
funds with various investment objectives or policies. The
shares of most of these mutual funds are offered to the
public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the
Fund shares may be exchanged for shares of other Franklin
Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such
fund's stated eligibility requirements and investment
minimums. Investors should review the prospectus of the fund
they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations
on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges. Exchanges may
be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of
the written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD,
IF ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY
CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS SYSTEM (DAY OR NIGHT) AT 1-800/247-1753
IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO
A PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD
BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to
effect exchanges from the Fund into an identically
registered account in one of the other available Franklin
Templeton Funds. The Telephone Exchange Privilege is
available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The
Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are
genuine. Please refer to "Telephone Transactions
Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be
difficult to implement and the eleFACTS option may not be
available. In this event, shareholders should follow the
other exchange procedures discussed in this section,
including the procedures for processing exchanges through
securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the
Fund's shares, Investor Services will accept exchange orders
by telephone or by other means of electronic transmission
from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be
effective only for uncertificated shares on deposit in the
shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a
fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject
to a contingent deferred sales charge in the original fund
purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will
be imposed. The contingency period will be tolled (or
stopped) for the period such shares are exchanged into and
held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
Exchanges are made on the basis of the net asset values of
the funds involved, except as set forth below. Exchanges of
shares of the Fund which were purchased without a sales
charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless
the investment on which no sales charge was paid was
transferred in from a fund on which the investor paid a
sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a
higher sales charge will be charged the difference, unless
the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests
the exchange of the total value of the Fund account,
declared but unpaid income dividends and capital gain
distributions will be transferred to the fund being
exchanged into and will be invested at net asset value.
Because the exchange is considered a redemption and purchase
of shares, the shareholder may realize a gain or loss for
federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding
the possible tax consequences of such an exchange is
included in the tax section in this Prospectus and in the
SAI.
There are differences among the many funds in the Franklin
Group of Funds and the Templeton Group. Before making an
exchange, a shareholder should obtain and review a current
prospectus of the fund into which the shareholder wishes to
transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the
Fund pursuant to the exchange privilege, the Fund might have
to liquidate portfolio securities it might otherwise hold
and incur the additional costs related to such transactions.
On the other hand, increased use of the exchange privilege
may result in periodic large inflows of money. If this
should occur, it is the general policy of the Fund to
initially invest this money in short-term, interest-bearing
money market instruments, unless it is felt that attractive
investment opportunities consistent with the Fund's
investment objectives exist immediately. Subsequently, this
money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as
orderly a manner as is possible when attractive investment
opportunities arise.
The Exchange Privilege may be modified or discontinued by
the
Fund at any time upon 60 days' written notice to
shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may
accomplish exchanges directly. Certain restrictions may
apply, however, to other types of retirement plans. See
"Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market
timing services to purchase or redeem shares based on
predetermined market indicators ("Timing Accounts") will be
charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective
prospectuses, certain funds do not accept or may place
differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose
transactions seem to follow a timing pattern who: (i) make
an exchange request out of the Fund within two weeks of an
earlier exchange request out of the Fund, or (ii) make more
than two exchanges out of the Fund per calendar quarter, or
(iii) exchange shares equal in value to at least $5 million,
or more than 1% of the Fund's net assets. Accounts under
common ownership or control, including accounts administered
so as to redeem or purchase shares based upon certain
predetermined market indicators, will be aggregated for
purposes of the exchange limits. The Fund reserves the right
to refuse the purchase side of exchange requests by any
Timing Account, person, or group if, in the Manager's
judgment, the Fund would be unable to invest effectively in
accordance with its investment objectives and policies, or
would otherwise potentially be adversely affected. A
shareholder's purchase exchanges may be restricted or
refused if the Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets.
In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and
therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order
for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and
receive from the Fund the value of the shares. Shares may be
redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of
this Prospectus, and any share certificates which have been
issued for the shares being redeemed, properly endorsed and
in order for transfer. The shareholder will then receive
from the Fund the value of the shares based upon the net
asset value per share next computed after the written
request in proper form is received by
Investor Services. Redemption requests received after the
time at which the net asset value is calculated (1:00 p.m.
Pacific time) each day that the New York Stock Exchange (the
"Exchange") is open for business will receive the price
calculated on the following business day. Shareholders are
requested to provide a telephone number(s) where they may be
reached during business hours, or in the evening if
preferred. Investor Services' ability to contact a
shareholder promptly when necessary will speed the
processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE
GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE
FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone
other than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any
address other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in
excess of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based
on the transfer instructions, including, for example,
when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple
owners have a dispute or give inconsistent instructions
to the Fund, (c) the Fund has been notified of an
adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered
owner, (e) the Fund determines that joint owners who
are married to each other are separated or may be the
subject of divorce proceedings, or (f) the authority of
a representative of a corporation, partnership,
association, or other entity has not been established
to the satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the
Securities Exchange Act of 1934. Generally, eligible
guarantor institutions include (1) national or state
banks, savings associations, savings and loan
associations, trust companies, savings banks,
industrial loan companies and credit unions; (2)
national securities exchanges, registered securities
associations and clearing agencies; (3) securities
dealers which are members of a national securities
exchange or a clearing agency or which have minimum net
capital of $100,000; or (4) institutions that
participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature
guarantee medallion program. A notarized signature will
not be sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be
accompanied by the share certificate and a share
assignment form signed by the registered shareholders
exactly as the account is registered, with the
signature(s) guaranteed as referenced above.
Shareholders are advised, for their own protection, to
send the share certificate and assignment form in
separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court
jurisdiction
require the following documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction
from the authorized officer(s) of the corporation and
(2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction
from a general partner and (2) pertinent pages from the
partnership agreement identifying the general partners
or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from
the trustee(s) and (2) a copy of the pertinent pages of
the trust document listing the trustee(s) or a
Certification for Trust if the trustee(s) are not
listed on the account registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents
and the applicable state law since these accounts have
varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in
proper form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"),
included with this Prospectus, may redeem shares of the
Fund by telephone, subject to the Restricted Account
exception noted under "Telephone Transactions
Restricted Accounts. INFORMATION MAY ALSO BE OBTAINED
BY WRITING TO THE FUND OR INVESTOR SERVICES AT THE
ADDRESS SHOWN ON THE COVER OR BY CALLING 1-800/6322301.
THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE
PROCEDURES TO CONFIRM THAT INSTRUCTIONS GIVEN BY
TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR THE
RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER
"TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with the completed Agreement on
file, redemptions of uncertificated shares or shares
which have previously been deposited with the Fund or
Investor Services may be made for up to $50,000 per
day per Fund account. Telephone redemption requests
received before 1:00 p.m. Pacific time on any business
day will be processed that same day. The redemption
check will be sent within seven days, made payable to
all the registered owners on the account, and will be
sent only to the address of record. Redemption requests
by telephone will not be accepted within 30 days
following an address change by telephone. In that case,
a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments,
government entities, and qualified retirement plans
which qualify to purchase shares at net asset value
pursuant to the terms of this Prospectus) which wish to
execute redemptions in excess of $50,000 must complete
an Institutional Telephone Privileges Agreement which
is available from Franklin's Institutional Services
Department by telephoning 1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities
dealers who have entered into a dealer or similar
agreement with Distributors.
This is known as a repurchase. The only difference between a
normal redemption and a repurchase is that if the
shareholder redeems shares through a dealer, the
redemption price will be the net asset value next
calculated after the shareholder's dealer receives the
order which is promptly transmitted to the Fund, rather
than on the day the Fund receives the shareholder's
written request in proper form. These documents, as
described in the preceding section, are required even
if the shareholder's securities dealer has placed the
repurchase order. After receipt of a repurchase order
from the dealer, the Fund will still require a signed
letter of instruction and all other documents set forth
above. A shareholder's letter should reference the
Fund, the account number, the fact that the repurchase
was ordered by a dealer and the dealer's name. Details
of the dealerordered trade, such as trade date,
confirmation number, and the amount of shares or
dollars, will help speed processing of the redemption.
The seven-day period within which the proceeds of the
shareholder's redemption will be sent will begin when
the Fund receives all documents required to complete
("settle") the repurchase in proper form. The
redemption proceeds will not earn dividends or interest
during the time between receipt of the dealer's
repurchase order and the date the redemption is
processed upon receipt of all documents necessary to
settle the repurchase. Thus, it is in a shareholder's
best interest to have the required documentation
completed and forwarded to the Fund as soon as
possible. The shareholder's dealer may charge a fee for
handling the order. The SAI contains more information
on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers
on investments of $1 million or more, a contingent
deferred sales charge of 1% applies to redemptions of
those investments within the contingency period of 12
months of the calendar month following their purchase.
The charge is 1% of the lesser of the value of the
shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the total cost of such
shares, and is retained by Distributors. In
determining if a charge applies, shares not subject to
a contingent deferred sales charge are deemed to be
redeemed first, in the following order: (i) shares
representing amounts attributable to capital
appreciation of those shares held less than 12 months;
(ii) shares purchased with reinvested dividends and
capital gain distributions; and (iii) other shares held
longer than 12 months; and followed by any shares held
less than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for:
exchanges; any account fee; distributions to
participants in Trust Company retirement plan accounts
due to death, disability or attainment of age 59 1/2;
tax-free returns of excess contributions to employee
benefit plans; distributions from employee benefit
plans, including those due to plan termination or plan
transfer; redemptions through a Systematic Withdrawal
Plan set up prior to February 1, 1995 and, for
Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net
asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to
a shareholder's account falling below the minimum
specified account size. In addition to the waiver
referred to above, shares of participants in Trust
Company retirement plan accounts will, in the event of
death, disability or attainment of age 59 1/2, no
longer be subject to the contingent deferred sales
charge.
Requests for redemptions for a specified dollar amount,
unless
otherwise specified, will result in additional shares being
redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a
specific number of shares will result in the applicable
contingent deferred sales charge being deducted from
the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used
to purchase Fund shares, which may take up to 15 days
or more. Although the use of a certified or cashier's
check will generally reduce this delay, shares
purchased with these checks will also be held pending
clearance. Shares purchased by federal funds wire are
available for immediate redemption. In addition, the
right of redemption may be suspended or the date of
payment postponed if the Exchange is closed (other than
customary closing) or upon the determination of the SEC
that trading on the Exchange is restricted or an
emergency exists, or if the SEC permits it, by order,
for the protection of shareholders. Of course, the
amount received may be more or less than the amount
invested by the shareholder, depending on fluctuations
in the market value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of
certain additional forms to ensure compliance with IRS
regulations. To liquidate a retirement account, a
shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary
forms.
Tax penalties will generally apply to any distribution from
such plans to a participant under age 59 1/2, unless
the distribution meets one of the exceptions set forth
in the Code, as defined in Treasury regulations.
OTHER
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services
Department or the securities dealer may call Franklin's
Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative
of record, if any, may be able to execute various
transactions by calling Investor Services at 1-800/632
2301.
All shareholders will be able to: (i) effect a change in
address, (ii) change a dividend option (see "Restricted
Accounts" below), (iii) transfer Fund shares in one
account to another identically registered account in
the Fund, and (iv) exchange Fund shares as described in
this Prospectus by telephone. In addition, shareholders
who complete and file an Agreement as described under
"How to Sell Shares of the Fund - Redemptions by
Telephone" will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by
telephone are genuine. These will include: recording
all telephone calls requesting account activity by
telephone, requiring that the caller provide certain
personal and/or account information
requested by the telephone service agent at the time of the
call for the purpose of establishing the caller's
identification, and by sending a confirmation statement
on redemptions to the address of record each time
account activity is initiated by telephone. So long as
the Fund and Investor Services follow instructions
communicated by telephone which were reasonably
believed to be genuine at the time of their receipt,
neither they nor their affiliates will be liable for
any loss to the shareholder caused by an unauthorized
transaction. Shareholders are, of course, under no
obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested
transaction will not be executed, and neither the Fund
nor Investor Services will be liable for any losses
which may occur because of a delay in implementing a
transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To
assure compliance with all applicable regulations,
special forms are required for any distribution,
redemption, or dividend payment. While the telephone
exchange privilege is extended to Franklin Templeton
IRA and 403(b) retirement accounts, certain
restrictions may apply to other types of retirement
plans. Changes to dividend options must also be made in
writing.
To obtain further information regarding distribution or
transfer procedures, including any required forms,
retirement account shareholders may call to speak to a
Retirement Plan Specialist at 1-800/527-2020 for
Franklin accounts or 1-800/354-9191 (press "2" when
prompted to do so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will
be difficult to execute because of heavy telephone
volume. In such situations, shareholders may wish to
contact their investment representative for assistance
or may wish to send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for
any losses resulting from the inability of a
shareholder to execute a telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days'
written notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as
of 1:00 p.m. Pacific time each day that the Exchange is
open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid"
(net asset value) and "ask" (offering price, which
includes the maximum front-end sales charge of the
Fund).
The net asset value per share of the Fund is determined in
the following manner: The aggregate of all liabilities,
including accrued expenses and taxes and any necessary
reserves, is deducted from the aggregate gross value of
all assets, and the difference is divided by the number
of shares of the Fund
outstanding at the time. For the purpose of determining the
aggregate net assets of the Fund, cash and receivables are
valued at their realizable amounts. Interest is recorded as
accrued. Under procedures approved by the Board of Trustees
of Adjustable Rate Securities Portfolios, the mortgage
securities of the Portfolio (in which the Fund invests all
of its assets) are valued at current market value provided
by a pricing service, bank or securities dealer, when over
the-counter market quotations are readily available.
Securities and other assets for which market prices are not
readily available are valued at fair value as determined
following procedures approved by the Board of Trustees.
With the approval of trustees, the Portfolio may utilize a
pricing service, bank or securities dealer to perform any of
the above described functions. The Portfolio advises the
Fund of the net asset value of the Portfolio shares which is
used to calculate the net asset value of the Fund's shares.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's
account should be directed to Investor Services at the
address shown on the back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current
price, yield or performance information specific to a fund
in the Franklin Funds by calling the automated Franklin
TeleFACTS(Registered Trademark) system (day or night) at 1
800/247-1753. Information about the Fund may be accessed by
entering Fund Code 38 followed by the # sign, when requested
to do so by the automated operator. The TeleFACTS system is
also available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to
speak directly with a representative, the following is a
list of the various Franklin departments, telephone numbers
and hours of operation to call.
The same numbers may be used when calling from a rotary
phone:
HOURS OF OPERATION (PACIFIC
TIME) DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH
FRIDAY)
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00
p.m. Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00
p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
In order to ensure that the highest quality of service is
being provided, telephone calls placed to or by
representatives in Franklin's service departments may be
accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions of
total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or
risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of
$1,000 invested at the maximum public offering price
(offering price includes front-end sales charge) for one-,
five- and ten-year periods, or portion thereof, to the
extent applicable, through the end of the most recent
calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return
quotations for other periods or based on investments at
various sales charge levels or at net asset value. For such
purposes total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of
all distributions, plus (or minus) the change in the value
of the original investment, expressed as a percentage of the
purchase price. Current yield reflects the income per share
earned by the Fund's portfolio investments; it is calculated
by dividing the Fund's net investment income per share
during a recent 30-day period by the maximum public offering
price on the last day of that period and annualizing the
result.
Yield, which is calculated according to a formula prescribed
by the SEC (see the SAI), is not indicative of the dividends
or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate,
which may be quoted to shareholders. The current
distribution rate is computed by dividing the total amount
of dividends per share paid by the Fund during the past 12
months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the
amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize
the dividends paid during the period such policies were in
effect, rather than using the dividends during the past 12
months. The current distribution rate differs from the
current yield computation because it may include
distributions to shareholders from sources other than
dividends and interest, such as shortterm capital gain, and
is calculated over a different period of time.
In each case, performance figures are based upon past
performance, reflect all recurring charges against Fund
income and will assume the payment of the maximum sales
charge on the purchase of shares. When there has been a
change in the sales charge structure, the historical
performance figures will be restated to reflect the new
rate. The investment results of the Fund, like all other
investment compa nies, will fluctuate over time; thus,
performance figures should not be considered to represent
what an investment may earn in the future or what the Fund's
yield, distribution rate or total return may be in any
future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Trust's fiscal year ends October 31. Annual Reports
containing audited financial statements of the Trust,
including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically
sent to shareholders. Copies may be obtained by investors or
shareholders, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page
of this Prospectus.
Additional information on Fund performance is included in
the Trust's Annual Report to Shareholders and the SAI.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on
December 16, 1986. The Trust is authorized to issue an
unlimited number of shares of beneficial interest, with a
par value of $.01 per share in various series. All shares
have one vote and, when issued, are fully paid, non
assessable, and redeemable. Currently, the Trust issues
shares in six separate and distinct series.
The Portfolio is a series of Adjustable Rate Securities
Portfolios, a Delaware business trust, organized on February
15, 1991. Adjustable Rate Securities Portfolios is
authorized to issue an unlimited number of shares of
beneficial interest, with a par value of $.01 per share. All
shares have one vote, and, when issued, are fully paid, non
assessable, and redeemable. Currently, Adjustable Rate
Securities Portfolios issues shares in only two series;
however, additional series may be added in the future by the
Board of Trustees, the assets and liabilities of which will
be separate and distinct from any other series.
VOTING RIGHTS
Shares of each series of the Trust have equal voting,
dividend and liquidation rights. Shares of each series of
the Trust vote separately as to issues affecting that series
or the Trust, unless otherwise permitted by the 1940 Act.
The shares have noncumulative voting rights, which means
that holders of more than 50% of the shares voting for the
election of trustees can elect 100% of the trustees if they
choose to do so. The Trust does not intend to hold annual
shareholders' meetings. The Trust may, however, hold a
special meeting for such purposes as changing fundamental
investment restrictions, approving a new management
agreement or any other matters which are required to be
acted on by shareholders under the 1940 Act. Whenever the
Fund is requested to vote on a fundamental policy pertaining
to the Portfolio, it will hold a special meeting of Fund
shareholders and will cast its vote in the same proportion
as the shareholders' votes received. A meeting may also be
called by a majority of the Board of Trustees or by
shareholders holding at least 10% of the shares entitled to
vote at the meeting. Shareholders may receive assistance in
communicating with other shareholders in connection with the
election or removal of trustees, such as that provided in
Section 16(c) of the 1940 Act. The Board of Trustees may
from time to time establish other series of the Trust, the
assets and liabilities of which will be separate and
distinct from any other series.
Shares have no preemptive or subscription rights and are
fully transferable. There are no conversion rights; however,
holders of shares of any fund may reinvest all or any
portion of the proceeds from the redemption or repurchase of
such shares into shares of another fund as described in
"Exchange Privilege."
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value,
shares of any shareholder whose account has a value of less
than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of
shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided
advance notice is given to the shareholder. More information
is included in the SAI.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do
not earn interest or any other income during the time such
checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss to the shareholder
caused by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check,
draft or wire. The Fund has no facility to receive or pay
out cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's
intentions as to ownership. Where there are two co-owners on
the account, the account will be registered as "Owner 1" and
"Owner 2"; the "or" designation is not used except for money
market fund accounts. If co-owners wish to have the ability
to redeem or convert on the signature of only one owner, a
limited power of attorney may be used.
Accounts should not be registered in the name of a minor
either as sole or co-owner of the account. Transfer or
redemption for such an account may require court action to
obtain release of the funds until the minor reaches the
legal age of majority. The account should be registered in
the name of one "Adult" as custodian for the benefit of the
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for"
should only be used if the account is being established
pursuant to a legal, valid trust document. Use of such a
designation in the absence of a legal trust document may
cause difficulties and require court action for transfer or
redemption of the funds.
Shares, whether in certificate form or not, registered as
joint tenants or "Jt Ten" shall mean "as joint tenants with
rights of survivorship" and not "as tenants in common."
Except as indicated, a shareholder may transfer an account
in the Fund carried in "street" or "nominee" name by the
shareholder's securities dealer to a comparably registered
Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have
executed dealer agreements on file with Distributors. Unless
a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and
will so inform the shareholder's delivering securities
dealer. To effect the transfer, a shareholder should
instruct the securities dealer to transfer the account to a
receiving securities dealer and sign any documents required
by the securities dealer(s) to evidence consent to the
transfer. Under current procedures the account transfer may
be processed by the delivering securities dealer and the
Fund after the Fund receives authorization in proper form
from the shareholder's delivering securities dealer. In the
future it may be possible to effect such transfers
electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner
or the owner's nominee listed in publicly available nominee
lists, regardless of whether the account was initially
registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of
record on an investor's account, the investor will be deemed
to have authorized the use of electronic instructions on the
account, including, without limitation, those initiated
through the services of the NSCC, to have adopted as
instruction and signature any such electronic
instructions received by the Fund and the Shareholder
Services Agent, and to have authorized them to execute the
instructions without further inquiry. At the present time,
such services which are available, or which are anticipated
to be made available in the near future, include the NSCC's
"Networking," "Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment,
or by calling Franklin's Fund Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund
may be required to report to the IRS any taxable dividend,
capital gain distribution, or other reportable payment
(including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt
shareholders who have not provided a correct taxpayer
identification number ("TIN") and made certain required
certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the
IRS or a securities dealer notifies the Fund that the number
furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account
for any person failing to provide a TIN along with the
required certifications and (2) close an account by
redeeming its shares in full at the then-current net asset
value upon receipt of notice from the IRS that the TIN
certified as correct by the shareholder is in fact incorrect
or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a
certified TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day
to day portfolio management of the Portfolio in which the
Fund invests: Tony Coffey since 1989, Roger Bayston since
1991 and Jack Lemein since inception.
Tony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey holds a Master of Business Administration from
the University of California at Los Angeles. He earned his
Bachelor of Arts degree from Harvard University. Prior to
joining Franklin, Mr. Coffey was an associate with the
Analysis Group. He is a member of several securities
industry associations and joined Franklin in 1989.
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a
Master of Business Administration degree from the University
of California at Los Angeles. He earned his Bachelor of
Science degree from the University of Virginia. Prior to
joining Franklin, Mr. Bayston was an Assistant Treasurer for
Bankers Trust Company. Following completion of the Masters
degree program, Mr. Bayston joined Franklin in 1991.
Jack Lemein
Senior Vice President
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance
from the University of Illinois. Mr. Lemein has been in the
securities industry since 1967. He is a member of several
securities industry associations. Mr. Lemein joined Franklin
in 1984. FRANKLIN INVESTORS SECURITIES TRUST
Franklin Adjustable U.S. Government Securities Fund
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
ADMINISTRATOR
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
FRANKLIN ADJUSTABLE
U.S. GOVERNMENT
SECURITIES FUND
PROSPECTUS &
APPLICATION MARCH 1,
1995
CUSTODIAN
Bank of America NT &
SA
555 California
Street, 4th Floor
San Francisco, California 94104
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services,
Inc. 777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
For an enlarged version of this
prospectus please call 1-800/DIAL
BEN.
Your Representative Is:
38 P 03/94
FRANKLIN ADJUSTABLE RATE SECURITIES
FUND FRANKLIN INVESTORS SECURITIES
TRUST PROSPECTUS MARCH 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX
7777 SAN MATEO, CA 94403-7777 1-
800/DIAL BEN
Franklin Investors Securities Trust (the "Trust") is an open
end management investment company consisting of both
diversified and non-diversified separate series. Each series
of the Trust in effect represents a separate fund with its
own investment objectives and policies, with varying
possibilities for income or capital appreciation, and subject
to varying market risks. Through the different series, the
Trust attempts to satisfy different investment objectives.
This Prospectus pertains only to the Franklin Adjustable
Rate Securities Fund (the "Fund"), a diversified series,
which seeks a high level of current income, with lower
volatility of principal than a fund which invests in fixed
rate securities. THE FUND, UNLIKE MOST FUNDS WHICH INVEST
DIRECTLY IN SECURITIES, SEEKS TO ACHIEVE THIS OBJECTIVE BY
INVESTING ALL OF ITS ASSETS IN THE ADJUSTABLE RATE
SECURITIES PORTFOLIO (THE "PORTFOLIO"), A SEPARATE SERIES OF
THE ADJUSTABLE RATE SECURITIES PORTFOLIOS, WHOSE INVESTMENT
OBJECTIVE IS THE SAME AS THAT OF THE FUND. The Portfolio in
turn invests primarily in adjustable rate securities,
including adjustable rate mortgage-backed securities which
are issued or guaranteed by private institutions or by the
United States ("U.S.") government, its agencies or
instrumentalities, collateralized by or representing an
interest in mortgages created from pools of adjustable rate
mortgages, and other adjustable rate asset-backed
securities. All securities purchased by the Portfolio will
be rated at least AA by Standard & Poor's Corporation
("S&P") or Aa by Moody's Investors Service ("Moody's") or,
if unrated, will be deemed to be of comparable quality by
the Portfolio's investment manager. The Fund is designed for
individuals as well as certain institutional investors.
There can, of course, be no assurance that the Fund's
objective will be achieved.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
This Prospectus is intended to set forth in a clear and
concise manner information about the Fund that a prospective
investor should know before investing. After reading the
Prospectus, it should be retained for future reference; it
contains information about the purchase and sale of shares
and other items which the prospective investor will find
useful to have.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
A Statement of Additional Information ("SAI") concerning the
Trust, the Fund and another series of the Trust, dated March
1, 1995, as may be amended from time to time, provides a
further discussion of certain areas in this Prospectus and
other matters
which may be of interest to some investors. It has been
filed with the Securities and Exchange Commission ("SEC")
and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown
on the cover.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT
AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE
UNDERWRITER.
CONTENTS PAGE
Expense Table
Financial Highlights
About the Fund
Investment Objective and Policies of the Fund
Administration of the Fund
Distributions to Shareholders
Taxation of the Fund and Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund in Connection with Retirement
Plans
Involving Tax-Deferred Investments
Other Programs and Privileges Available to Fund Shareholders
Exchange Privilege
How to Sell Shares of the Fund
Valuation of Fund Shares
How to Get Information Regarding an Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding Taxpayer IRS Certifications
Portfolio Operations
Telephone Transactions
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a
shareholder will bear directly or indirectly in connection
with an investment in the Fund. These figures are based on
aggregate operating expenses of the Fund, before fee waivers
and expense reductions, for the fiscal year ended October
31, 1994, and include the expenses of the Portfolio.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on PurchasesE 2.25%
(as a percentage of offering price)
Deferred Sales Charge NONE*
Exchange Fee (per transaction)
$5.00**
*Investments of $1 million or more are not subject to a
front-end sales charge, but a contingent deferred sales
charge of 1% is imposed on certain redemptions within 12
months of the calendar month following such investments. See
"How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
**$5.00 fee only imposed on Timing Accounts as described
under "Exchange Privilege." All other exchanges are without
charge.
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Portfolio Management Fees
0.40%*** Fund Administration Fees
0.10%*** 12b-1 Fees
0.19%**** Other Expenses of the Fund 0.13%
Other Expenses of the Portfolio 0.03%
Total Other Expenses
0.16% Total Fund Operating Expenses
0.85%***
***The Fund's administrator and the Portfolio's
investment
manager agreed in advance to waive the entire administration
fee and a portion of the Portfolio's management fee. With
this reduction, the Fund's share of the Portfolio's
management fee was 0.23% of the average net assets of the
Fund and total operating expenses of the Fund, including the
Fund's proportionate share of Portfolio expenses, were 0.45%
of the Fund's average net assets. ****Consistent with
National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges
and Rule 12b-1 fees could cause long-term shareholders to
pay more than the economic equivalent of the maximum front
end sales charges permitted under those same rules.
Investors should be aware that the preceding table is not
intended to reflect in precise detail the fees and expenses
associated with an individual's own investment in the Fund.
Rather the table has been provided only to assist investors
in gaining a more complete understanding of fees, charges
and expenses. For a more detailed discussion of these
matters, investors should refer to the appropriate sections
of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example
illustrates the expenses, including the initial sales
charge, that apply to a $1,000 investment in the Fund over
various time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted
in the preceding table, the Fund charges no redemption fees:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
$31 $49 $69 $125
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING
EXPENSES OF THE FUND, BEFORE FEE WAIVERS OR EXPENSE
REDUCTIONS, AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
FUTURE EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN.
The operating expenses are borne by the Fund and only
indirectly by shareholders as a result of their investment
in the Fund. In addition, federal regulations require the
example to assume an annual return of 5%, but the Fund's
actual return may be more or less than 5%.
The above table summarizes the aggregate fees and expenses
incurred by both the Fund and the Portfolio. The Board of
Trustees considered the aggregate fees and expenses to be
paid by both the Fund and the Portfolio under the Fund's
policy of investing all of its assets in shares of the
Portfolio and such fees and expenses the Fund would pay if
it invested directly in adjustable rate securities. Because
this arrangement enables various institutional investors,
including the Fund, to pool their assets, which may be
expected to result in the achievement of a variety of
operating economies, the Board of Trustees concluded that
the aggregate expenses of the Fund and the Portfolio were
expected to be lower than the expenses that would be
incurred by the Fund if it invested directly in adjustable
rate securities, although there is no guarantee or assurance
that
asset growth and lower expenses will be recognized. Advisers
has agreed to limit expenses so that in no event will
shareholders of the Fund incur higher expenses than if it
invested directly in adjustable rate securities. Further
information regarding the Fund's and the Portfolio's fees
and expenses is included under "Administration of the Fund."
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial
highlights for a share of the Fund throughout the periods
from the effective date of registration (December 26, 1991)
to January 31, 1993, for the nine-month period from February
1, 1993 to October 31, 1993, and for the fiscal year ended
October 31, 1994. The information for each of the periods
indicated has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the
financial statements in the Trust's SAI. See the discussion
"Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance+
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Net Realized Distributions Net Asset
Values at Net & Unrealized Total From From Net Distributions Values
Year Beginning Investment Gains on Investment Investment From Total at End
Ended of Year Income Securities Operations Income Capital Gains Distributions of Year
- ------------------------------------------------------------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992(1) $ 10.00 $ -- $ -- $ -- $ -- $ -- $ -- $ 10.00
1993 10.00 .60 .031 .631 (.601) -- (.601) 10.03
1993(2) 10.03 .37 .009 .379 (.369) -- (.369) 10.04
1994(3) 10.04 .45 (.341) .109 (.449) -- (.449) 9.70
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------
Ratio of Net
Net Assets Ratio of Investments
at End Expenses Income Portfolio
Year Total of Year to Average to Average Turnover
Ended Return++ (in 000's) Net Assets** Net Assets Rate
- ----------------------------------------------------------------------------------------------------
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
<S> <C> <C> <C> <C> <C>
1992(1) -- % $ -- -- % -- % -- %
1993 6.48 12,521 -- 5.84 48.95
1993(2) 3.83 37,809 -- 4.69* 49.11
1994(3) 1.11 24,564 0.20 4.45* 84.67
</TABLE>
(1)For the period December 26, 1991 (effective date of registration) to January
31, 1992.
(2)For the nine months ended October 31, resulting from a change in fiscal year
from January 31.
(3)For the year ended October 31, 1994
*Annualized.
+Selected data for a share of capital stock outstanding throughout the period.
++Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends and capital gains at net asset value.
**During the periods indicated, the Fund's administrator agreed in advance to
waive a portion of its administration fees and made payments of other expenses
incurred by the Fund. Had such action not been taken,
the ratios of operating expenses to average net assets would have been as
follows:
FRANKLIN ADJUSTABLE RATE SECURITIES FUND
1992(1)..................... -%
1993........................ 1.27
1993(2)..................... .54*
1994(3) .42
The combined ratio of expenses to average net assets of the Fund and
the Portfolio is as follows:
After Fee Before Fee
Reduction Reduction
1992(1)..................... .00% .00%
1993........................ .00 1.91
1993(2)..................... .11* 1.01*
1994(3) .45 .85
ABOUT THE FUND
The Trust, which was organized as a Massachusetts business
trust on December 16, 1986, is an open-end management
investment company, or mutual fund, and has registered with
the SEC under the Investment Company Act of 1940 (the "1940
Act"). The Fund and the additional separate diversified and
non-diversified series of the Trust each issue a separate
series of shares of beneficial interest.
Shares of the Fund may be purchased (minimum investment of
$100 initially and $25 thereafter) at the current public
offering price which is equal to the Fund's net asset value
(see "Valuation of Fund Shares") plus a sales charge not
exceeding 2.25% of the offering price. See "How to Buy
Shares of the Fund."
INVESTMENT OBJECTIVE
AND POLICIES OF THE FUND
The investment objective of the Fund is to seek a high level
of current income, with lower volatility of principal than a
fund which invests in fixed-rate securities. The Fund
pursues its investment objective by investing all of its
assets in the Portfolio, which has the same investment
objective and substantially similar policies as the Fund.
The Portfolio is a separate diversified series of the
Adjustable Rate Securities Portfolios, an open-end
management investment company, managed by Franklin Advisers,
Inc. ("Advisers") Shares of the Portfolio are acquired by
the Fund at net asset value with no sales charge.
Accordingly, an investment in the Fund is an indirect
investment in the Portfolio.
The Portfolio pursues its objective by investing primarily
(at least 65% of its total assets) in adjustable rate
securities, including adjustable rate mortgage securities
which are issued or guaranteed by private institutions or by
the U.S. government, its agencies or instrumentalities,
collateralized by or representing an interest in mortgages,
and other adjustable rate asset-backed securities
(collectively, "ARS," or, with respect only to adjustable
rate mortgage securities, "ARMS") which have interest rates
which reset at periodic intervals. All securities in which
the Portfolio invests will be rated at least AA or Aa by S&P
or Moody's, respectively, or if unrated, will be deemed to
be of comparable quality by the Portfolio's investment
manager. Nongovernmental issuers of the ARMS in which the
Fund may invest through the Portfolio include commercial
banks, savings and loan
institutions, insurance companies, including private
mortgage insurance companies, mortgage bankers, mortgage
conduits of investment banks, finance companies, real
estate companies and private corporations and others
("private mortgage securities"), so long as they are
consistent with the Portfolio's (and the Fund's) investment
objective. Such private mortgage securities which are not
issued or guaranteed by the U.S. government are generally
structured with one or more types of credit enhancement.
The Portfolio may from time to time increase its
investments by borrowing from banks (see "Borrowing" for
further information). In addition, the Fund may invest,
through the Portfolio, up to 35% of its total assets in the
following fixedrate securities: (a) notes, bonds and
discount notes of the following U.S. government agencies or
instrumentalities: Federal Home Loan Banks, Federal
National Mortgage Association ("FNMA"), Government National
Mortgage Association ("GNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), and Small Business Administration;
(b) obligations of or guaranteed by the full faith and
credit of the U. S. government and repurchase agreements
collateralized by such obligations; (c) privately
issued fixed-rate mortgage securities; (d) privately issued
assetbacked securities; and (e) time and savings deposits in
commercial or savings banks or in institutions whose accounts
are insured by the FDIC. Investments in savings deposits are
considered illiquid and are further restricted as noted under
"Other Permitted Investments." Investments in fixed-rate
securities generally decline in value during periods of
rising interest rates and conversely, increase in value when
interest rates fall. To the extent any Portfolio assets are
invested in such fixed-rate securities, the Portfolio's (and
the Fund's) values will be more sensitive to interest rate
changes than if it were fully invested in adjustable rate
securities.
There is, of course, no assurance that the Fund's investment
objective will be achieved. As the value of the securities
held by the Portfolio fluctuate, the Portfolio's net asset
value (and the Fund's) per share will also fluctuate.
ADVANTAGES OF INVESTING IN THE FUND
The Fund enables its shareholders to invest easily in ARS
which are rated at least AA by S&P or Aa by Moody's or, if
unrated, will be deemed to be of comparable quality by the
Portfolio's investment manager, or such ARS which are issued
or guaranteed by the U.S. government, its agencies or
instrumentalities, by allowing an initial investment of as
low as $100. The Fund believes that by investing in the
Portfolio, which in turn invests primarily in ARS which
provide for variable rates of interest, it will achieve a
more consistent and less volatile net asset value than is
characteristic of mutual funds that invest primarily in
securities paying a fixed rate of interest.
SPECIAL INFORMATION REGARDING THE
FUND'S MASTER/FEEDER FUND STRUCTURE
The investment objectives of both the Fund and the
Portfolio are fundamental and may not be changed without
shareholder approval. The investment policies described
herein include those followed by the Portfolio in which the
Fund invests. Information on administration and expenses is
included under "Administration of the Fund." See the SAI
for further information regarding the Fund's and the
Portfolio's investment restrictions.
An investment in the Fund may be subject to certain risks
due to the Fund's structure, such as the potential that
upon redemption by other shareholders in the Portfolio, the
Fund's expenses may
increase or the economies of scale which have been achieved
as a result of the structure may be diminished.
Institutional investors in the Portfolio that have a greater
pro rata ownership interest in the Portfolio than the Fund
could have effective voting control over the operation of
the Portfolio. Further, in the event that the shareholders
of the Fund do not approve a proposed future change in the
Fund's objective or fundamental policies, which has been
approved for the Portfolio, the Fund may be forced to
withdraw its investment from the Portfolio and seek another
investment company with the same objective and policies. In
addition, the Fund may withdraw its investment in the
Portfolio at any time if the Board of Trustees of the Trust
considers that it is in the best interests of the Fund to do
so. Upon any such withdrawal, the Board of Trustees of the
Trust would consider what action to take, including the
investment of all of the assets of the Fund in another
pooled investment entity having the same investment
objectives and policies as the Fund or the hiring of an
investment adviser to manage the Fund's investments. Such
circumstances may cause an increase in Fund expenses.
Further, the Fund's structure is a relatively new format
which often results in certain operational and other
complexities. The Franklin organization was one of the first
mutual fund complexes in the country to implement such a
structure, and the trustees do not believe that the
additional complexities outweigh the benefits to be gained
by shareholders.
The Franklin Group of Funds(Registered Trademark) has
another fund which may invest in the Portfolio and which is
designed for institutional investors only. It is possible
that in the future other funds may be created which may
likewise invest in the Portfolio or existing funds may be
restructured so that they may invest in the Portfolio. For
further information please refer to "Organization" under
"General Information." If and when that happens, the Fund or
Advisers will forward to any interested shareholder
additional information, including a prospectus and statement
of additional information, if requested, regarding such
other institutions through which they may make investments
in the Portfolio. Any such fund may be offered with the same
or different sales charge structure and Rule 12b-1 fees;
thus, an investor in such fund may experience a different
return from an investor in another investment company which
invests exclusively in the Portfolio. Investors interested
in obtaining information about such funds may contact the
departments listed under "How to Get Information Regarding
an Investment in the Fund." Whenever the Fund, as an
investor in the Portfolio, is asked to vote on a matter
relating to the Portfolio, the Trust, on behalf of the Fund,
will hold a meeting of the Fund's shareholders and will cast
its votes in the same proportions as the Fund's shareholders
have voted.
ADJUSTABLE RATE SECURITIES
Adjustable Rate Securities are debt securities with interest
rates which, rather than being fixed, are adjusted
periodically pursuant to a pre-set formula and interval. As
stated above, the Portfolio will invest primarily in ARS.
The interest paid on ARS and, therefore, the current income
earned by the Portfolio by investing in such securities,
will be a function primarily of the indexes upon which
adjustments are based and the applicable spread relating to
such securities. (See the discussion of "Resets" herein.)
The interest rates paid on ARS are generally readjusted
periodically to an increment over the chosen interest rate
index. Such readjustments occur at intervals ranging from
one to sixty months. The degree of volatility in the market
value of the
securities held by the Portfolio and of the net asset value
of Portfolio shares will be a function primarily of the
length of the adjustment period and the degree of volatility
in the applicable indexes. It will also be a function of the
maximum increase or decrease of the interest rate adjustment
on any one adjustment date, in any one year and over the
life of the securities. These maximum increases and
decreases are typically referred to as "caps" and "floors,"
respectively. The Portfolio does not seek to maintain an
overall average cap or floor, although the Portfolio's
investment manager will consider caps or floors in selecting
ARS for the Portfolio.
While the Portfolio does not attempt to maintain a constant
net asset value per share, during periods in which shortterm
interest rates move within the caps and floors of the
securities held by the Portfolio, the fluctuation in market
value of the ARS in the portfolio is expected to be
relatively limited, since the interest rate on the
Portfolio's ARS will generally adjust to market rates within
a short period of time. In periods of substantial short-term
volatility in short-term interest rates, the value of the
Portfolio's holdings may fluctuate more substantially since
the caps and floors of its ARS may not permit the interest
rate to adjust to the full extent of the movements in short
term rates during any one adjustment period. In the event of
dramatic increases in interest rates, the lifetime caps on
the ARS may prevent such securities from adjusting to
prevailing rates over the term of the loan. In this
circumstance, the market value of the ARS may be
substantially reduced with a corresponding decline in the
Portfolio's net asset value.
For a discussion of the Portfolio's investments in
adjustable rate asset-backed securities, including the risk
of such investments, see "Investment Objective and Policies
of the Fund Asset-Backed Securities."
RISK OF ADJUSTABLE RATE SECURITIES
ARS have several characteristics that should be considered
before investing in the Fund. As indicated above, the
interest rate reset features of ARS held by the Portfolio
will reduce the effect on the net asset value of Portfolio
shares caused by changes in market interest rates. The
market value of ARS and, therefore, the Portfolio's net
asset value, however, may vary to the extent that the
current interest rate on such securities differs from market
interest rates during periods between the interest reset
dates. A portion of the ARS in which the Portfolio may
invest may not reset for up to five years. These variations
in value occur inversely to changes in the market interest
rates. Thus, if market interest rates rise above the current
rates on the securities, the value of the securities will
decrease; conversely, if market interest rates fall below
the current rate on the securities, the value of the
securities will rise. If investors in the Fund sold their
shares during periods of rising rates before an adjustment
occurred, such investors may suffer some loss. The longer
the adjustment intervals on ARS held by the Portfolio, the
greater the potential for fluctuations in the Portfolio's
net asset value.
Investors in the Fund will receive increased income as a
result of upward adjustments of the interest rates on ARS
held by the Portfolio in response to market interest rates.
The Fund and its shareholders, however, will not benefit
from increases in market interest rates once such rates rise
to the point where they cause the rates on such ARS to reach
their maximum adjustment date, annual or lifetime caps. In
addition, because of their interest rate adjustment feature,
ARS are not an effective means of
"locking-in" attractive interest rates for periods in excess
of the adjustment period.
The largest class of ARS in which the Fund will invest is
ARMS which possesses unique risks. For example, in the case
of privately issued ARMS where the underlying mortgage
assets carry no agency or instrumentality guarantee, the
mortgagors on the loans underlying ARMS are often qualified
for such loans on the basis of the original payment amounts.
The mortgagor's income may not be sufficient to enable them
to continue making their loan payments as such payments
increase, resulting in a greater likelihood of default.
Conversely, any benefits to the Fund and its shareholders
from an increase in the Portfolio's net asset value caused
by falling market interest rates is reduced by the potential
for a decline in the interest rates paid on ARS held by the
Portfolio. In this regard, the Fund is not designed for
investors seeking capital appreciation.
ADJUSTABLE RATE MORTGAGE SECURITIES
Adjustable Rate Mortgage Securities (ARMS), like a
traditional mortgage security, are interests in a pool of
mortgage loans. Most mortgage securities are pass-through
securities, which means that they provide investors with
payments consisting of both principal and interest as
mortgages in the underlying mortgage pool are paid off by
the borrower. The dominant issuers or guarantors of mortgage
securities today are GNMA, FNMA, and FHLMC. GNMA creates
mortgage securities from pools of governmentguaranteed or
insured (Federal Housing Authority or Veterans
Administration) mortgages originated by mortgage bankers,
commercial banks, and savings and loan associations. FNMA
and FHLMC issue mortgage securities from pools of
conventional and federally insured and/or guaranteed
residential mortgages obtained from various entities,
including savings and loan associations, savings banks,
commercial banks, credit unions, and mortgage bankers. Non
governmental issuers of mortgage pools may be the
originators of the underlying mortgage loans as well as the
guarantors of the private mortgage securities.
The adjustable interest rate feature of the mortgages
underlying the mortgage securities in which the Portfolio
invests generally will act as a buffer to reduce sharp
changes in the Portfolio's net asset value in response to
normal interest rate fluctuations. As the interest rates on
the mortgages underlying the Portfolio's investments are
reset periodically, yields of portfolio securities will
gradually align themselves to reflect changes in market
rates so that the market value of the securities held by the
Portfolio will remain relatively stable as compared to fixed
rate instruments and should cause the net asset value of the
Fund to fluctuate less significantly than it would if the
Portfolio invested in more traditional long-term, fixed-rate
debt securities. During periods of rising interest rates,
changes in the coupon rate lag behind changes in the market
rate, resulting in possibly a lower net asset value until
the coupon resets to market rates. Thus, investors could
suffer some principal loss if they sold their shares of the
Fund before the interest rates on the underlying mortgages
are adjusted to reflect current market rates. A portion of
the ARMS in which the Portfolio may invest may not reset for
up to five years. During periods of extreme fluctuation in
interest rates, the Fund's net asset value will fluctuate as
well. Since most mortgage securities in the Portfolio's
portfolio will generally have annual reset caps of 100 to
200 basis points, short-term fluctuation in interest rates
above these levels could cause such mortgage securities to
"cap out" and to behave more like long-term, fixed-rate debt
securities.
Unlike fixed-rate mortgages, which generally decline in
value during periods of rising interest rates, adjustable
rate mortgage securities allow the Portfolio to participate
in increases in interest rates through periodic adjustments
in the coupons of the underlying mortgages, resulting in
both higher current yields and lower price fluctuations.
Furthermore, if prepayments of principal are made on the
underlying mortgages during periods of rising interest
rates, the Portfolio generally will be able to reinvest such
amounts in securities with a higher current rate of return.
The Portfolio, however, will not benefit from increases in
interest rates to the extent that interest rates rise to the
point where they cause the current coupon of adjustable rate
mortgages held as investments by the Portfolio to exceed the
maximum allowable annual or lifetime reset limits (or "cap
rates") for a particular mortgage. Also, the Portfolio's net
asset value could vary to the extent that current yields on
mortgage-backed securities are different than market yields
during interim periods between coupon reset dates.
During periods of declining interest rates, of course, the
coupon rates may readjust downward, resulting in lower
yields to the Fund. Further, because of this feature, the
value of ARMS are unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate
instruments. As with other mortgage backed securities,
interest rate declines may result in accelerated prepayment
of mortgages and the proceeds from such prepayments must be
reinvested at lower prevailing interest rates.
One additional difference between ARMS and fixed-rate
mortgages is that for certain types of ARMS, the rate of
amortization of principal, as well as interest payments, can
and does change in accordance with movements in a
particular, pre-specified, published interest rate index.
The amount of interest due to an ARMS holder is calculated
by adding a specified additional amount, the "margin," to
the index, subject to limitations or caps on the maximum and
minimum interest that is charged to the mortgagor during the
life of the mortgage or to maximum and minimum changes to
that interest rate during a given period. It is these
special characteristics which are unique to adjustable rate
mortgages that the Fund believes make them attractive
investments in seeking to accomplish the Fund's objective.
Many mortgage securities which are issued or guaranteed by
GNMA, FHLMC, or FNMA ("Certificates") are called passthrough
certificates because a pro rata share of both regular
interest and principal payments (less GNMA's, FHLMC's, or
FNMA's fees and any applicable loan servicing fees), as well
as unscheduled early prepayments on the underlying mortgage
pool, are passed through monthly to the holder of the
Certificate (i.e., the Portfolio). The principal and
interest on GNMA securities are guaranteed by GNMA which
guarantee is backed by the full faith and credit of the U.S.
government. FNMA guarantees full and timely payment of all
interest and principal, while FHLMC guarantees timely
payment of interest and ultimate collection of principal.
Mortgage securities issued or guaranteed by FNMA and FHLMC
are not backed by the full faith and credit of the U.S.
government; however, they are generally considered to offer
minimal credit risks. The yields provided by these mortgage
securities have historically exceeded the yields on other
types of U.S. government securities with comparable
maturities in large measure due to the prepayment risk. (See
"Risks of Mortgage Securities.")
The Portfolio may also invest in pass-through Certificates
issued by non-governmental issuers. Pools of conventional
residential
mortgage loans created by such issuers generally offer a
higher rate of interest than government and government
related pools because there are no direct or indirect
government guarantees of payment. Timely payment of interest
and principal of these pools is, however, generally
supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance.
The insurance and guarantees are issued by government
entities, private insurance or the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a
mortgagerelated security meets the Portfolio's quality
standards.
The Portfolio may buy mortgage-related securities without
insurance or guarantees if through an examination of the
loan experience and practices of the poolers, the investment
manager determines that the securities meet the Portfolio's
quality standards. The Portfolio expects that governmental,
governmentrelated or private entities may create mortgage
loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these
securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from
customary long-term, fixed-rate mortgages. As new types of
mortgage-related securities are developed and offered to
investors, the investment manager will, consistent with the
Portfolio's objective, policies and quality standards,
consider making investments in such new types of securities.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS") AND REAL ESTATE
MORTGAGE INVESTMENT CONDUITS ("REMICS") AND MULTI-CLASS PASS
THROUGHS. The Portfolio may also invest in certain debt
obligations which are collateralized by mortgage loans or
mortgage pass-through securities. Such securities may be
issued or guaranteed by U.S. government agencies or issued
by certain financial institutions and other mortgage
lenders. CMOs and REMICs are debt instruments issued by
special purpose entities which are secured by pools of
mortgage loans or other mortgagebacked securities. Multi
class pass-through securities are equity
interests in a trust composed of mortgage loans or other
mortgagebacked securities. Payments of principal and interest
on underlying collateral provides the funds to pay debt
service on the CMO or REMIC or make scheduled distributions
on the multiclass pass-through securities. CMOs, REMICs and
multi-class passthrough securities (collectively CMO unless
the context indicates otherwise) may be issued by agencies or
instrumentalities of the U.S. government or by private
organizations.
In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs, often referred to as a
"tranche," is issued at a specified coupon rate or adjustable
rate tranche (which is discussed in the next paragraph) and
has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause it to be
retired substantially earlier than the stated maturities or
final distribution dates. Interest is paid or accrues on all
classes of a CMO on a monthly, quarterly or semi-annual
basis. The principal and interest on the underlying mortgages
may be allocated among several classes of a series of a CMO
in many ways. In a common structure, payments of principal,
including any principal prepayments, on the underlying
mortgages are applied to the classes of a series of a CMO in
the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be
made on any class of a CMO until all other classes having an
earlier stated maturity or final distribution date have been
paid in full.
One or more tranches of a CMO may have coupon rates which
reset periodically at a specified increment over an index
such as the London Interbank Offered Rate ("LIBOR"). These
adjustable rate tranches, known as "floating rate CMOs," will
be deemed to be treated as ARMS by the Portfolio. Floating
rate CMOs may be
backed by fixed-rate or adjustable rate mortgages; to date,
fixedrate mortgages have been more commonly utilized for this
purpose. Floating rate CMOs are typically issued with
lifetime caps on the coupon rate thereon. These caps, similar
to the caps on adjustable rate mortgages, represent a ceiling
beyond which the coupon rate on a floating rate CMO may not
be increased regardless of increases in the interest rate
index to which the floating rate CMO is geared.
REMICs, which are authorized under the Tax Reform Act of
1986, are private entities formed for the purpose of holding
a fixed pool of mortgages secured by an interest in real
property. REMICs are similar to CMOs in that they issue
multiple classes of securities. As with CMOs, the mortgages
which collateralize the REMICs in which the Portfolio may
invest include mortgages backed by GNMA certificates or other
mortgage pass-throughs issued or guaranteed by the U.S.
government, its agencies or instrumentalities or issued by
private entities, which are not guaranteed by any government
agency.
The Portfolio's investment manager currently intends to limit
investment in fixed-rate CMOs and REMICS to planned
amortization classes ("PACs") and sequential pay classes. A
PAC is retired according to a payment schedule in order to
have a stable average life and yield even if expected
prepayment rates change. Within a specified broad range of
prepayment possibilities, the retirement of all classes is
adjusted so that the PAC bond amortization schedule will be
met. Thus PAC bonds offer more predictable amortization
schedules at the expense of less predictable cash flows for
the other bonds in the structure. Within a given structure,
the Portfolio currently intends to buy the PAC bond with the
shortest remaining average life. A sequential pay CMO is
structured so that only one class of bonds will receive
principal until it is paid off completely. Then the next
sequential pay CMO class will begin receiving principal until
it is paid off. The Portfolio currently intends to buy
sequential pay CMO securities in the class with the shortest
remaining average life.
Yields on privately issued CMOs as described above have been
historically higher than the yields on CMOs issued or
guaranteed by U.S. government agencies. The risk of loss due
to default on such instruments, however, is higher since they
are not guaranteed by the U.S. government. The trustees of
the Portfolio believe that accepting the risk of loss
relating to privately issued CMOs that the Portfolio acquires
is justified by the higher yield the Portfolio will earn in
light of the historic loss experience on such instruments.
The Portfolio will not invest in subordinated privately
issued CMOs.
To the extent any privately issued CMOs and REMICs in which
the Portfolio invests are considered by the SEC to be
investment companies, the Portfolio will limit its
investments in such securities in a manner consistent with
the provisions of the 1940 Act.
RESETS. The interest rates paid on the ARS and floating rate
CMO's in which the Portfolio invests generally are readjusted
at intervals of one year or less to an increment over some
predetermined interest rate index, although some may have
intervals as long as 5 years. There are three main categories
of indices: those based on U.S. Treasury securities; those
derived
from a calculated measure such as a cost of funds index; or a
moving average of mortgage rates. Commonly utilized indices
include the one-, three- and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the six-
month Treasury bill rate, rates on longer-term Treasury
securities, the 11th District Federal Home Loan Bank Cost of
Funds, the National Median Cost of Funds, the one-, three-,
six-month or one-year LIBOR, the prime rate of a specific
bank, or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds index, tend to lag
behind changes in market rate levels and tend to be somewhat
less volatile.
CAPS AND FLOORS. The underlying mortgages which collateralize
the ARMS and the floating rate CMOs in which the Portfolio
invests will frequently have caps and floors which limit the
maximum amount by which the loan rate to the residential
borrower may change up or down (1) per reset or adjustment
interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting
changes in the borrower's monthly principal and
interest payments rather than limiting interest rate
changes. These payment caps may result in negative
amortization.
STRIPPED MORTGAGE SECURITIES. The Portfolio may also invest
in stripped mortgage securities, which are derivative
multiclass mortgage securities. The stripped mortgage
securities in which the Portfolio may invest will only be
issued or guaranteed by the U.S. government, its agencies or
instrumentalities. Stripped mortgage securities have greater
market volatility than other types of mortgage securities in
which the Portfolio invests.
Stripped mortgage securities are usually structured with two
classes that receive different proportions of the interest
and principal distributions on a pool of mortgage assets. A
common type of stripped mortgage security will have one
class receiving some of the interest and most of the
principal from the mortgage assets, while the other class
will receive most of the interest and the remainder of the
principal. In the most extreme case, one class will receive
all of the interest (the interest-only or "IO" class), while
the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an
IO class is extremely sensitive not only to changes in
prevailing interest rates but also to the rate of principal
payments (including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on the yield to maturity of
any such IOs held by the Portfolio. If the underlying
mortgage assets experience greater than anticipated
prepayments of principal, the Portfolio may fail to fully
recoup its initial investment in these securities even if
the securities are rated in the highest rating categories,
AAA or Aaa, by S&P or Moody's, respectively.
Stripped mortgage securities are purchased and sold by
institutional investors, such as the Fund, through several
investment banking firms acting as brokers or dealers. As
these securities were only recently developed, traditional
trading markets have not yet been established for all such
securities. Accordingly, some of these securities may
generally be illiquid. The staff of the SEC (the "Staff")
has indicated that only government-issued IO or PO
securities which are backed by fixedrate mortgages may be
deemed to be liquid, if procedures with respect to
determining liquidity are established by a fund's board. The
Board of Trustees may, in the future, adopt procedures which
would permit the Fund to acquire, hold, and treat as liquid
government-issued IO and PO securities. At the present time,
however, all such securities will continue to be treated as
illiquid and will, together with any other illiquid
investments, not exceed 10% of the Fund's net assets. Such
position may be changed in the future, without notice to
shareholders, in response to the Staff's continued
reassessment of this matter as well as to changing market
conditions.
RISKS OF MORTGAGE SECURITIES
The mortgage securities in which the Portfolio invests
differ from conventional bonds in that principal is paid
back over the life of the mortgage security rather than at
maturity. As a result, the holder of the mortgage securities
(i.e., the Portfolio) receives monthly scheduled payments of
principal and interest, and may receive unscheduled
principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments
and any unscheduled prepayments of principal it receives, it
may receive a rate of interest which is lower than the rate
on the existing mortgage securities. For this reason,
mortgage securities may be less effective than other types
of U.S. government securities as a means of "locking in"
long-term interest rates. The fixed-rate mortgage securities
in which the Portfolio may invest are generally more exposed
to this "prepayment risk" than adjustable rate mortgage
securities.
The market value of mortgage securities, like other U.S.
government securities, will generally vary inversely with
changes in market interest rates, declining when interest
rates rise and rising when interest rates decline. Mortgage
securities, however, while having less risk of a decline
during periods of rapidly rising rates, may also have less
potential for capital appreciation than other investments of
comparable maturities due to the likelihood of increased
prepayments of mortgages as interest rates decline. To the
extent market interest rates increase beyond the applicable
cap or maximum rate on an adjustable rate mortgage security
or beyond the coupon rate of a fixed-rate mortgage security,
the market value of the mortgage security would likely
decline to the same extent as a conventional fixed-rate
security.
In addition, to the extent mortgage securities are purchased
at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of the
holder's principal investment to the extent of the premium
paid. On the other hand, if mortgage securities are
purchased at a discount, both a scheduled payment of
principal and an unscheduled prepayment of principal will
increase current and total returns and will accelerate the
recognition of income which, when distributed to
shareholders, will be taxable as ordinary income.
With respect to pass-through mortgage pools issued by non
governmental issuers, there can be no assurance that the
private insurers associated with such securities can meet
their obligations under the policies. Although the market
for such nongovernmentally issued or guaranteed mortgage
securities is becoming increasingly liquid, securities
issued by certain private organizations may not be readily
marketable. The purchase of such securities is subject to
the Portfolio's limit with respect to investment in illiquid
securities, as described under "Illiquid Securities."
ASSET-BACKED SECURITIES
In addition to the above types of securities, the Fund may
invest through the Portfolio in asset-backed securities,
including
adjustable rate asset-backed securities, which have interest
rates that reset at periodic intervals. Asset-backed
securities are similar to mortgage-backed securities. The
underlying assets, however, include assets such as
receivables on home equity and credit card loans, and
receivables regarding automobiles, mobile home and
recreational vehicle loans an leases. The assets are
securitized either in a pass-through structure (similar to a
mortgage pass-through structure) or in a pay-through
structure (similar to the CMO structure). The Portfolio may
invest in these and other types of asset-backed securities
that may be developed in the future. In general, the
collateral supporting assetbacked securities is of a shorter
maturity than mortgage loans and historically has been less
likely to experience substantial prepayment.
Asset-backed securities entail certain risks not presented
by mortgage-backed securities. Asset-backed securities do
not have the benefit of the same type of security interests
in the related collateral. Credit card receivables are
generally unsecured and a number of state and federal
consumer credit laws give debtors the right to set off
certain amounts owed on the credit cards, thereby reducing
the outstanding balance. In the case of automobile
receivables, there is a risk that the holders may not have
either a proper or first security interest in all of the
obligations backing such receivables due to the large number
of vehicles involved in a typical issuance and technical
requirements under state laws. Therefore, recoveries on
repossessed collateral may not always be available to
support payments on the securities. For further discussion
concerning the risks of investing in asset-backed
securities, see the SAI.
OTHER INVESTMENT POLICIES
REPURCHASE AGREEMENTS. The Portfolio may engage in
repurchase transactions, in which the Portfolio purchases a
U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction
requires the collateralization of the seller's obligation by
the transfer of securities with an initial market value,
including accrued interest, equal to at least 102% of the
dollar amount invested by the Portfolio in each agreement,
with the value of the underlying security marked to market
daily to maintain coverage of at least 100%. A default by
the seller might cause the Portfolio to experience a loss or
delay in the liquidation of the collateral securing the
repurchase agreement. The Portfolio might also incur
disposition costs in liquidating the collateral. The
Portfolio, however, intends to enter into repurchase
agreements only with financial institutions such as broker
dealers and banks which are deemed creditworthy by the
Portfolio's investment manager. A repurchase agreement is
deemed to be a loan by the Portfolio under the 1940 Act. The
U.S. government security subject to resale (the collateral)
will be held on behalf of the Portfolio by a custodian
approved by the Portfolio's Board and will be held pursuant
to a written agreement.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS. The Portfolio
may purchase any securities for its portfolio on a "when
issued" or "delayed delivery" basis. These transactions are
arrangements under which the Portfolio purchases securities
with payment and delivery scheduled for a future time,
generally in 30 to 60 days. Purchases of securities on a
when-issued or delayed delivery basis are subject to market
fluctuation and are subject to the risk that the value or
yields at delivery may be more or less than the purchase
price or the yields available when the transaction was
effected. Although the Portfolio will generally purchase
securities on a when-issued basis with the intention of
holding such securities, it may sell such securities before
the settlement date if it is deemed advisable. When the
Portfolio is the buyer in such a transaction, it will
maintain, in a segregated account with its custodian, cash
or high-grade marketable securities having an aggregate
value equal to the amount of such purchase commitments until
payment is made. To the extent the Portfolio engages in when
issued and delayed delivery transactions, it will do so only
for the purpose of acquiring portfolio securities consistent
with the Portfolio's investment objective and policies, and
not for the purpose of investment leverage. In when-issued
and delayed delivery transactions, the Portfolio relies on
the seller to complete the transaction. The other party's
failure to do so may cause the Portfolio to miss a price or
yield considered advantageous. Securities purchased on a when-
issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. The Portfolio
is not subject to any percentage limit on the amount of its
assets which may be invested in when-issued purchase
obligations.
BORROWING. The Fund does not borrow money or mortgage or
pledge any of the assets of the Fund except that it may
borrow from banks for temporary or emergency purposes up to
20% of its total assets and pledge its assets in connection
therewith. The Fund may not, however, purchase any portfolio
securities (additional shares of the Portfolio) while
borrowings representing more than 5% of its total assets are
outstanding.
The Portfolio may from time to time increase its investments
by borrowing from banks. Borrowings may be secured or
unsecured, and at fixed or variable rates of interest. The
Portfolio will borrow only to the extent that the value of
its assets, less its liabilities other than borrowings, is
equal to at least 300% of its borrowings. If the Portfolio
does not meet the 300% test, it will be required to reduce
its debt within three business days to the extent necessary
to meet that test. This may require the Portfolio to sell a
portion of its investments at a disadvantageous time.
Borrowing for investment purposes is a speculative investment
technique known as leveraging. When the Portfolio leverages
its assets, the net asset value of the Portfolio may increase
or decrease at a greater rate than would be the case if the
Portfolio were not leveraged. The interest payable on the
amount borrowed increases the Portfolio's expenses, (and thus
reduces the income to the Fund) and if the appreciation and
income produced by the investments purchased with the
borrowings exceed the cost of the borrowing, the investment
performance of the Portfolio will be reduced by leveraging.
MORTGAGE DOLLAR ROLLS. The Portfolio may enter into mortgage
"dollar rolls" in which the Portfolio sells mortgage-backed
securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar
(name, type, coupon and maturity) securities on a specified
future date. During the roll period, the Portfolio forgoes
principal and interest paid on the mortgage-backed
securities. The Portfolio is compensated by the difference
between the current sales price and the lower forward price
for the future purchase (often referred to as the "drop") as
well as by the interest earned on the cash proceeds of the
initial sale. A covered roll is a specific type of dollar
roll for which there is an offsetting cash position or a cash
equivalent security position.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures
approved by the Boards of Trustees of the Portfolio and
subject to the following conditions, the Portfolio may lend
its portfolio
securities to qualified securities dealers or other
institutional investors, provided that such loans do not
exceed 10% of the value of their respective total assets at
the time of the most recent loan. The borrower must deposit
with the Portfolio's custodian collateral with an initial
market value of at least 102% of the inital market value of
the securities loaned, including any accrued interest, with
the value of the collateral and loaned securities marked-to
market daily to maintain collateral coverage of at least
102%. Such collateral shall consist of cash. The lending of
securities is a common practice in the securities industry.
The Portfolio engages in security loan arrangements with the
primary objective of increasing the Portfolio's income
either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium
from the borrower. Under the securities loan agreement, the
Portfolio continues to be entitled to all dividends or
interest on any loaned securities. As with any extension of
credit, there are risks of delay in recovery and loss of
rights in the collateral should the borrower of the security
fail financially.
OTHER PERMITTED INVESTMENTS. Other investments permitted by
the Fund and the Portfolio consist of obligations of the
U.S., notes, bonds, and discount notes of the following U.S.
government agencies or instrumentalities: Federal Home Loan
Banks, FNMA, GNMA and time and savings deposits (including
fixed or adjustable rate certificates of deposit) in
commercial or savings banks or in institutions whose
accounts are insured by the FDIC and other securities which
are consistent with the Portfolio's investment objective.
The Portfolio's investments in savings deposits are
generally deemed to be illiquid and will, together with any
other illiquid investments, not exceed 10% of the
Portfolio's total net assets. The Portfolio's investments in
time deposits will not exceed 10% of its total assets.
ILLIQUID SECURITIES. It is the policy of the Portfolio that
illiquid securities (securities that cannot be disposed of
within seven days in the normal course of business at
approximately the amount at which the Portfolio has valued
the securities and includes, among other things, repurchase
agreements of more than seven days duration) may not
constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Portfolio.
TEMPORARY DEFENSIVE POSITIONS. When maintaining a temporary
defensive position, the Portfolio may invest its assets
without limit in U.S. government securities, certificates of
deposit of banks having total assets in excess of $5
billion, and repurchase agreements.
INVESTMENT RESTRICTIONS
The Fund is subject to a number of additional investment
restrictions, some of which have been adopted as fundamental
policies of the Fund and may be changed only with the
approval of a majority of the outstanding voting securities
of the Fund. A list of these restrictions and more
information concerning the policies are discussed in the
SAI.
HOW SHAREHOLDERS PARTICIPATE IN
THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in the Portfolio, the
assets of which are continuously being invested in portfolio
securities. If the securities owned by the Portfolio
increase in value, the value of the Fund shares which the
shareholder owns will
increase. If the securities owned by the Portfolio decrease
in value, the value of the shareholder's shares will also
decline. In this way, shareholders participate in any change
in the value of the securities owned by the Portfolio.
In addition to the factors which affect the value of
individual securities, as described in the preceding
sections, a shareholder may anticipate that the value of
Portfolio shares will fluctuate with movements in the
broader equity and bond markets, as well. In particular,
changes in interest rates will affect the value of the
Portfolio's holdings and thus its share price. Increased
rates of interest which frequently accompany higher
inflation and/or a growing economy are likely to have a
negative effect on the value of Portfolio shares. History
reflects both increases and decreases in the prevailing rate
of interest and these may reoccur unpredictably in the
future.
ADMINISTRATION OF THE FUND
The Board of Trustees has the primary responsibility for the
overall management of the Trust and the Fund and for
electing the officers of the Trust who are responsible for
administering the day-to-day operations of all series of the
Trust. The officers and trustees of the Trust are also
officers and trustees of the Adjustable Rate Securities
Portfolios. For information concerning the officers and
trustees of the Trust and the Adjustable Rate Securities
Portfolios, see "Trustees and Officers" in the SAI. The
Board of Trustees, with all disinterested trustees as well
as the interested trustees voting in favor, has adopted
written procedures designed to deal with potential conflicts
of interest which may arise from having the same persons
serving on each trust's Board of Trustees. The procedures
call for an annual review of the Fund's relationship with
the Portfolio, and in the event a conflict is deemed to
exist, the Board of Trustees may take action, up to and
including the establishment of a new Board of Trustees. The
Board of Trustees has determined that there are no conflicts
of interest presented by this arrangement at the present
time. Further information is included in the SAI.
Advisers serves as the Fund's administrator and as the
Portfolio's investment manager. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr.,
who own approximately 20% and 16%, respectively, of
Resources' outstanding shares. Resources is engaged in
various aspects of the financial services industry through
its varuous subsidiaries (the "Franklin Templeton Group").
Advisers acts as investment manager or administrator to 33
U.S. registered investment companies (111 separate series)
with aggregate assets of over $73 billion.
Pursuant to the administration agreement, Advisers provides
the Fund with various administrative, statistical and other
services which are necessary in order to conduct the Fund's
business.
Pursuant to the management agreement with the Portfolio,
Advisers supervises and implements the Portfolio's
investment activities and provides certain administrative
services and facilities which are necessary to conduct the
Portfolio's business.
Fund shareholders will bear a portion of the Portfolio's
operating expenses, including its management fee, to the
extent that the Fund, as a shareholder of the Portfolio,
bears such expenses. The portion of the Portfolio's expenses
borne by the Fund is dependent upon the number of other
shareholders of the
Portfolio, if any.
Advisers may, but is not obligated to, agree in advance to
waive all or any portion of the management fee due from the
Portfolio or the administration fee due from the Fund, the
administration fee which would have accrued to Advisers
totaled 0.10% of the Fund's daily net assets. Advisers,
however, waived the entire amount. The Fund's proportionate
share of the Portfolio's management fees was 0.40%.
Advisers, however, waived a portion of the Portfolio's
management fee. With this reduction, the Fund's
proportionate share of the Portfolio's management fees was
0.23%. Total operating expenses, including administration
fees and the Fund's proportionate share of the Portfolio's
expenses, would have totaled .85%. After fee waivers, total
operating expenses of the Fund, including its proportionate
share of the Portfolio's operating expenses, totaled 0.45%.
This arrangement may be terminated by Advisers at any time.
It is not anticipated that the Portfolio or the Fund will
incur a significant amount of brokerage expenses because
adjustable rate securities are generally traded on a "net"
basis, that is, in principal transactions without the
addition or deduction of brokerage commissions. To the
extent that the Portfolio does participate in transactions
involving brokerage commissions, it is Advisers'
responsibility to select brokers through which such
transactions will be effected.
Shareholder accounting and many of the clerical functions
for the Fund are performed by Franklin/Templeton Investor
Services, Inc. ("Investor Services" or "Shareholder Services
Agent"), in its capacity as transfer agent and dividend
paying agent. Investor Services is a wholly-owned subsidiary
of Resources.
DISTRIBUTION EXPENSES
The Fund has adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act whereby it may
reimburse Distributors or others for expenses actually
incurred by Distributors or others in the promotion and
distribution of the Fund's shares, including but not limited
to, the printing of prospectuses and reports used for sales
purposes, expenses of preparation and distribution of sales
literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion
of Distributors' overhead expenses attributable to the
distribution of Fund shares, and fees paid to dealers or
others as a distribution or service fee for servicing
shareholders of the Fund. The maximum amount which the Fund
may pay to Distributors or others for such distribution
expenses is 0.25% per annum of the average daily net assets
of the Fund, payable on a quarterly basis. All expenses of
distribution and marketing in excess of 0.25% per annum will
be borne by Distributors or others who have incurred them,
without reimbursement from the Fund. The Plan also covers
any payments to or by the Fund, Distributors, or other
parties on behalf of the Fund or Distributors, to the extent
such payments are deemed to be for the financing of any
activity primarily intended to result in the sale of shares
issued by the Fund within the context of Rule 12b-1. The
payments under the Plan are included in the maximum
operating expenses which may be borne by the Fund.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make
to its shareholders:
1.EINCOME DIVIDENDS. The Fund receives income primarily in
the
form of income dividends paid by the Portfolio. This income,
less the expenses incurred in the Fund's operations, is its
net investment income from which income dividends may be
distributed. Thus, the amount of dividends paid per share
may vary with each distribution.
2.ECAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital
gains or losses in connection with sales or other
dispositions of its portfolio securities. Distributions by
the Fund derived from net short-term and net long-term
capital gains (after taking into account any net capital
loss carryovers) may generally be made once a year in
December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31. These
distributions, when made, will generally be fully taxable to
the Fund's shareholders. The Fund may make more than one
distribution derived from net short-term and net long-term
capital gains in any year or adjust the timing of these
distributions for operational or other reasons.
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without
prior notice to or approval by shareholders, the Fund's
current policy is to declare income dividends daily and pay
them monthly on or about the last business day of that
month. The amount of income dividend payments by the Fund is
dependent upon the amount of net income received by the Fund
from the Portfolio (and the amount of income received by the
Portfolio from its investments), is not guaranteed and is
subject to the discretion of the Board of Trustees. THE FUND
DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF
RETURN ON AN INVESTMENT IN ITS SHARES.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain
distributions, if any, will be automatically reinvested in
the shareholder's account in the form of additional shares,
valued at the closing net asset value (without sales charge)
on the dividend reinvestment date. Shareholders have the
right to change their election with respect to the receipt
of distributions by notifying the Fund, but any such change
will be effective only as to distributions for which the
reinvestment date is seven or more business days after the
Fund has been notified. See the SAI for more information.
Many of the Fund's shareholders receive their distributions
in the form of additional shares. This is a convenient way
to accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so
acquired remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application
included with this Prospectus, a shareholder may direct the
selected distributions to another fund in the Franklin Group
of Funds(Registered Trademark) or the Templeton Funds, to
another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the
Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last
option is requested, the shareholder should allow at least
15 days for initial processing. Dividends which may be paid
in the interim will be sent to the address of record.
Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services
Department. Dividend and capital gain distributions are
eligible for investment in another fund in the Franklin
Group of Funds or the Templeton Funds at net asset value.
See "Purchases at Net Asset Value" under "How to Buy Shares
of the Fund."
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax
considerations that affect mutual funds and their
shareholders. Additional information on tax matters relating
to the Fund and its shareholders is included in the section
entitled "Additional Information Regarding Taxation" in the
SAI.
The Fund is treated as a separate entity for federal income
tax purposes. The Fund has elected and qualified to be
treated as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended (the
"Code"). By distributing all of its net investment income
and net realized short-term and long-term capital gain for a
fiscal year in accordance with the timing requirements
imposed by the Code and by meeting certain other
requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable
for federal income or excise taxes.
For federal income tax purposes, any income dividends which
the shareholder receives from the Fund, as well as any
distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to
receive them in cash or in additional shares. Distributions
derived from the excess of net long-term capital gain over
net short-term capital loss are treated as long-term capital
gain regardless of the length of time the shareholder has
owned Fund shares and regardless of whether such
distributions are received in cash or in additional shares.
None of the distributions paid by the Fund for the fiscal
year ended October 31, 1994, qualified for the corporate
dividendsreceived deduction and it is not expected that
distributions for the current fiscal year will so qualify.
Pursuant to the Code, certain distributions which are
declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder
until the following January, will be treated as if received
by the shareholder on December 31 of the calendar year in
which they are declared.
Redemptions and exchanges of Fund shares are taxable events
on which a shareholder may realize a gain or loss. Any loss
incurred on sale or exchange of the Fund's shares, held for
six months or less, will be treated as a long-term capital
loss to the extent of capital gain dividends received with
respect to such shares. Shareholders should consult with
their tax advisors concerning the tax rules applicable to
the redemption and exchange of fund shares.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid and
will promptly after the close of each calendar year advise
shareholders of the tax status for federal income tax
purposes of such dividends and distributions.
While many states grant tax-free status to dividends paid to
shareholders of mutual funds from interest income earned by
the Fund from direct obligations of the U.S. government,
none of the distributions of the Fund during fiscal year
ending October 31, 1994, qualified for such tax-free
treatment. Investments in mortgage-backed securities
(including GNMA, FNMA and FHLMC securities) and repurchase
agreements collateralized by U.S. government securities do
not qualify as direct federal obligations in most states.
Shareholders should consult with their own tax advisors with
respect to the applicability of state and local intangible
property or income taxes to their shares of the Fund and
distributions and redemption proceeds received from the
Fund.
Shareholders who are not U.S. persons for purposes of
federal income taxation should consult with their financial
or tax advisors regarding the applicability of U.S.
withholding taxes to distributions received by them from the
Fund and the application of foreign tax laws to these
distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through
securities dealers which execute an agreement with
Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The
minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans
established at Franklin. The Fund and Distributors reserve
the right to refuse any order for the purchase of shares.
The Fund may impose a $10 charge for each returned item,
against any shareholder account which, in connection with
the purchase of Fund shares, submits a check or a draft
which is returned unpaid to the Fund.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is the net asset value per share, plus a sales charge,
next computed (1) after the shareholder's securities dealer
receives the order which is promptly transmitted to the
Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a
completed Shareholder Application accompanied by a
negotiable check). The sales charge is a variable percentage
of the offering price, depending upon the amount of the
sale. On orders for 100,000 shares or more, the offering
price will be calculated to four decimal places. On orders
for less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net
asset value per share is included under the caption
"Valuation of Fund Shares."
Set forth below is a table of total sales charges or
underwriting commissions and dealer concessions:
Total Sales
Charge
As a As a
Size of Percentage Percentage Dealer
Concession
Transaction of Offering of Net As a
Percentage
at Offering Price Price Amount of
Offering
Invested
Price*, ***
Less than $100,000 2.25% 2.30% 2.00%
$100,000 but less than
$250,000 1.75% 1.78%
1.50%
$250,000 but less than
$500,000 1.25% 1.26%
1.00%
$500,000 but less than
$1,000,000 1.00% 1.00%
0.85%
$1,000,000 or more none none (see
below)**
*Financial institutions or their affiliated brokers may
receive an agency transaction fee in the percentages set
forth above.
**The following commissions will be paid by Distributors,
out of its own resources, to securities dealers who initiate
and are responsible for purchases of $1 million or more:
0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus
0.50% on sales of $3 million but less than $50 million, plus
0.25% on sales of $50 million but less than $100 million,
plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for
purposes of additional purchases.
***At the discretion of Distributors, all sales charges may
at times be allowed to the securities dealer. If 90% or more
of the sales commission is allowed, such securities dealer
may be deemed to be an underwriter as that term is defined
in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1
million or more, but a contingent deferred sales charge of
1% is imposed on certain redemptions all or a portion of
investment of $1 million or more within 12 months of the
calendar month following such investments ("contingency
period"). See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
The size of a transaction which determines the applicable
sales charge on the purchase of Fund shares is determined by
adding the amount of the shareholder's current purchase plus
the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the
funds in the Franklin Group of Funds(Registered Trademark)
and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the
Franklin Group of Funds except Franklin Valuemark Funds and
Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors
or its affiliates (although certain investments may not have
the same schedule of sales charges and/or may not be subject
to reduction) and (c) the U.S. mutual funds in the Templeton
Group of Funds except Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). (Franklin Funds and Templeton Funds
are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors or one of its affiliates, out of its own
resources, may also provide additional compensation to
securities dealers in connection with sales of shares of the
Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers in connection with
conferences, sales or training
programs for their employees, seminars for the public,
advertising, sales campaigns and/or shareholder services and
programs regarding one or more of the Franklin Templeton
Funds and other dealer-sponsored programs or events. In some
instances, this compensation may be made available only to
certain securities dealers whose representatives have sold
or are expected to sell significant amounts of shares of the
Franklin Templeton Funds. Compensation may include payment
for travel expenses, including lodging, incurred in
connection with trips taken by invited registered
representatives and members of their families to locations
within or outside of the United States for meetings or
seminars of a business nature. Dealers may not use sales of
the Fund's shares to qualify for this compensation to the
extent such may be prohibited by the laws of any state or
any self-regulatory agency, such as the National Association
of Securities Dealers, Inc. None of the aforementioned
additional compensation is paid for by the Fund or its
shareholders.
Certain officers and trustees of the Fund are also
affiliated with Distributors. A detailed description is
included in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which
provide for a reduced sales charge. To be certain to obtain
the reduction of the sales charge, the investor or the
dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In
determining whether a purchase qualifies for any of the
discounts, investments in any Franklin Templeton Investments
may be combined with those of the investor's spouse and
children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is
available, even though there may be a number of
beneficiaries of the account.
In addition, an investment in the Fund may qualify for a
reduction in the sales charge under the following programs:
1.ERIGHTS OF ACCUMULATION. The cost or current value
(whichever is higher) of existing investments in the
Franklin Templeton Investments may be combined with the
amount of the current purchase in determining the sales
charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for
a reduced sales charge on a purchase of shares of the Fund
by completing the Letter of Intent section of the
Shareholder Application (the "Letter of Intent" or
"Letter"). By completing the Letter, the investor expresses
an intention to invest during the next 13 months a specified
amount which, if made at one time, would qualify for a
reduced sales charge, grants to Distributors a security
interest in the reserved shares and irrevocably appoints
Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares
for the purpose of paying any additional sales charge due.
Purchases under the Letter will conform with the
requirements of Rule 22d-1 under the 1940 Act. The investor
or the investor's securities dealer must inform Investor
Services or Distributors that this Letter is in effect each
time a purchase is made.
AN INVESTOR ACKNOWLEDGES AND AGREES TO THE FOLLOWING
PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of
the total intended purchase will be reserved in shares of
the Fund,
registered in the investor's name, to assure that the full
applicable sales charge will be paid if the intended
purchase is not completed. The reserved shares will be
included in the total shares owned as reflected on periodic
statements; income and capital gain distributions on the
reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by
the investor until the Letter of Intent has been completed,
or the higher sales charge paid. For more information, see
"Additional Information Regarding Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of
the current purchase. For example, if members of the group
had previously invested and still held $80,000 of Fund
shares and now were investing $25,000, the sales charge
would be 1.75%. Information concerning the current sales
charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence
for more than six months, (ii) has a purpose other than
acquiring Fund shares at a discount and (iii) satisfies
uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, be available
to arrange for group meetings between representatives of the
Fund or Distributors and the members, agree to include sales
and other materials related to the Fund in its publications
and mailings to members at reduced or no cost to
Distributors, and seek to arrange for payroll deduction or
other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such
time as the investor notifies the Fund and the investor's
employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the
payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time
the money reaches the Fund. The investment in the Fund will
be made at the offering price per share determined on the
day that both the check and payroll deduction data are
received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition
of either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, trustees,
directors and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members including any
subsequent payments made by such parties after cessation of
employment; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer;
(3) insurance company separate accounts for pension plan
contracts; (4) accounts managed by the Franklin Templeton
Group; (5) Shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund under an
employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the
Fund; (6) certain unit investment trusts and unit holders of
such trusts reinvesting their distributions from the trusts
in the Fund; (7) registered
securities dealers and their affiliates, for their
investment account only, and (8) registered personnel and
employees of securities dealers and by their spouses and
family members, in accordance with the internal policies and
procedures of the employing securities dealer.
Shares of the Fund may be purchased at net asset value by
persons who have redeemed, within the previous 120 days,
their shares of the Fund or another of the Franklin
Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on
redemption. An investor may reinvest an amount not exceeding
the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed
and subsequently repurchased, a new contingency period will
begin. Shares of the Fund redeemed in connection with an
exchange into another fund (see "Exchange Privilege") are
not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of
shares of the Fund must be received by the Fund or the
Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other
financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the
amount of gain or loss recognized and the tax basis of the
shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in
the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a
reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the
shareholder may also be used to purchase shares of the Fund
or another of the Franklin Templeton Funds at net asset
value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such
distribution. To exercise this privilege, a written request
to reinvest the distribution must accompany the purchase
order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions
in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by investors who have, within the past 60 days, redeemed an
investment in an unaffiliated mutual fund which charged the
investor a contingent deferred sales charge upon redemption
and which has investment objectives similar to those of the
Fund.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by broker-dealers who have entered into a supplemental
agreement with Distributors, or by registered investment
advisers affiliated with such broker dealers on behalf of
their clients who are participating in a comprehensive fee
program (sometimes known as a wrap fee program).
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by anyone who has taken a distribution from an existing
retirement plan already invested in the Franklin Templeton
Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such
distribution. In order to exercise this privilege a written
order for the purchase of
shares of the Fund must be received by Franklin Templeton
Trust Company (the "Trust Company"), the Fund or Investor
Services, within 120 days after the plan distribution. A
prospectus outlining the investment objectives and policies
of a fund in which the shareholder wishes to invest may be
obtained by calling toll free at 1-800/DIAL BEN (1-800/342
5236).
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by any state, county, or city, or any
instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment
laws from paying a sales charge or commission in connection
with the purchase of shares of any registered management
investment company ("an eligible governmental authority").
SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors
considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net
asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors
or one of its affiliates may make a payment, out of their
own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by certain designated retirement plans, including
profit sharing, pension, 401(k) and simplified employee
pension plans ("designated plans"), subject to minimum
requirements with respect to number of employees or amount
of purchase, which may be established by Distributors.
Currently those criteria require that the employer
establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13
month period in the Fund or in any of the Franklin Templeton
Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of
the Code ("non-designated plans") may be afforded the same
privilege if they meet the above requirements as well as the
uniform criteria for qualified groups previously described
under "Group Purchases" which enable Distributors to realize
economies of scale in its sales efforts and sales related
expenses.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trust companies and bank trust departments for funds over
which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are
subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors.
Currently, those criteria require that the amount invested
or to be invested during the subsequent 13-month period in
this Fund or any of the Franklin Templeton Investments must
total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds
received by the close of business on the next business day
following such order.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trustees or other fiduciaries purchasing securities for
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without
regard to where such assets are currently invested.
Refer to the SAI for further information.
GENERAL
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling
Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND IN
CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or employer
sponsored retirement plans involving tax-deferred
investments. The Fund may be used as an investment vehicle
for an existing retirement plan, or Franklin Templeton Trust
Company ( the "Trust Company") may provide the plan
documents and serve as custodian or trustee. A plan
document must be adopted for a retirement plan to be in
existence.The Trust Company, an affiliate of Distributors,
can serve as custodian or trustee for retirement plans.
Brochures for the Trust Company plans contain important
information regarding eligibility, contribution and deferral
limits and distribution requirements. Please note that an
application other than the one contained in this Prospectus
must be used to establish a retirement plan account with the
Trust Company. To obtain a retirement plan brochure or
application, call toll free 1-800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan
accounts. Specific forms are required to be completed for
distributions from Franklin Templeton Trust Company
retirement plans.
Individuals and plan sponsors should consult with legal, tax
or benefits and pension consultants before choosing a
retirement plan. In addition, retirement plan investors
should consider consulting their investment representatives
or advisers concerning decisions within their plans.
OTHER PROGRAMS AND PRIVILEGES
AVAILABLE TO FUND SHAREHOLDERS
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS
SECTION MAY NOT BE AVAILABLE DIRECTLY FROM THE FUND TO
SHAREHOLDERS WHOSE SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT, OR
NETWORKED ACCOUNT THROUGH THE NATIONAL SECURITIES CLEARING
CORPORATION ("NSCC") (SEE THE SECTION CAPTIONED "ACCOUNT
REGISTRATIONS" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and
capital gain distributions, are generally credited to an
account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining
shares in
uncertificated form (also known as "plan balance") minimizes
the risk of loss or theft of a share certificate. A lost,
stolen or destroyed certificate cannot be replaced without
obtaining a sufficient indemnity bond. The cost of such a
bond, which is generally borne by the shareholder, can be 2%
or more of the value of the lost, stolen or destroyed
certificate. A certificate will be issued if requested in
writing by the shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that
period and after each other transaction which affects the
shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including
the number of shares in "plan balance" for the account of
the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be
able to arrange to make additional purchases of shares
automatically on a monthly basis by electronic funds
transfer from a checking account, if the bank which
maintains the account is a member of the Automated Clearing
House, or by preauthorized checks drawn on the shareholder's
bank account. A shareholder may, of course, terminate the
program at any time. The Shareholder Application included
with this Prospectus contains the requirements applicable to
this program. In addition, shareholders may obtain more
information concerning this program from their securities
dealers or from Distributors.
The market value of the Fund's shares is subject to
fluctuation. Before undertaking any plan for systematic
investment, the investor should keep in mind that such a
program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided
that the net asset value of the shares held by the
shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal
Plan. The minimum amount which the shareholder may withdraw
is $50 per withdrawal transaction although this is merely
the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject
to mandatory distribution requirements are not subject to
the $50 minimum. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder
establishes a plan, any capital gain distributions and
income dividends paid by the Fund will be reinvested for the
shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of
shares at net asset value on the day of the transaction
(which is generally the first business day of the month in
which the payment is scheduled) with payment generally
received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may
direct the selected withdrawals to another of the Franklin
Templeton Funds, to another person, or directly to a
checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder
should allow at
least 15 days for initial processing. Withdrawals which may
be paid in the interim will be sent to the address of
record. Liquidation of shares may reduce or possibly exhaust
the shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and
distributions, particularly in the event of a market
decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a
sale for federal income tax purposes. Because the amount
withdrawn under the plan may be more than the shareholder's
actual yield or income, part of the payment may be a return
of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the
additional purchases. The shareholder should ordinarily not
make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time
such a plan is in effect. A Systematic Withdrawal Plan may
be terminated on written notice by the shareholder or the
Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's
receipt of notification of the death or incapacity of the
shareholder. Shareholders may change the amount (but not
below the specified minimum) and schedule of withdrawal
payments, or suspend one such payment by giving written
notice to Investor Services at least seven business days
prior to the end of the month preceding a scheduled payment.
Share certificates may not be issued while a Systematic
Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual
funds with various investment objectives or policies. The
shares of most of these mutual funds are offered to the
public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the
Fund shares may be exchanged for shares of other Franklin
Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such
fund's stated eligibility requirements and investment
minimums. Investors should review the prospectus of the fund
they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations
on exercising the exchange privilege, for example, minimum
holding periods or applicable sales charges. Exchanges may
be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of
the written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD,
IF ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY
CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS SYSTEM (DAY OR NIGHT) AT 1-800/247-1753.
IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO
A PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD
BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to
effect exchanges from the Fund into an identically
registered account in one of the other available Franklin
Templeton Funds. The Telephone Exchange Privilege is
available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The
Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are
genuine. Please refer to "Telephone Transactions
Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be
difficult to implement and the eleFACTS option may not be
available. In this event, shareholders should follow the
other exchange procedures discussed in this section,
including the procedures for processing exchanges through
securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the
Fund's shares, Investor Services will accept exchange orders
by telephone or by other means of electronic transmission
from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be
effective only for uncertificated shares on deposit in the
shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a
fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject
to a contingent deferred sales charge in the original fund
purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will
be imposed. The contingency period will be tolled (or
stopped) for the period such shares are exchanged into and
held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
Exchanges are made on the basis of the net asset values of
the funds involved, except as set forth below. Exchanges of
shares of the Fund which were purchased without a sales
charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless
the investment on which no sales charge was paid was
transferred in from a fund on which the investor paid a
sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a
higher sales charge will be charged the difference, unless
the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests
the exchange of the total value of the Fund account, accrued
but unpaid income dividends and capital gain distributions
will be reinvested in the Fund at the net asset value on the
date of the exchange, and then the entire share balance will
be exchanged into the new fund in accordance with the
procedures set forth above. Because the exchange is
considered a redemption and purchase of shares, the
shareholder may realize a gain or loss
for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding
the possible tax consequences of such an exchange is
included in the tax section in this Prospectus and in the
SAI.
There are differences among the Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the
shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the
Fund pursuant to the exchange privilege, the Fund might have
to liquidate portfolio securities it might otherwise hold
and incur the additional costs related to such transactions.
On the other hand, increased use of the exchange privilege
may result in periodic large inflows of money. If this
should occur, it is the general policy of the Fund to
initially invest this money in short-term, interest-bearing
money market instruments, unless it is felt that attractive
investment opportunities consistent with the Fund's
investment objectives exist immediately. Subsequently, this
money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as
orderly a manner as is possible when attractive investment
opportunities arise.
The Exchange Privilege may be modified or discontinued by
the Fund at any time upon 60 days' written notice to
shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may
accomplish exchanges directly. Certain restrictions may
apply, however, to other types of retirement plans. See
"Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market
timing services to purchase or redeem shares based on
predetermined market indicators ("Timing Accounts") will be
charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective
prospectuses, certain funds do not accept or may place
differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose
transactions seem to follow a timing pattern who: (i) make
an exchange request out of the Fund within two weeks of an
earlier exchange request out of the Fund, or (ii) make more
than two exchanges out of the Fund per calendar quarter, or
(iii) exchange shares equal in value to at least $5 million,
or more than 1% of the Fund's net assets. Accounts under
common ownership or control, including accounts administered
so as to redeem or purchase shares based upon certain
predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of
exchange requests by any Timing Account, person, or group
if, in the Manager's judgment, the Fund would be unable to
invest
effectively in accordance with its investment objectives and
policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be
restricted or refused
if the Fund receives or anticipates simultaneous orders
affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and
therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order
for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and
receive from the Fund the value of the shares. Shares may be
redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of
this Prospectus, and any share certificates which have been
issued for the shares being redeemed, properly endorsed and
in order for transfer. The shareholder will then receive
from the Fund the value of the shares based upon the net
asset value per share next computed after the written
request in proper form is received by Investor Services.
Redemption requests received after the time at which the net
asset value is calculated (at 1:00 p.m. Pacific time) each
day that the New York Stock Exchange (the "Exchange") is
open for business will receive the price calculated on the
following business day. Shareholders are requested to
provide a telephone number(s) where they may be reached
during business hours, or in the evening if preferred.
Investor Services' ability to contact a shareholder promptly
when necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE
GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE
FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone
other than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any
address other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in
excess of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based on
the transfer instructions, including, for example, when
(a) the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund,
(c) the Fund has been notified of an adverse claim, (d)
the instructions received by the Fund are given by an
agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each
other are separated or may be the subject of divorce
proceedings, or (f) the authority of a representative of
a corporation, partnership, association, or other entity
has not been established to the satisfaction of
the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the
Securities Exchange Act of 1934. Generally, eligible
guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust
companies, savings banks, industrial loan companies and
credit unions; (2) national securities exchanges, registered
securities associations and clearing agencies; (3)
securities dealers which are members of a national
securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that
participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee
medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied
by the share certificate and a share assignment form signed
by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced
above. Shareholders are advised, for their own protection,
to send the share certificate and assignment form in
separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court
jurisdiction require the following documentation to be in
proper form:
Corporation - (1) Signature guaranteed letter of instruction
from the authorized officer(s) of the corporation and (2) a
corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction
from a general partner and (2) pertinent pages from the
partnership agreement identifying the general partners or a
certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from
the trustee(s) and (2) a copy of the pertinent pages of the
trust document listing the trustee(s) or a Certification for
Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents
and the applicable state law since these accounts have
varying requirements, depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper
form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"),
included with this Prospectus may redeem shares of the Fund
by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts.
INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR
INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY
CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL
EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS
GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS
DESCRIBED UNDER "TELEPHONE TRANSACTIONS - VERIFICATION
PROCEDURES."
For shareholder accounts with the completed Agreement on
file, redemptions of uncertificated shares or shares which
have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00
p.m. Pacific time on any business day will be processed that
same day. The redemption check will be sent within seven
days, made payable to all the registered owners on the
account, and will be sent only to the address of record.
Redemption requests by telephone will not be accepted within
30 days following an address change by telephone. In that
case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments,
government entities, and qualified retirement plans which
qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department
by telephoning 1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities dealers who
have entered into a dealer or similar agreement with
Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is
that if the shareholder redeems shares through a dealer, the
redemption price will be the net asset value next calculated
after the shareholder's dealer receives the order which is
promptly transmitted to the Fund, rather than on the day the
Fund receives the shareholder's written request in proper
form. These documents, as described in the preceding
section, are required even if the shareholder's securities
dealer has placed the repurchase order. After receipt of a
repurchase order from the dealer, the Fund will still
require a signed letter of instruction and all other
documents set forth above. A shareholder's letter should
reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name.
Details of the dealerordered trade, such as trade date,
confirmation number, and the amount of shares or dollars,
will help speed processing of the redemption. The seven-day
period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives
all documents required to complete ("settle") the repurchase
in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle
the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded
to the Fund as soon as possible. The shareholder's dealer
may charge a fee for handling the order. The SAI contains
more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers
on investments of $1 million or more, a contingent deferred
sales charge of 1% applies to redemptions of those
investments within the contingency period of 12 months of
the calendar month following their purchase. The charge is
1% of the lesser of the value of the shares redeemed
(exclusive of reinvested dividends and capital gain
distributions) or the total cost of such shares,
and is retained by Distributors. In determining if a charge
applies, shares not subject to a contingent deferred sales
charge are deemed to be redeemed first, in the following
order: (i) shares representing amounts attributable to
capital appreciation of those shares held less than 12
months; (ii) shares purchased with reinvested dividends and
capital gain distributions; and (iii) other shares held
longer than 12 months; and followed by any shares held less
than 12 months, on a "first in, first out" basis.
The contingent deferred sales charge is waived for:
exchanges; any account fees; distributions to participants
in Trust Company retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of
excess contributions to employee benefit plans;
distributions from employee benefit plans, including those
due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to
February 1, 1995 and, for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's
net asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to a
shareholder's account falling below the minimum specified
account size. In addition, shares of participants in Trust
Company retirement plan accounts will, in the event of
death, disability or attainment of age 59 1/2, no longer be
subject to the contingent deferred sales charge.
Requests for redemptions for a specified dollar amount
unless otherwise specified, will result in additional shares
being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific
number of shares will result in the applicable contingent
deferred sales charge being deducted from the total dollar
amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used to
purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these
checks will also be held pending clearance. Shares purchased
by federal funds wire are available for immediate
redemption. In addition, the right of redemption may be
suspended or the date of payment postponed if the Exchange
is closed (other than customary closing) or upon the
determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it,
by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount invested
by the shareholder, depending on fluctuations in the market
value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of
certain additional forms to ensure compliance with IRS
regulations. To liquidate a retirement account, a
shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from
such plans to a participant under age 59 1/2, unless the
distribution meets one of the exceptions set forth in the
Code, as defined in Treasury regulations.
OTHER
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services
Department or the securities dealer may call Franklin's
Dealer Services Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative
of record, if any, may be able to execute various
transactions by calling Investor Services at 1-800/632-2301.
All shareholders will be able to: (i) effect a change in
address, (ii) change a dividend option (see "Restricted
Accounts" below), (iii) transfer Fund shares in one account
to another identically registered account in the Fund, and
(iv) exchange Fund shares as described in this Prospectus by
telephone. In addition, shareholders who complete and file
an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem
shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by
telephone are genuine. These will include: recording all
telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or
account information requested by the telephone service agent
at the time of the call for the purpose of establishing the
caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the
Fund and Investor Services follow instructions communicated
by telephone which were reasonably believed to be genuine at
the time of their receipt, neither they nor their affiliates
will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under
no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction
will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur
because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To
assure compliance with all applicable regulations, special
forms are required for any distribution, redemption, or
dividend payment. While the telephone exchange privilege is
extended to Franklin Templeton IRA and 403(b) retirement
accounts, certain restrictions may apply to other types of
retirement plans. Changes to dividend options must also be
made in writing.
To obtain further information regarding distribution or
transfer procedures, including any required forms,
retirement account shareholders may call to speak to a
Retirement Plan Specialist at 1-800/527-2020 for Franklin
accounts or 1-800/354-9191 (press "2" when prompted to do
so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will be
difficult to execute because of heavy telephone volume. In
such situations, shareholders may wish to contact their
investment representative for assistance, or to send written
instructions to the Fund as detailed elsewhere in this
Prospectus.
Neither the Fund nor Investor Services will be liable for
any losses resulting from the inability of a shareholder to
execute a telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written
notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as
of 1:00 p.m. Pacific time each day that the Exchange is open
for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and
"ask" (offering price, which includes the maximum front-end
sales charge of the Fund).
The net asset value per share of the Fund is determined in
the following manner: The aggregate of all liabilities,
including accrued expenses and taxes and any necessary
reserves, is deducted from the aggregate gross value of all
assets, and the difference is divided by the number of
shares of the Fund outstanding at the time. For the purpose
of determining the aggregate net assets of the Fund, cash
and receivables are valued at their realizable amounts.
Interest is recorded as accrued. Under procedures approved
by the Board of Trustees of Adjustable Rate Securities
Portfolios, the securities of the Portfolio (in which the
Fund invests all of its assets) are valued at current market
value provided by a pricing service, bank or securities
dealer, when over-the-counter market quotations are readily
available. Securities and other assets for which market
prices are not readily available are valued at fair value as
determined following procedures approved by the Board of
Trustees.
With the approval of trustees, the Portfolio may utilize a
pricing service, bank or securities dealer to perform any of
the above described functions. The Portfolio advises the
Fund of the net asset value of the Portfolio shares which is
used to calculate the net asset value of the Fund's shares.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's
account should be directed to Investor Services at the
address shown on the back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current
price, yield or performance information specific to a fund
in the Franklin Funds by calling the automated Franklin
TeleFACTS system (day or night) at 1-800/247-1753.
Information about the Fund may be accessed by entering Fund
Code 51 followed by the # sign, when requested to do so by
the automated operator. The TeleFACTS system is also
available for processing exchanges. See "Exchange
Privilege."
To assist shareholders and securities dealers wishing to
speak directly with a representative, the following is a
list of the various Franklin departments, telephone numbers
and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
HOURS OF OPERATION (PACIFIC
TIME)
DEPARTMENT NAME TELEPHONE NO. (MONDAY THROUGH FRIDAY)
Shareholder Services 1-800/632-2301 6:00 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 6:00 a.m. to 5:00
p.m. Fund Information 1-800/DIAL BEN 6:00 a.m. to 8:00
p.m.
8:30 a.m. to 5:00 p.m. (Saturday)
Retirement Plans 1-800/527-2020 6:00 a.m. to 5:00 p.m.
TDD (hearing 1-800/851-0637 6:00 a.m. to 5:00 p.m.
impaired)
In order to ensure that the highest quality of service is
being provided, telephone calls placed to or by
representatives in Franklin's service departments may be
accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions of
total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or
risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of
$1,000 invested at the maximum public offering price
(offering price includes front-end sales charge) for one-,
five- and ten-year periods, or portion thereof, to the
extent applicable, through the end of the most recent
calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return
quotations for other periods or based on investments at
various sales charge levels or at net asset value. For such
purposes total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of
all distributions, plus (or minus) the change in the value
of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the
Fund's portfolio investments; it is calculated by dividing
the Fund's net investment income per share during a recent
30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield, which is calculated according to a formula prescribed
by the SEC (see the SAI), is not indicative of the dividends
or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate,
which may be quoted to shareholders. The current
distribution rate is computed by dividing the total amount
of dividends per share paid by the Fund during the past 12
months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the
amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize
the dividends paid during the period such policies were in
effect, rather than using the dividends during the past 12
months. The current distribution rate differs from the
current yield computation because it may include
distributions to shareholders from sources other than
dividends and interest, such as shortterm capital gain, and
is calculated over a different period of time.
In each case, performance figures are based upon past
performance, reflect all recurring charges against Fund
income and will assume the payment of the maximum sales
charge on the purchase of shares. When there has been a
change in the sales charge structure, the historical
performance figures will be restated to reflect the new
rate. The investment results of the Fund, like all other
investment companies, will fluctuate over time; thus,
performance figures should not be considered to represent
what an investment may earn in the future or what the Fund's
yield, distribution rate or total return may be in any
future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Trust's fiscal year ends October 31. Annual Reports
containing audited financial statements of the Trust,
including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically
sent to shareholders.Copies may be obtained by investors or
shareholders, without charge, upon request to the Trust at
the telephone number or address set forth on the cover page
of this Prospectus.
Additional information on Fund performance is included in
the Trust's Annual Report to Shareholders and the SAI.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on
December 16, 1986. The Trust is authorized to issue an
unlimited number of shares of beneficial interest, with a
par value of $.01 per share in various series. All shares
have one vote and, when issued, are fully paid, non
assessable, and redeemable. Currently, the Trust issues
shares in six separate and distinct series.
The Portfolio is a series of Adjustable Rate Securities
Portfolios, a Delaware business trust, organized on February
15, 1991. Adjustable Rate Securities Portfolios is
authorized to issue an unlimited number of shares of
beneficial interest, with a par value of $.01 per share. All
shares have one vote and, when issued, are fully paid, non
assessable, and redeemable. Currently, Adjustable Rate
Securities Portfolios issues shares in only two series;
however, additional series may be added in the future by the
Board of Trustees, the assets and liabilities of which will
be separate and distinct from any other series.
VOTING RIGHTS
Shares of each series of the Trust have equal voting,
dividend and liquidation rights. Shares of each series of
the Trust vote separately as to issues affecting that
series, or the Trust, unless otherwise permitted by the 1940
Act. The shares have noncumulative voting rights, which
means that holders of more than 50% of the shares voting for
the election of trustees can elect 100% of the trustees if
they choose to do so. The Trust does not intend to hold
annual shareholders' meetings. The Trust may, however, hold
a meeting for such purposes as changing fundamental
investment restrictions, approving a new management
agreement or any other matters which are required to be
acted on by shareholders under the 1940 Act. Whenever the
Fund is requested to vote on a fundamental policy pertaining
to the Portfolio, it will hold a special meeting of Fund
shareholders and will cast its vote in the same proportion
as the shareholders' votes received. A meeting may also be
called by a
majority of the Board of Trustees or by shareholders holding
at least 10% of the shares entitled to vote at the meeting.
Shareholders may receive assistance in communicating with
other shareholders in connection with the election or
removal of trustees such as that provided in Section 16(c)
of the 1940 Act. The Board of Trustees may from time to time
establish other series of the Trust, the assets and
liabilities of which will be separate and distinct from any
other series.
Shares have no preemptive or subscription rights and are
fully transferable. There are no conversion rights; however,
holders of shares of any fund may reinvest all or any
portion of the proceeds from the redemption or repurchase of
such shares into shares of another fund as described in
"Exchange Privilege."
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value,
shares of any shareholder whose account has a value of less
than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of
shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided
advance notice is given to the shareholder. More information
is included in the SAI.
OTHER INFORMATION
Distribution or redemption checks sent to shareholders do
not earn interest or any other income during the time such
checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss to the shareholder
caused by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check,
draft or wire. The Fund has no facility to receive, or pay
out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's
intentions as to ownership. Where there are two co-owners on
the account, the account will be registered as "Owner 1" and
"Owner 2"; the "or" designation is not used except for money
market fund accounts. If co-owners wish to have the ability
to redeem or convert on the signature of only one owner, a
limited power of attorney may be used.
Accounts should not be registered in the name of a minor
either as sole or co-owner of the account. Transfer or
redemption for such an account may require court action to
obtain release of the funds until the minor reaches the
legal age of majority. The account should be registered in
the name of one "Adult" as custodian for the benefit of the
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for"
should only be used if the account is being established
pursuant to a legal, valid trust document. Use of such a
designation in the absence of a legal trust document may
cause difficulties and require court action for transfer or
redemption of the funds.
Shares, whether in certificate form or not, registered as
joint tenants or "Jt Ten" shall mean "as joint tenants with
rights of survivorship" and not "as tenants in common."
Except as indicated, a shareholder may transfer an account
in the
Fund carried in "street" or "nominee" name by the
shareholder's securities dealer to a comparably registered
Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have
executed dealer agreements on file with Distributors. Unless
a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and
will so inform the shareholder's delivering securities
dealer. To effect the transfer, a shareholder should
instruct the securities dealer to transfer the account to a
receiving securities dealer and sign any documents required
by the securities dealer(s) to evidence consent to the
transfer. Under current procedures the account transfer may
be processed by the delivering securities dealer and the
Fund after the Fund receives authorization in proper form
from the shareholder's delivering securities dealer. In the
future it may be possible to effect such transfers
electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner
or the owner's nominee listed in publicly available nominee
lists, regardless of whether the account was initially
registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of
record on an investor's account, the investor will be deemed
to have authorized the use of electronic instructions on the
account, including, without limitation, those initiated
through the services of the NSCC, to have adopted as
instruction and signature any such electronic instructions
received by the Fund and the Shareholder Services Agent, and
to have authorized them to execute the instructions without
further inquiry. At the present time, such services which
are available, or which are anticipated to be made available
in the near future, include the NSCC's "Networking,"
"Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment,
or by calling Franklin's Fund Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund
may be required to report to the IRS any taxable dividend,
capital gain distribution, or other reportable payment
(including share redemption proceeds) and withhold 31% of
any such payments made to individuals and other non-exempt
shareholders who have not provided a correct taxpayer
identification number ("TIN") and made certain required
certifications that appear in the Shareholder Application. A
shareholder may also be subject to backup withholding if the
IRS or a securities dealer notifies the Fund that the number
furnished by the shareholder is incorrect or that the
shareholder is subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account
for any person failing to provide a TIN along with the
required certifications and (2) close an account by
redeeming its shares in full at the then-current net asset
value upon receipt of notice from the IRS that the TIN
certified as correct by the shareholder is in fact incorrect
or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a
certified TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day
to day portfolio management of the Portfolio in which the
Fund invests: Tony Coffey since 1989, Roger Bayston since
1991 and Jack Lemein since inception.
Tony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey holds a Master of Business Administration from
the University of California at Los Angeles. He earned his
Bachelor of Arts degree from Harvard University. Prior to
joining Franklin, Mr. Coffey was an associate with the
Analysis Group. He is a member of several securities
industry associations and joined Franklin in 1989.
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a
Master of Business Administration degree from the University
of California at Los Angeles. He earned his Bachelor of
Science degree from the University of Virginia. Prior to
joining Franklin, Mr. Bayston was an Assistant Treasurer for
Bankers Trust Company. Following completion of the Masters
degree program, Mr. Bayston joined Franklin in 1991.
Jack Lemein
Senior Vice President
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance
from the University of Illinois. Mr. Lemein has been in the
securities industry since 1967. He is a member of several
securities industry associations. Mr. Lemein joined Franklin
in 1984.
FRANKLIN INVESTORS SECURITIES TRUST
Franklin Adjustable Rate Securities
Fund 777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
ADMINISTRATOR
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors,
Inc. 777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
FRANKLIN ADJUSTABLE
RATE SECURITIES
FUND PROSPECTUS &
APPLICATION MARCH
1, 1995
CUSTODIAN
Bank of America NT
& SA
555 California
Street, 4th Floor
San Francisco, California 94104
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services,
Inc. 777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
333 Market Street
San Francisco, California 94105
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
For an enlarged version of this
prospectus, please call 1-800/DIAL
BEN.
Your Representative Is:
51 P 03/95
FRANKLIN
GLOBAL GOVERNMENT
INCOME FUND
FRANKLIN INVESTORS SECURITIES TRUST
PROSPECTUS MARCH 1, 1995
777 MARINERS ISLAND BLVD., P.O. BOX
7777 SAN MATEO, CA 94403-7777 1-
800/DIAL BEN
Franklin Global Government Income Fund (the "Fund"),
formerly known as Franklin Global Opportunity Income Fund, a
nondiversified separate series of Franklin Investors
Securities Trust (the "Trust"), seeks a high level of
current income, consistent with preservation of capital,
with capital appreciation as a secondary consideration. The
Fund seeks to achieve this objective through investing
primarily in debt securities issued by domestic and foreign
governments and related currency transactions. There can, of
course, be no assurance that the Fund's objective will be
achieved.
This Prospectus is intended to set forth in a clear and
concise manner information about the Fund that a prospective
investor should know before investing. After reading the
Prospectus, it should be retained for future reference; it
contains information about the purchase and sale of shares
and other items which the prospective investor will find
useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK; FURTHER, SUCH SHARES
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information concerning the Fund
and the Trust, dated March 1, 1995, as may be amended from
time to time, provides a further discussion of certain areas
in this Prospectus and other matters which may be of
interest to some investors. It has been filed with the
Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal
underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown
above.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN
DESCRIBED IN ANY STATE IN WHICH THE OFFERING IS NOT
AUTHORIZED. NO SALES REPRESENTATIVE, DEALER, OR OTHER PERSON
IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. FURTHER INFORMATION MAY BE OBTAINED FROM THE
UNDERWRITER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS PAGE
Expense Table
Financial Highlights
About the Trust
Investment Objective and Policies
Eof the Fund
Management of the Fund
Distributions to Shareholders
Taxation of the Fund
Eand Its Shareholders
How to Buy Shares of the Fund
Purchasing Shares of the Fund
Ein Connection with Retirement
Plans EInvolving Tax-Deferred
Investments Other Programs and
Privileges EAvailable to Fund
Shareholders Exchange Privilege
How to Sell Shares of the Fund
Telephone Transactions
Valuation of Fund Shares
How to Get Information Regarding
Ean Investment in the Fund
Performance
General Information
Account Registrations
Important Notice Regarding
ETaxpayer IRS Certifications
Portfolio Operations
EXPENSE TABLE
The purpose of this table is to assist an investor in
understanding the various costs and expenses that a
shareholder will bear directly or indirectly in connection
with an investment in the Fund. These figures are based on
aggregate operating expenses of the Fund for the fiscal year
ended October 31, 1994.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases 4.25% E(as
a percentage of offering price)
Deferred Sales Charge NONE*
Exchange Fee (per transaction) $5.00**
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees
0.56%
12b-1 Fees
0.07%*** Other Expenses:
EECustodian Fees 0.15% EEReports
to Shareholders 0.06%
EEOther 0.09%
Total Other Expenses
0.30%
Total Fund Operating Expenses
0.93%***
*Investments of $1 million or more are not subject to a front
end sales charge, but a contingent deferred sales charge of !5
is imposed on certain redemptions within 12 months of the
calendar month following such investments. See "How to Sell
Shares of the Fund-Contingent Deferred Sales Charge." **$5.00
fee imposed only on Timing Accounts as described
under "Exchange Privilege." All other exchanges are processed
without a fee.
***Based on the initial rate of Rule 12b-1 fees as discussed
in "Plan of Distribution" under "Management of the Fund."
Actual 12b-1 fees incurred by the Fund for the six months
ended October 31, 1994 were 0.03%, which represents an
annualized rate of 0.06%. Consistent with National
Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and
Rule 12b-1 fees could cause long-term shareholders to pay
more than the economic equivalent of the
maximum front-end sales charges permitted under those same
rules.
Investors should be aware that the above table is not
intended to reflect in precise detail the fees and expenses
associated with an individual's own investment in the Fund.
Rather the table has been provided only to assist investors
in gaining a more complete understanding of fees, charges and
expenses. For a more detailed discussion of these matters,
investors should refer to the appropriate sections of this
Prospectus.
EXAMPLE
As required by SEC regulations, the following example
illustrates the expenses, including the initial sales charge,
that apply to a $1,000 investment in the Fund over various
time periods assuming (1) a 5% annual rate of return
and (2) redemption at the end of each time period. As noted
in the table above, the Fund charges no redemption fees:
1 year 3 years 5 years 10 years
$52 $71 $92 $152
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING
EXPENSES SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY BE MORE
OR LESS THAN THOSE SHOWN. The operating expenses are borne
by the Fund and only indirectly by shareholders as a result
of their investment in the Fund. In addition, federal
regulations require the example to assume an annual return
of 5%, but the Fund's actual return may be more or less than
5%.
FINANCIAL HIGHLIGHTS
Set forth below is a table containing the financial
highlights for a share of the Fund throughout the fiscal
periods from the effective date of registration (March 15,
1988) to October 31, 1994. The information for each of the
periods ended in 1990 or later has been audited by Coopers &
Lybrand, independent auditors, whose audit report appears in
the financial statements in the Trust's Statement of
Additional Information. The remaining figures, which are
also audited, are not covered by the auditors' current
report. See the discussion "Reports to Shareholders" under
"General Information."
<TABLE>
<CAPTION>
Per Share Operating Performance+
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Net Realized Distributions Distributions
Values at Net & Unrealized Total From From Net Distributions From
Period Beginning Investment Gains (Losses) Investment Investment From Return+++ Total
Ended of Year Income on Securities Operations Income Capital Gains of Capital Distributions
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1989(1) $10.00 $ .66 $ .296 $ .956 $ (.558) $(.008) $ - $ (.566)
1990 10.39 1.11 (.804) .306 (1.116) - - (1.116)
1991 9.58 1.05 (.174) .876 (1.107) (.009) - (1.116)
1992 9.34 .86 .246 1.106 (.900) (.156) - (1.056)
1993 9.39 .83 (.698) .132 (.713) (.075) (.124) (.912)
1993(2) 8.61 .58 .716 1.296 (.576) - - (.576)
1994 9.33 1.30 (1.806) (.506) (.078) (.083) (.603) (.764)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
- ------------------------------------------------------------------------------------------
Ratio of Ratio of Net
Net Asset Net Assets Expenses Investment
Values at End to Average Income Portfolio
Period at End Total of Year Net Assets to Average Turnover
Ended of Year Return++ (in 000's) (See Note 6)** Net Assets Rate
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1989(1) $10.39 9.52%(1) $ 5,604 -% 9.92%* 2.05%
1990 9.58 2.69 12,421 .03 11.97 41.34
1991 9.34 9.27 29,660 .25 11.80 72.21
1992 9.39 12.15 78,911 .50 7.87 155.40
1993 8.61 1.08 153,899 .72 7.08 49.20
1993(2) 9.33 15.14 195,627 .77* 6.74* 67.36
1994 8.06 (5.72) 187,204 0.89 8.54 80.69
</TABLE>
(1) For the period March 15, 1988 (effective date of registration) to January
31, 1989.
(2) For the nine months ended October 31, resulting from a change in fiscal
year from January 31.
* Annualized.
+ Selected data for a share of capital stock outstanding throughout the period.
++ Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum initial sales charge, and assumes
reinvestment of dividends at the offering price and capital gains at net asset
value.
+++ Certain distributions have been reclassed to conform with SOP 93-2.
** During the periods indicated, Franklin Advisers, Inc., the investment
manager, reduced its management fees and reimbursed other expenses incurred by
the Fund. Had such action not been taken, the ratios of operating expenses to
average net assets would have been as follows:
<TABLE>
<S> <C>
1989(1).......... 1.71%*
1990............. .96
1991............. .87
1992............. .80
1993............. .73*
</TABLE>
ABOUT THE TRUST
The Trust is an open-end management investment company, or
mutual fund, organized as a Massachusetts business trust on
December 16, 1986 and registered with the SEC under the 1940
Act. The Fund and the other series of the Trust each issue a
separate series of shares of beneficial interest, each a
separate entity with its own investment objective and
policies and varying possibilities for income or capital
appreciation, and each subject to varying market risks. The
Fund is a non-diversified series, although the other series
of the Trust are diversified.
Shares of the Fund may be purchased (minimum investment of
$100 initially and $25 thereafter) at the current public
offering price which is equal to the Fund's net asset value
(see "Valuation of Fund Shares") plus a sales charge based
upon a variable percentage (ranging from 4.25% to less than
1.0% of the offering price) depending upon the amount
invested. (See "How to Buy Shares of the Fund.")
INVESTMENT OBJECTIVE AND
POLICIES OF THE FUND
The Fund's principal investment objective is to provide high
current income, consistent with preservation of capital,
with capital appreciation as a secondary consideration. The
objective is a fundamental policy of the Fund and may not be
changed without shareholder approval. The Fund seeks to
achieve its objective by investing primarily in securities
issued by both domestic and foreign governments and engaging
in related currency transactions. Investments will be
selected to provide a high current yield and currency
stability, or a combination of yield, capital appreciation
or currency appreciation consistent with the Fund's
objective. The Fund may also seek to protect or enhance
income, or protect capital, through the use of forward
currency exchange contracts, options, futures contracts and
interest rate swaps, all of which may be considered to be
"derivatives". A detailed description of these financial
transactions is included under "Special Strategies." The
risk considerations involved in global investing generally
are included under "Special Considerations with Respect to
Global Investing."
THE FUND IS A GLOBAL FUND: As a global fund, the Fund may
invest in securities issued in any currency and may hold
foreign currency. Under normal circumstances, at least 65%
of the Fund's assets will be invested in government
securities of issuers located in at least three countries,
one of which may be the United States ("U.S."). Securities
of issuers within a given country may be denominated in the
currency of another country, or in multinational currency
units such as the European Currency Unit ("ECU").
The Fund will allocate its assets among securities of
various issuers, geographic regions, and currency
denominations in a manner which is consistent with its
objectives based upon relative interest rates among
currencies, the outlook for changes in these interest rates,
and anticipated changes in worldwide exchange rates. In
considering these factors, a country's economic and
political conditions such as inflation rate, growth
prospects, global trade patterns and government policies
will be evaluated.
The Fund's assets will be invested principally within
Australia, Canada, Japan, New Zealand, the U.S. and Western
Europe, and in securities denominated in the currencies of
these countries or denominated in multinational currency
units such as the ECU. The Fund may also acquire securities
and currency in less developed countries and in developing
countries, which investments may involve greater exposure to
the risks ordinarily associated with foreign investing. See
"Special Considerations with Respect to Global Investing,"
below. The Fund's manager does not currently expect the
Fund's investments in less developed and developing
countries to exceed 20% of the Fund's total net assets.
Investments will not be made in securities of foreign
countries issued without stock certificates or comparable
stock documents. Securities which are acquired by the Fund
outside the U.S. and which are publicly traded in the U.S.
on a foreign securities exchange or in a foreign securities
market are not considered by the Fund to be illiquid assets
so long as the Fund acquires and holds the securities with
the intention of reselling the securities in the foreign
trading market, the Fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign
market, and current market quotations are readily available.
The Fund is also authorized to invest in debt securities of
supranational entities denominated in any currency. A
supranational entity is an entity designated or supported by
the national government of one or more countries to promote
economic reconstruction or development. Examples of
supranational entities include, among others, the World
Bank, the European Investment Bank and the Asian Development
Bank. The Fund may, in addition, invest in debt securities
denominated in ECU of an issuer in any country (including
supranational issuers). The Fund is further authorized to
invest in "semi-governmental securities," which are debt
securities issued by entities owned by either a national,
state or equivalent government or are obligations of such a
government jurisdiction which are not backed by its full
faith and credit and general taxing powers.
TYPE OF SECURITIES THE FUND MAY PURCHASE
The Fund is authorized to invest in securities issued by
domestic and foreign governments and their political
subdivisions, including the U.S. government, its agencies,
and authorities or instrumentalities ("U.S. government
securities") and supranational organizations and in
securities issued by foreign and domestic corporations,
banks, and other business organizations.
The Fund may purchase and sell forward currency exchange
contracts, options on currencies and securities, and futures
contracts and options thereon, if such transactions are
believed to be consistent with the Fund's objectives. A
further discussion of these transactions is included under
"Special Strategies."
Under normal economic conditions, at least 65% of the Fund's
total assets will be invested in fixed-income securities
such as bonds, notes and debentures. The remaining 35% may
be invested, to the extent available and permissible, in
equity securities, foreign or domestic currency deposits or
equivalents such as short-term U.S. Treasury notes or
repurchase agreements. Some of the fixed-income securities
may be convertible into common stock or be traded together
with warrants for the purchase of common stocks, although
the Fund has no current intention of converting such
securities into equity or holding them as equity upon such
conversion.
The Fund may invest in debt securities with varying
maturities. Under current market conditions, it is expected
that the dollarweighted average maturity of the Fund's
investments will not exceed 15 years. Generally, the
portfolio's average maturity will be shorter when, in the
opinion of the Fund's investment manager, interest rates
worldwide or in a particular country are expected to rise,
and longer when interest rates are expected to fall.
Other fixed-income securities of both domestic and foreign
issuers in which the Fund may invest include preferred and
preference stock and all types of long-term or short-term
debt obligations, such as bonds, debentures, notes,
commercial paper, equipment lease certificates, equipment
trust certificates and conditional sales contracts.
Additional information concerning these three latter
categories is included in the Statement of Additional
Information. These fixed-income securities may involve
equity features, such as conversion or exchange rights or
warrants for the acquisition of stock of the same or a
different issuer; participation based on revenues, sales or
profits; or the purchase of common stock in a unit
transaction (where an issuer's debt securities and common
stock are offered as a unit). The Fund will limit its
investments in warrants, valued at the lower of cost or
market, to 5% of the Fund's net assets or to warrants
attached to securities.
The Fund may invest in obligations of domestic and foreign
banks which, at the date of investment, have total assets
(as of the date of their most recently published financial
statements) in excess of one billion dollars (or foreign
currency equivalent at then current exchange rates).
The Fund is also authorized to acquire loan participations
in which the Fund will purchase from a lender a portion of a
larger loan which it has made to a borrower. Generally, such
loan participations are sold without guarantee or recourse
to the lending institution and are subject to the credit
risks of both the borrower and the lending institution. Such
loan participations, however, may enable the Fund to acquire
an interest in a loan from a financially strong borrower,
which the Fund could not do directly. Further information is
included in the Statement of Additional Information.
OTHER INVESTMENT POLICIES
As a non-diversified fund, there is no restriction under the
1940 Act on the percentage of the Fund's assets that may be
invested at any time in the securities of any issuer.
However, the Fund intends to comply with the diversification
and other requirements of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), applicable to regulated
investment companies so that the Fund will not be subject to
U.S. federal income tax on the income and capital gain that
it distributes to shareholders. Nevertheless, the Fund's
nondiversified status may expose it to greater risk or
volatility than diversified funds with otherwise similar
investment policies, since the Fund may have a larger
portion of its assets invested in securities of a small
number of issuers.
Under normal market conditions, the Fund will have at least
65% of its total assets invested in securities issued or
guaranteed by domestic and foreign governments. Securities
issued by central banks which are guaranteed by their
national governments are considered to be government
securities. Bonds of foreign governments or their agencies
which may be purchased by the Fund may be less secure than
those of U.S. government issuers.
During periods when the Fund's investment manager believes
that the Fund should be in a temporary defensive position,
the Fund may have less than 25% of its assets concentrated
in such foreign government securities and may invest instead
in U.S. government securities. Such U.S. government
securities which may be purchased by the Fund may include
(i) U.S. Treasury obligations, which differ only in their
interest rates, maturities and times of issuance: U.S.
Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturities of one to 10 years), and U.S. Treasury
bonds (generally maturities of greater than 10 years), all
of which are backed by the full faith and credit of the U.S.
government; and (ii) obligations issued or guaranteed by
U.S. government agencies or instrumentalities, some of which
are backed by the full faith and credit of the U.S. Treasury
(e.g., direct pass-through certificates of the Government
National Mortgage Association); some of which are supported
by the right of the issuer to borrow from the U.S.
government (e.g., obligations of Federal Home Loan Banks);
and some of which are backed only by the credit of the
issuer itself (e.g., obligations of the Student Loan
Marketing Association).
When investing for defensive purposes is appropriate, such
as during periods of adverse market conditions, or when
relative yields in other securities are not deemed
attractive, part or all of the Fund's assets may be invested
in cash (including foreign
currency) or cash equivalent short-term obligations,
including, but not limited to: certificates of deposit,
commercial paper, short-term notes, obligations issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities, and repurchase agreements secured
thereby. In particular, for defensive purposes a larger
portion of the Fund's assets may be invested in U.S. dollar
denominated obligations to reduce the risks inherent in non
dollar denominated assets.
SPECIAL STRATEGIES
The Fund intends to pursue its fundamental investment
objective previously described through the investment
strategies and practices involving the "derivative"
securities and transactions described in this section. These
practices and strategies are not fundamental policies of the
Fund and may be changed at the discretion of the Board of
Trustees without prior notice or shareholder approval. While
there are no specific limits on the Fund's use of these
practices other than those limits stated below, the Fund
only engages in these practices for hedging purposes, or in
other words for the purpose of protecting against declines
in the value of the Fund's portfolio securities and the
income of those securities. The production of additional
income may at times be a secondary purpose of these
practices.
FORWARD CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward currency exchange contracts ("Forward Contract[s]")
to attempt to minimize the risk to the Fund from adverse
changes in the relationship between currencies or to enhance
income. A Forward Contract is an obligation to purchase or
sell a specific currency for an agreed price at a future
date which is individually negotiated and privately traded
by currency traders and their customers.
The Fund may construct an investment position by combining a
debt security denominated in one currency with a Forward
Contract calling for the exchange of that currency for
another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security
coupled with a Forward Contract) that is intended to be
similar in overall performance to a debt security
denominated in the currency purchased.
For example, an Italian lira-denominated position could be
constructed by purchasing a German mark-denominated debt
security and simultaneously entering into a Forward Contract
to exchange an equal amount of marks for lira at a future
date and at a specified exchange rate. With such a
transaction, the Fund may be able to receive a return that
is substantially similar from a yield and currency
perspective to a direct investment in lira debt securities
while achieving other benefits from holding the underlying
security. The Fund may experience slightly different results
from its use of such combined investment positions as
compared to its purchase of a debt security denominated in
the particular currency subject to the Forward Contract.
Such difference may be enhanced or offset by premiums which
may be available in connection with the Forward Contract.
The Fund may also enter into a Forward Contract, for
example, when it enters into a contract for the purchase or
sale of a security denominated in a foreign currency in
order to "lock in" the U.S. dollar price of that security.
Additionally, for example, when the Fund believes that a
foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a Forward Contract to
sell an amount of that foreign currency approximating the
value of some or all of the Fund's portfolio securities
denominated in such foreign currency; or
when the Fund believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, it may enter
into a Forward Contract to buy that foreign currency for a
fixed dollar amount.
The Fund sets aside or segregates sufficient cash, cash
equivalents or readily marketable debt securities held by
its custodian bank as deposits for commitments created by
open forward contracts. The Fund will cover any commitments
under these contracts to sell currency by owning or
acquiring the underlying currency (or an absolute right to
acquire such currency). The segregated account will be
marked to market on a daily basis. The ability of the Fund
to enter into Forward Contracts is limited only to the
extent such Forward Contracts would, in the opinion of the
investment manager, impede portfolio management or the
ability of the Fund to honor redemption requests.
Forward Contracts may limit potential gain from a positive
change in the relationship between the U.S. dollar and
foreign currencies or between foreign currencies.
Unanticipated changes in currency exchange rates also may
result in poorer overall performance for the Fund than if it
had not entered into such contracts.
OPTIONS ON U.S. AND FOREIGN SECURITIES: The Fund intends to
write covered put and call options and purchase put and call
options on U.S. or foreign securities that are traded on
U.S. and foreign securities exchanges and in over-thecounter
markets.
Call options written by the Fund give the holder the right
to buy the underlying security from the Fund at a stated
exercise price upon exercising the option at any time prior
to its expiration. A call option written by the Fund is
"covered" if the Fund owns or has an absolute right (such as
by conversion) to the underlying security covered by the
call. A call option is also covered if the Fund holds a call
on the same security and in the same principal amount as the
call written and the exercise price of the call held is (a)
equal to or less than the exercise price of the call
written, or (b) greater than the exercise price of the call
written if the difference is maintained by the Fund in cash,
government securities or other high grade debt obligations
in a segregated account with its custodian.
Put options written by the Fund give the holder the right to
sell the underlying security to the Fund at a stated
exercise price. A put option written by the Fund is
"covered" if the Fund maintains cash or high grade debt
obligations with a value equal to the exercise price in a
segregated account with its custodian bank, or else holds a
put on the same security and in the same principal amount as
the put written and the exercise price of the put held is
equal to or greater than the exercise price of the put
written.
The premium paid by the purchaser of an option will
generally reflect, among other things, the relationship of
the exercise price to the market price and volatility of the
underlying security, the remaining term of the option,
supply and demand, and current interest rates.
The writer of an option who wishes to terminate its
obligation may effect a "closing purchase transaction." This
is accomplished by buying an option of the same series as
the option previously written. The effect of the purchase is
that the writer's position will be cancelled by the Options
Clearing Corporation or otherwise economically nullified.
However, a writer may not
effect a closing purchase transaction after being notified
of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by
effecting a "closing sale transaction." This is accomplished
by selling an option of the same series as the option
previously purchased.
Effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject
to the option to be used for other Fund investments. If the
Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the
sale of the security. There is no guarantee in any
particular situation that either a closing purchase or a
closing sale transaction can be effected.
The writer of an option may have no control over when the
underlying securities must be sold in the case of a call
option, or purchased in the case of a put option, since the
writer of certain options may be assigned an exercise notice
at any time prior to the expiration of the option. Whether
or not an option expires unexercised, the writer retains the
amount of the premium.
An option position may be closed out only where there exists
a secondary market for an option of the same series. If a
secondary market does not exist, it might not be possible to
effect closing sale transactions in particular options held
by the Fund, with the result that the Fund would have to
exercise the options in order to realize any profit. If the
Fund is unable to effect a closing purchase transaction with
respect to options it has written in a secondary market, it
will not be able to sell the underlying security or other
asset covering the option until the option expires or it
delivers the underlying security or asset upon exercise.
The risks of transactions in options on foreign exchanges
are similar to the risks of investing in foreign securities,
which are also described under "Special Considerations with
Respect to Global Investing" herein. In addition, a foreign
exchange may impose different exercise and settlement terms
and procedures and margin requirements than a U.S. exchange.
The Fund may purchase put options to hedge against a decline
in the value of its portfolio. By using put options in this
way, the Fund will reduce any profit it might otherwise have
realized in the underlying security by the amount of the
premium paid for the put option plus transaction costs.
The Fund may purchase call options to hedge against an
increase in the price of securities that the Fund
anticipates purchasing in the future. The premium paid for
the call option plus any transaction costs will reduce the
benefit, if any, realized by the Fund upon exercise of the
option. Unless the price of the underlying security rises
sufficiently, the option may expire worthless to the Fund.
The ability of the Fund to engage in options transactions is
subject to the following limitations: a) not more than 5% of
the total assets of the Fund may be invested in options
(when aggregated with straddles and spreads); b) the
obligations of the Fund under put options written by the
Fund may not exceed 50% of the net assets of the Fund; and
c) the aggregate premiums on all options purchased by the
Fund may not exceed 20% of the net assets of the Fund.
A further discussion of the use, risks and costs of options
is
included in the Statement of Additional Information.
OPTIONS ON FOREIGN CURRENCIES: The Fund may purchase and
write put and call options on foreign currencies (traded on
U.S. and foreign exchanges or over-the counter) for hedging
purposes to protect against declines in the U.S. dollar
value of foreign portfolio securities and against increases
in the U.S. dollar cost of foreign securities or other
assets to be acquired. As in the case of other kinds of
options, however, the writing of an option on foreign
currency will constitute only a partial hedge, up to the
amount of the premium received, and the Fund could be
required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute
an effective hedge against fluctuations in exchange rates
although, in the event of rate movements adverse to the
Fund's position, the Fund may forfeit the entire amount of
the premium plus related transaction costs. A further
discussion of the use, risks and costs of options on foreign
currencies is included in the Statement of Additional
Information.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS: The Fund
may enter into contracts for the purchase or sale for future
delivery of debt securities ("Futures Contracts") and may
purchase or write options to buy or sell Futures Contracts
traded on U.S. and foreign exchanges ("Options on Futures
Contracts"). These investment techniques are designed only
to hedge against anticipated future changes in interest
rates which otherwise might either adversely affect the
value of the Fund's portfolio securities or adversely affect
the prices of securities which the Fund intends to purchase
at a later date. Should interest rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of
Futures Contracts or Options on Futures Contracts or may
realize a loss. A further discussion of the use, risks and
costs of Futures Contracts and Options on Futures Contracts
is included in the Statement of Additional Information.
The trustees have adopted the requirement that Futures
Contracts and Options on Futures Contracts may only be used
for hedging purposes and not for speculation. In addition to
complying with this requirement, the Fund will not purchase
or sell Futures Contracts and Options on Futures Contracts
if immediately thereafter the amount of initial margin
deposits on all the futures positions of the Fund and
premiums paid on Options on Futures Contracts would exceed
5% of the market value of the total assets of the Fund.
The Fund's investment in options, futures contracts and
forward contracts, options on futures contracts, including
transactions involving actual or deemed short sales, may
give rise to taxable income, gain or loss and will be
subject to special tax treatment under certain mark-tomarket
and straddle rules, the effect of which may be to accelerate
income to the Fund, defer Fund losses, cause adjustments in
the holding periods of Fund securities, convert capital
gains and losses into ordinary income and losses, convert
long-term capital gains into short-term capital gains, and
convert short-term capital losses into long-term capital
losses. These rules could, therefore, affect the amount,
timing and character of distributions to shareholders.
Certain elections may be available to the Fund to mitigate
some of the unfavorable consequences of the provisions
described in this paragraph. These investments and
transactions are discussed in the Statement of Additional
Information.
OTHER INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES. Consistent with procedures
approved by the Board of Trustees and subject to the
following conditions, the Fund may lend its portfolio
securities to qualified securities dealers or other
institutional investors, provided that such loans do not
exceed 30% of the value of the Fund's total assets at the
time of the most recent loan. The borrower must deposit with
the Fund's custodian collateral with an initial market value
of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the
value of the collateral and loaned securities marked-to
market daily to maintain collateral coverage of at least
100%. Such collateral shall consist of cash, securities
issued by the U.S. Government, its agencies or
instrumentalities, or irrevocable letters of credit. The
lending of securities is a common practice in the securities
industry. The Fund engages in security loan arrangements
with the primary objective of increasing the Fund's income
either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium
from the borrower. Under the securities loan agreement, the
Fund continues to be entitled to all dividends or interest
on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in
the collateral should the borrower of the security fail
financially.
WHEN-ISSUED SECURITIES: Securities may be purchased by the
Fund on a "when-issued" or on a "forward delivery" basis,
which means that the obligations will be delivered at a
future date beyond customary settlement time. Although the
Fund is not limited to the amount of securities for which it
may have commitments to purchase on such basis, it is
expected that under normal circumstances, the Fund will not
commit more than 30% of its assets to such purchases. The
Fund does not pay for the securities until received nor does
it start earning interest on them until it is notified of
the settlement date. In order to invest its assets
immediately, while awaiting delivery of securities purchased
on such basis, the Fund will normally invest the amount
required to settle the transaction in short-term securities
that offer same-day settlement and earnings, but which may
bear interest at a lower rate than longer term securities.
When the Fund commits to purchase a security on a whenissued
or forward delivery basis, it will set up segregated
accounts, as described in "Forward Currency Exchange
Contracts" above, concerning such purchases. Although the
Fund does not intend to make such purchases for speculative
purposes, purchases of securities on such basis may involve
more risk than other types of purchases. For example, if the
Fund determines it is necessary to sell the when-issued or
forward delivery securities before delivery, it may incur a
gain or a loss because of market fluctuations since the time
the commitment to purchase such securities was made.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase
transactions, in which the Fund purchases a U.S. government
security subject to resale to a bank or dealer at an agreed
upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer
of securities with an initial market value, including
accrued interest, equal to at least 102% of the dollar
amount invested by the Fund in each agreement, with the
value of the underlying security marked to market daily to
maintain coverage of at least 100%. A default by the seller
might cause the Fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase
agreement. The Fund might also incur disposition costs in
liquidating the collateral. The Fund, however, intends to
enter
into repurchase agreements only with financial institutions
such as broker-dealers and banks which are deemed
creditworthy by the Fund's investment manager. A repurchase
agreement is deemed to be a loan by the Fund under the 1940
Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a
custodian approved by the Fund's Board and will be held
pursuant to a written agreement.
REVERSE REPURCHASE AGREEMENTS. The Fund may also enter into
reverse repurchase agreements which are the opposite of
repurchase agreements but involve similar mechanics and
risks. The Fund sells securities to a bank or broker and
agrees to repurchase them at a mutually agreed price and
date. Cash or liquid high-grade debt securities having an
initial market value, including accrued interest, equal to
at least 102% of the dollar amount sold by the Fund are
segregated as collateral and marked to market daily to
maintain coverage of at least 100%. A default by the
purchaser might cause the Fund to experience a loss or delay
in the liquidation costs. The Fund intends to enter into
reverse repurchase agreements with domestic or foreign banks
or securities dealers. The investment manager will evaluate
the creditworthiness of these entities prior to engaging in
such transactions, under the general supervision of the
Board of Trustees.
The general investment practices described above may be
changed without shareholder approval and no assurances can
be given that they will in any event accomplish the results
intended.
SPECIAL CONSIDERATIONS WITH RESPECT
TO GLOBAL INVESTING
Investment in shares of the Fund may not be appropriate for
all investors and should not be considered as a complete
investment program. Each prospective investor should take
into account overall investment objectives as well as other
investments made when considering the purchase of shares of
the Fund. The value of the investments held by the Fund will
generally vary inversely with changes in prevailing interest
rates, and the extent of such variance will generally depend
upon the maturities of the instruments held by the Fund.
The Fund may invest in debt securities denominated in U.S.
and foreign currencies. A change in the value of any such
foreign currency against the U.S. dollar will result in a
corresponding change in the U.S. dollar value of the Fund's
assets denominated in the foreign currency. Such changes
will also affect the Fund's yield, income and distributions
to shareholders. In addition, although the Fund receives
income in various currencies, the Fund is required to
compute and distribute its income in U.S. dollars.
Therefore, if the exchange rate for any such currency
depreciates after the Fund's income has been accrued and
translated into U.S. dollars, the Fund could be required to
liquidate portfolio securities to make such distributions.
Similarly, if an exchange rate depreciates between the time
the Fund incurs expenses in U.S. dollars and the time such
expenses are paid, the amount of a currency required to be
converted into U.S. dollars in order to pay such expenses in
U.S. dollars will be greater than the equivalent amount in
any such currency at the time the expenses were incurred.
The Fund will only invest in foreign currency denominated
debt securities of countries whose currency is fully
exchangeable into U.S. dollars without legal restriction at
the time of investment.
Investment in foreign securities involves certain risks
which should be considered carefully. Each of the risks
described below
may be heightened to the extent that the fund invests in
securities of developing or emerging markets. These risks
include political, social or economic instability in the
country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the
imposition of exchange controls, expropriation, limits on
removal of currency or other assets, nationalization of
assets, foreign withholding and income taxation and foreign
trading practices (including higher trading commissions,
custodial charges and delayed settlements). Such securities
may be subject to greater fluctuations in price than
securities issued by U.S. corporations or issued or
guaranteed by the U.S. government, its instrumentalities or
agencies. The markets on which such securities trade may
have less volume and liquidity, and may be more volatile
than securities markets in the U.S. In addition, there may
be less publicly available information about a foreign
company than about a U.S. domiciled company. Foreign
companies generally are not subject to uniform accounting,
auditing and financial reporting standards comparable to
those applicable to U.S. domestic companies. There is
generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the
U.S. Confiscatory taxations or diplomatic developments could
also affect investment in those countries.
There may be less publicly available information about
foreign issuers than is contained in reports and reflected
in ratings published for U.S. issuers. Some foreign
securities markets have substantially less volume than the
New York Stock Exchange (the "Exchange") and some foreign
government securities may be less liquid and more volatile
than U.S. government securities. Transaction costs on
foreign securities exchanges may be higher than in the U.S.
and foreign securities settlements may, in some instances,
be subject to delays and related administrative
uncertainties.
The operating expense ratio of the Fund can be expected to
be higher than that of an investment company investing
exclusively in U.S. securities because of the additional
expenses of the Fund, such as custodial costs, valuation
costs and communication costs, although they are expected to
be similar to expenses of other investment companies
investing in a mix of U.S. securities and securities of one
or more foreign countries.
INVESTMENT RESTRICTIONS
BORROWING: The Fund may borrow from banks, for temporary or
emergency purposes only, up to 30% of its total assets, and
pledge up to 30% of its total assets in connection
therewith. No new investments will be made by the Fund while
any outstanding borrowings exceed 5% of its total assets.
ILLIQUID SECURITIES: It is the policy of the Fund that
illiquid securities (a term which means securities that
cannot be disposed of within seven days in the normal course
of business at approximately the amount at which the Fund
has valued the securities) may not constitute, at the time
of purchase or at any time, more than 10% of the value of
the total net assets of the Fund. The Fund may only invest
in illiquid securities, as set forth above, to the extent
such securities would otherwise qualify as permissible
investments for the Fund.
The Fund is subject to a number of additional investment
restrictions, some of which, like the Fund's investment
objectives, have been adopted as fundamental policies of the
Fund and may only be changed with the approval of a majority
of the outstanding voting securities of the Fund. A list of
these
restrictions and more information concerning the policies
discussed herein is included in the Statement of Additional
Information.
HOW SHAREHOLDERS PARTICIPATE IN THE RESULTS OF THE FUND'S
ACTIVITIES
The assets of the Fund are invested in portfolio securities.
If the securities owned by the Fund increase in value, the
value of the shares of the Fund which the shareholder owns
will increase. If the securities owned by the Fund decrease
in value, the value of the shareholder's shares will also
decline. In this way, shareholders participate in any change
in the value of the securities owned by the Fund.
In addition to the factors which affect the value of
individual securities,as described in the preceding
sections, a shareholder may anticipate that the value of
Fund shares will fluctuate with movements in the broader
equity and bond markets, as well.
Changes in the prevailing rates of interest in any of the
countries in which the Fund is invested will likely affect
the value of the Fund's holdings and thus the value of Fund
shares. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are
likely to have a negative effect on the value of Fund
shares. In addition, changes in currency valuations will
impact the price of Fund shares.
To the extent the Fund's investments consist of common
stocks, a decline in the stock market of any country in
which the Fund is invested, expressed for example by a drop
in a domestic or foreign equity based index, may also be
reflected in declines in the Fund's share price. History
reflects both increases and decreases in interest rates,
currency valuations and stock market indexes in individual
countries and throughout the world, and these may reoccur
unpredictably in the future.
MANAGEMENT OF THE FUND
The Board of Trustees has the primary responsibility for the
overall management of the Trust and for electing the
officers of the Trust who are responsible for administering
its day-to-day operations.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as
the Fund's investment manager. Advisers is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Resources"), a
publicly owned holding company, the principal shareholders
of which are Charles B. Johnson, Rupert H. Johnson, Jr. and
R. Martin Wiskemann, who own approximately 20%, 16% and 10%,
respectively, of Resources' outstanding shares. Through its
subsidiaries, Resources is engaged in various aspects of the
financial services industry. Advisers acts as investment
manager or administrator to 33 U.S. registered investment
companies (111 separate series) with aggregate assets of
over $73 billion.
Pursuant to the management agreement, the Manager supervises
and implements the Fund's investment activities and provides
certain administrative services and facilities which are
necessary to conduct the Fund's business.
The Fund is responsible for its own operating expenses
including, but not limited to, the Manager's fee; taxes, if
any; custodian, legal and auditing fees; fees and expenses
of directors who are not members of, affiliated with, or
interested persons of the Manager; salaries of any personnel
not affiliated with the Manager; insurance premiums; trade
association dues; expenses of
obtaining quotations for calculating the value of the Fund's
net assets; printing and other expenses which are not
expressly assumed by the Manager.
During the fiscal year ended October 31, 1994, fees totaling
0.56% of the average daily net assets of the Fund were paid
to Advisers.
Among the responsibilities of the Manager under the
management agreement is the selection of brokers and dealers
through whom transactions in the Fund's portfolio securities
will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more
than one broker is able to provide the best execution, the
Manager will consider the furnishing of quotations and of
other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of
shares of the Fund as factors in selecting a broker. Further
information is included under "The Fund's Policies Regarding
Brokers Used on Portfolio Transactions" in the Statement of
Additional Information.
Shareholders approved the adoption of a subadvisory
agreement between the Manager and Templeton Investment
Counsel, Inc. ("TICI" or "subadvisor"), an indirect
subsidiary of Resources on April 27, 1994. The agreement
provides for the subadvisor to furnish, subject to the
Manager's discretion, a portion of the investment advisory
services for which the Manager is responsible pursuant to
the management agreement. Such responsibilities may include
managing a portion of the Fund's investments and supplying
research services. For its services, TICI receives from the
Manager a monthly fee equal to an annual rate of 0.35% of
the average daily net assets up to and including $100
million of net assets of each Fund; 0.25% of average daily
net assets over $100 million up to and including $250
million; and 0.20% of average daily net assets over $250
million. The subadvisory fees are not in addition to those
the Fund is currently obligated to pay the Manager.
Shareholder accounting and many of the clerical functions
for the Fund are performed by Franklin/Templeton Investor
Services, Inc. ("Investor Services" or "Shareholder Services
Agent") in its capacity as transfer agent and dividendpaying
agent. Investor Services is a wholly-owned subsidiary of
Resources.
Total operating expenses of the Fund, including fees paid to
Advisers and Investor Services represented 0.89% of the
Fund's average daily net assets during the fiscal year ended
October 31, 1994.
PLAN OF DISTRIBUTION
The Fund has adopted a distribution plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
the Fund may reimburse Distributors or others for all
expenses incurred by Distributors or others in the promotion
and distribution of the Fund's shares. Such expenses may
include, but are not limited to, the printing of
prospectuses and reports used for sales purposes, expenses
of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors'
overhead expenses attributable to the distribution of Fund
shares, as well as any distribution or service fees paid to
securities dealers or their firms or others who have
executed a servicing agreement with the Fund, Distributors
or its affiliates. The maximum amount which the Fund may pay
to Distributors or others for such distribution expenses is
0.15% per annum of the average daily net
assets of the Fund, payable on a quarterly basis. All
expenses of distribution and marketing in excess of 0.15%
per annum will be borne by Distributors, or others who have
incurred them, without reimbursement from the Fund. The Plan
also covers any payments to or by the Fund, Advisers,
Distributors, or other parties on behalf of the Fund,
Advisers or Distributors, to the extent such payments are
deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund
within the context of Rule 12b-1. The payments under the
Plan are included in the maximum operating expenses which
may be borne by the Fund.
In implementing the Plan, the Board has determined that the
annual fees payable thereunder will be equal to the sum of:
(i) the amount obtained by multiplying 0.15% by the average
daily net assets represented by shares of the Fund that were
acquired by investors on or after the Effective Date of the
Plan ("New Assets"), and (ii) the amount obtained by
multiplying 0.05% by the average daily net assets
represented by shares of the Fund that were acquired before
the Effective Date of the Plan ("Old Assets"). Such fees
will be paid to the current securities dealer of record on
the shareholder's account. In addition, until such time as
the maximum payment of 0.15% is reached on a yearly basis,
up to an additional 0.02% will be paid to Distributors under
the Plan. The payments to be made to Distributors will be
used by Distributors to defray other marketing expenses that
have been incurred in accordance with the Plan, such as
advertising.
The fee is a Fund expense so that all shareholders
regardless of when they purchased their shares will bear 12b1
expenses at the same rate. That rate initially will be at
least 0.07% (0.05% plus 0.02%) of such average daily net
assets and, as Fund shares are sold on or after the Effective
Date, will increase over time. Thus, as the proportion of
Fund shares purchased on or after the Effective Date
increases in relation to outstanding Fund shares, the
expenses attributable to payments under the proposed Plan
will also increase (but will not exceed 0.15% of average
daily net assets). While this is the currently anticipated
calculation for fees payable under the Plan, the Plan permits
the Fund's directors to allow the Fund to pay a full 0.15% on
all assets at any time. The approval of the Fund's Board of
Trustees would be required to change the calculation of the
payments to be made under the Plan. For more information,
please see the Statement of Additional Information.
DISTRIBUTIONS TO SHAREHOLDERS
There are two types of distributions which the Fund may make
to its shareholders:
1.EINCOME DIVIDENDS. The Fund receives income in the form of
dividends, interest and other income derived from its
investments. This income, less the expenses incurred in the
Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of
dividends paid per share may vary with each distribution.
2.ECAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital
gains or losses in connection with sales or other
dispositions of its portfolio securities. Distributions by
the Fund derived from net short-term and net long-term
capital gains (after taking into account any net capital loss
carryovers) may generally be made once a year in December to
reflect any net short-term and net long-term capital gains
realized by the Fund as of October 31, its fiscal year-end.
These distributions, when made, will generally be fully
taxable to the Fund's shareholders. The Fund
may make more than one distribution derived from net short
term and net long-term capital gains in any year or adjust
the timing of these distributions for operational or other
reasons.
The Fund may derive capital gains or losses in connection
with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net shortterm and net
long-term capital gains (after taking into account any net
capital loss carryovers) may generally be made twice each
year.
One distribution may be made in December to reflect any net
shortterm and net long-term capital gains realized by the
Fund as of October 31 of such year. Any net short-term and
net long-term capital gains realized by the Fund during the
remainder of the fiscal year may be distributed following the
end of the fiscal year. These distributions, when made, will
generally be fully taxable to the Fund's shareholders. The
Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or
adjust the timing of its distributions for operational or
other reasons.
DISTRIBUTION DATE
Although subject to change by the Board of Trustees, without
prior notice to or approval by shareholders, the Fund's
current policy is to declare income dividends monthly for
shareholders of record generally on the first business day
preceding the 15th day of the month, payable on or about the
last business day of that month. The amount of income
dividend payments by the Fund is dependent upon the amount of
net income received by the Fund from its portfolio holdings,
is not guaranteed and is subject to the discretion of the
Fund's Board of Trustees. Fund shares are quoted ex-dividend
on the first business day following the record date. THE FUND
DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN
ON AN INVESTMENT IN ITS SHARES.
In order to be entitled to a dividend, an investor must have
acquired Fund shares prior to the close of business on the
record date. An investor considering purchasing Fund shares
shortly before the record date of a distribution should be
aware that because the value of the Fund's shares is based
directly on the amount of its net assets, rather than on the
principle of supply and demand, any distribution of income or
capital gain will result in a decrease in the value of the
Fund's shares equal to the amount of the distribution. While
a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a
portion of the shareholder's investment, it may be taxable as
dividend income or capital gain.
DIVIDEND REINVESTMENT
Unless requested otherwise in writing or on the Shareholder
Application, income dividends and capital gain distributions,
if any, will be automatically reinvested in the shareholder's
account in the form of additional shares, valued at the
closing net asset value (without sales charge) on the
dividend reinvestment date. Shareholders have the right to
change their election with respect to the receipt of
distributions by notifying the Fund, but any such change will
be effective only as to distributions for which the record
date is seven or more business days after the Fund has been
notified. See the Statement of Additional Information for
more information.
Many of the Fund's shareholders receive their distributions
in the form of additional shares. This is a convenient way to
accumulate additional shares and maintain or increase the
shareholder's earnings base. Of course, any shares so
acquired
remain at market risk.
DISTRIBUTIONS IN CASH
A shareholder may elect to receive income dividends, or both
income dividends and capital gain distributions, in cash. By
completing the "Special Payment Instructions for
Distributions" section of the Shareholder Application
included with this Prospectus, a shareholder may direct the
selected distributions to another fund in the Franklin Group
of Funds(Registered Trademark) or the Templeton Funds, to
another person, or directly to a checking account. If the
bank at which the account is maintained is a member of the
Automated Clearing House, the payments may be made
automatically by electronic funds transfer. If this last
option is requested, the shareholder should allow at least
15 days for initial processing. Dividends which may be paid
in the interim will be sent to the address of record.
Additional information regarding automated fund transfers
may be obtained from Franklin's Shareholder Services
Department. Dividend and capital gain distributions are
eligible for investment in another fund in the Franklin
Group of Funds or the Templeton Funds at net asset value.
See "Purchases at Net Asset Value" under "How to Buy Shares
of the Fund."
Investors should be aware that for federal tax purposed,
foreign exchange losses realized by the Fund, including any
such losses realized on a sale of foreign currency
denominated debt securities, are treated as ordinary losses.
This treatment may have the effect of reducing the Fund's
income available for distribution to shareholders and
causing some or all of the Fund's previously distributed
income to be classified as a return of capital. For
additional information, see "Special Considerations with
Respect to Global Investing" under "Investment Objectives
and Policies of the Fund", above, and "Taxation of the Fund
and Its Shareholders", below.
TAXATION OF THE FUND AND ITS SHAREHOLDERS
The following discussion reflects some of the tax
considerations which affect mutual funds and their
shareholders. Additional information on tax matters relating
to the Fund and its shareholders is included in the section
entitled "Additional Information Regarding Taxation" in the
Statement of Additional Information.
Each fund of the Trust is treated as a separate entity for
federal income tax purposes. The Fund has elected and
qualified to be treated as a regulated investment company
under Subchapter M of the Code. By distributing all of its
net investment income and net realized short-term and long
term capital gain in accordance with the timing requirements
imposed by the Code and by meeting certain other
requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable
for federal income or excise taxes.
For federal income tax purposes, any income dividends which
the shareholder receives from a Fund, as well as any
distributions derived from the excess of net short-term
capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to
receive them in cash or in additional shares.
Distributions derived from the excess of net long-term
capital gain over net short-term capital loss are treated as
long-term capital gain regardless of the length of time the
shareholder has owned Fund shares and regardless of whether
such distributions
are received in cash or in additional shares.
Pursuant to the Code, certain distributions which are
declared in October, November or December but which, for
operational reasons, may not be paid to the shareholder
until the following January, will be treated for tax
purposes as if received by the shareholder on December 31 of
the calendar year in which they are declared.
Redemptions and exchanges of Fund shares are taxable events
on which a shareholder may realize a gain or loss. Any loss
incurred on sale or exchange of Fund shares held for six
months or less will be treated as a long-term capital loss
to the extent of capital gain dividends received with
respect to such shares. All or a portion of the sales charge
incurred in purchasing shares of the Fund will not be
included in the federal tax basis of such shares sold or
exchanged within ninety (90) days of their purchase (for
purposes of determining gain or loss with respect to such
shares) if the sales proceeds are reinvested in the Fund or
in another fund in the Franklin/Templeton Group and a sales
charge which would otherwise apply to the reinvestment is
reduced or eliminated. Any portion of such sales charge
excluded from the tax basis of the shares sold will be added
to the tax basis of the shares acquired in the reinvestment.
Shareholders should consult with their tax advisors
concerning the rules applicable to the redemption or
exchange of Fund shares.
For corporate shareholders, it is anticipated that only a
small portion, if any, of the Fund's dividends during the
current fiscal year will qualify for the corporate dividends
received deduction because of the Fund's principal
investment objective of investing in nonqualifying fixed
income securities. To the extent that the Fund pays
dividends which qualify for this deduction, the availability
of the deduction is subject to certain holding period and
debt financing restrictions imposed under the Code on the
corporation claiming the deduction. These restrictions are
discussed in the Statement of Additional Information.
The Fund may be subject to foreign withholding taxes on
income from certain of its foreign securities. Because the
Fund has invested and intends in the future to invest 50% or
less of its total assets in securities of foreign issuers,
it is not entitled under the Code to pass-through to its
shareholders their pro rata share of the foreign taxes paid
by the Fund. These taxes will be taken as a deduction by the
Fund.
Foreign exchange gains and losses realized by the Fund in
connection with certain transactions involving foreign
currencies, foreign currency payables or receivables,
foreign currency-denominated debt securities, foreign
currency forward contracts, and options or futures contracts
on foreign currencies are subject to special tax rules which
may cause such gains and losses to be treated as ordinary
income and losses rather than capital gains and losses and
may affect the amount and timing of the Fund's income or
loss from such transactions and in turn its distributions to
shareholders.
The Fund will inform shareholders of the source of their
dividends and distributions at the time they are paid, and
will promptly after the close of each calendar year advise
them of the tax status for federal income tax purposes of
such dividends and distributions.
Shareholders who are not U.S. persons for purposes of
federal income taxation should consult with their financial
or tax advisors regarding the applicability of U.S.
withholding or other
taxes to distributions received by them from the Fund and
the application of foreign tax laws to these distributions.
HOW TO BUY SHARES OF THE FUND
Shares of the Fund are continuously offered through
securities dealers which execute an agreement with
Distributors, the principal underwriter of the Fund's
shares. The use of the term "securities dealer" shall
include other financial institutions which, pursuant to an
agreement with Distributors (directly or through
affiliates), handle customer orders and accounts with the
Fund. Such reference however is for convenience only and
does not indicate a legal conclusion of capacity. The
minimum initial investment is $100 and subsequent
investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans
established by the Franklin Templeton Group. The Fund and
Distributors reserve the right to refuse any order for the
purchase of shares.
The Fund may impose a $10 charge for each returned item
against any shareholder account which, in connection with
the purchase of Fund shares, submits a check or a draft
which is returned unpaid to the Fund.
PURCHASE PRICE OF FUND SHARES
Shares of the Fund are offered at the public offering price,
which is the net asset value per share plus a sales charge,
next computed (1) after the shareholder's securities dealer
receives the order which is promptly transmitted to the
Fund, or (2) after receipt of an order by mail from the
shareholder directly in proper form (which generally means a
completed Shareholder Application accompanied by a
negotiable check). The sales charge is a variable percentage
of the offering price depending upon the amount of the sale.
On orders for 100,000 shares or more, the offering price
will be calculated to four decimal places. On orders for
less than 100,000 shares, the offering price will be
calculated to two decimal places using standard rounding
criteria. A description of the method of calculating net
asset value per share is included under the caption
"Valuation of Fund Shares."
Set forth below is a table of total sales charges or
underwriting commissions and dealer concessions.
TOTAL SALES CHARGE
DEALER
AS A
CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET
PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF
OFFERING
AT OFFERING PRICE PRICE INVESTED
PRICE*, ***
*Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.25%
$250,000 but less than $500,000 2.75% 2.83% 2.50%
$500,000 but less than $1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more None None See
below**
*Financial institutions or their affiliated brokers may receive
an agency transaction fee in the percentages set forth
above.
**The following commissions will be paid by
Distributors,from its own resources, to securities dealers
who initiate and are responsible for purchases of $1 million
or more: 0.75% on sales
of $1 million but less than $2 million, plus 0.60% on sales
of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales
of $50 million but less than $100 million, plus 0.15% on
sales of $100 million or more. Dealer concession breakpoints
are reset every 12 months for purposes of additional
purchases.
***At the discretion of Distributors, all sales charges may
at times be allowed to the securities dealer. If 90% or
more of the sales commission is allowed, such securities
dealer may be deemed to be an underwriter as that term is
defined in the Securities Act of 1933, as amended.
No front-end sales charge applies on investments of $1
million or more, but a contingent deferred sales charge of
1% is imposed on certain redemptions of all or a portion of
investments of $1 million or more within 12 months of the
calendar month following such investments ("contingency
period"). See "How to Sell Shares of the Fund - Contingent
Deferred Sales Charge."
The size of a transaction which determines the applicable
sales charge on the purchase of Fund shares is determined by
adding the amount of the shareholder's current purchase plus
the cost or current value (whichever is higher) of a
shareholder's existing investment in one or more of the
funds in the Franklin Group of Funds(Registered Trademark)
and the Templeton Group of Funds. Included for these
aggregation purposes are (a) the mutual funds in the
Franklin Group of Funds except Franklin Valuemark Funds and
Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors
or its affiliates (although certain investments may not have
the same schedule of sales charges and/or may not be subject
to reduction) and (c) the U.S. mutual funds in the Templeton
Group of Funds except Templeton American Trust, Inc.,
Templeton Capital Accumulator Fund, Inc., Templeton Variable
Annuity Fund, and Templeton Variable Products Series Fund
(the "Templeton Funds"). (Franklin Funds and Templeton Funds
are collectively referred to as the "Franklin Templeton
Funds.") Sales charge reductions based upon aggregate
holdings of (a), (b) and (c) above ("Franklin Templeton
Investments") may be effective only after notification to
Distributors that the investment qualifies for a discount.
Distributors, or one of its affiliates, may make payments,
out of its own resources, of up to 0.75% of the amount
purchased to securities dealers who initiate and are
responsible for purchases made at net asset value by non
designated retirement plans, and up to 1% of the amount
purchased to securities dealers who initiate and are
responsible for purchases made at net asset value by certain
designated retirement plans (excluding IRA and IRA
rollovers), certain trust company and trust departments of
banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more.
See definitions under "Description of Special Net Asset
Value Purchases" and as set forth in the SAI.
Distributors or one of its affiliates, out of its own own
resources, may also provide additional compensation to
securities dealers in connection with sales of shares of the
Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers in connection with
conferences, sales or training programs for their employees,
seminars for the public, advertising, sales campaigns and/or
shareholder services and programs regarding one or more of
the Franklin Templeton Funds, and other dealer-sponsored
programs or events. In some instances, this compensation may
be made available only to certain securities dealers whose
representatives have sold or are
expected to sell significant amounts of shares of the
Franklin Templeton Funds. Compensation may include payment
for travel expenses, including lodging, incurred in
connection with trips taken by invited registered
representatives and members of their families to locations
within or outside of the United States for meetings or
seminars of a business nature. Dealers may not use sales of
the Fund's shares to qualify for this compensation to the
extent such may be prohibited by the laws of any state or
any self-regulatory agency, such as the National Association
of Securities Dealers, Inc. None of the aforementioned
additional compensation is paid for by the Fund or its
shareholders.
This statement is required by item 7a of the instructions to
Form N-1ACertain officers and directors of the Fund are also
affiliated with Distributors. A detailed description is
included in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES
Shares may be purchased under a variety of plans which
provide for a reduced sales charge. To be certain to obtain
the reduction of the sales charge, the investor or the
dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In
determining whether a purchase qualifies for any of the
discounts, investments in any Franklin Templeton Investments
may be combined with those of the investor's spouse and
children under the age of 21. In addition, the aggregate
investments of a trustee or other fiduciary account (for an
account under exclusive investment authority) may be
considered in determining whether a reduced sales charge is
available, even though there may be a number of
beneficiaries of the account.
In addition, an investment in the Fund may qualify for a
reduction in the sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value
(whichever is higher) of existing investments in the
Franklin Templeton Investments may be combined with the
amount of the current purchase in determining the sales
charge to be paid.
2. LETTER OF INTENT. An investor may immediately qualify for
a reduced sales charge on a purchase of shares of the Fund
by completing the Letter of Intent section of the
Shareholder Application (the "Letter of Intent" or
"Letter"). By completing the Letter, the investor expresses
an intention to invest during the next 13 months a specified
amount which, if made at one time, would qualify for a
reduced sales charge, grants to Distributors a security
interest in the reserved shares and irrevocably appoints
Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares
for the purpose of paying any additional sales charge due.
Purchases under the Letter will conform with the
requirements of Rule 22d-1 under the 1940 Act. The investor
or the investor's securities dealer must inform Investor
Services or Distributors that this Letter is in effect each
time a purchase is made.
AN INVESTOR (EXCEPT FOR CERTAIN EMPLOYEE BENEFIT PLANS WHICH
ARE LISTED UNDER "DESCRIPTION OF SPECIAL NET ASSET VALUE
PURCHASES") ACKNOWLEDGES AND AGREES TO THE FOLLOWING
PROVISIONS BY COMPLETING THE LETTER OF INTENT SECTION OF THE
SHAREHOLDER APPLICATION: Five percent (5%) of the amount of
the total intended purchase will be reserved in shares of
the Fund, for series funds add "in which you invest,"
registered in the investor's name, to assure that the full
applicable sales charge will be paid if the intended
purchase is not completed. The reserved shares will be
included
in the total shares owned as reflected on periodic
statements; income and capital gain distributions on the
reserved shares will be paid as directed by the investor.
The reserved shares will not be available for disposal by
the investor until the Letter of Intent has been completed
or the higher sales charge paid. For more information, see
"Additional Information Regarding Purchases" in the SAI.
GROUP PURCHASES
An individual who is a member of a qualified group may also
purchase shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of shares previously
purchased and still owned by the group, plus the amount of
the current purchase. For example, if members of the group
had previously invested and still held $80,000 of Fund
shares and now were investing $25,000, the sales charge
would be 1.75%. Information concerning the current sales
charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence
for more than six months, (ii) has a purpose other than
acquiring Fund shares at a discount and (iii) satisfies
uniform criteria which enable Distributors to realize
economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, be available
to arrange for group meetings between representatives of the
Fund or Distributors and the members, agree to include sales
and other materials related to the Fund in its publications
and mailings to members at reduced or no cost to
Distributors, and seek to arrange for payroll deduction or
other bulk transmission of investments to the Fund.
If an investor selects a payroll deduction plan, subsequent
investments will be automatic and will continue until such
time as the investor notifies the Fund and the investor's
employer to discontinue further investments. Due to the
varying procedures used to prepare, process and forward the
payroll deduction information to the Fund, there may be a
delay between the time of the payroll deduction and the time
the money reaches the Fund. The investment in the Fund will
be made at the offering price per share determined on the
day that both the check and payroll deduction data are
received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Shares of the Fund may be purchased without the imposition
of either a front-end sales charge ("net asset value") or a
contingent deferred sales charge by (1) officers, trustees,
directors and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton
Group, and by their spouses and family members including ay
subsequent payments made by such parties after cessation of
employment; (2) companies exchanging shares with or selling
assets pursuant to a merger, acquisition or exchange offer;
(3) insurance company separate accounts for pension plan
contracts; (4) accounts managed by the Franklin Templeton
Group; (5) Shareholders of Templeton Institutional Funds,
Inc. reinvesting redemption proceeds from that fund under an
employee benefit plan qualified under Section 401 of the
Internal Revenue Code of 1986, as amended, in shares of the
Fund; (6) certain unit investment trusts and unit holders of
such trusts reinvesting their distributions from the trusts
in the Fund; (7) registered securities dealers and their
affiliates, for their investment account only, and (8)
registered personnel and employees of securities dealers and
by their spouses and family members, in
accordance with the internal policies and procedures of the
employing securities dealer.
Shares of the Fund may be purchased at net asset value by
persons who have redeemed, within the previous 120 days,
their shares of the Fund or another of the Franklin
Templeton Funds which were purchased with a front-end sales
charge or assessed a contingent deferred sales charge on
redemption. An investor may reinvest an amount not exceeding
the redemption proceeds. While credit will be given for any
contingent deferred sales charge paid on the shares redeemed
and subsequently repurchased, a new contingency period will
begin. Shares of the Fund redeemed in connection with an
exchange into another fund (see "Exchange Privilege") are
not considered "redeemed" for this privilege. In order to
exercise this privilege, a written order for the purchase of
shares of the Fund must be received by the Fund or the
Fund's Shareholder Services Agent within 120 days after the
redemption. The 120 days, however, do not begin to run on
redemption proceeds placed immediately after redemption in a
Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset
value may also be handled by a securities dealer or other
financial institution, who may charge the shareholder a fee
for this service. The redemption is a taxable transaction
but reinvestment without a sales charge may affect the
amount of gain or loss recognized and the tax basis of the
shares reinvested. If there has been a loss on the
redemption, the loss may be disallowed if a reinvestment in
the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a
reinvestment is included in the tax section of this
Prospectus and the SAI.
Dividends and capital gains received in cash by the
shareholder may also be used to purchase shares of the Fund
or another of the Franklin Templeton Funds at net asset
value and without the imposition of a contingent deferred
sales charge within 120 days of the payment date of such
distribution. To exercise this privilege, a written request
to reinvest the distribution must accompany the purchase
order. Additional information may be obtained from
Shareholder Services at 1-800/632-2301. See "Distributions
in Cash" under "Distributions to Shareholders."
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by investors who have, within the past 60 days, redeemed an
investment in an unaffiliated mutual fund which charged the
investor a contingent deferred sales charge upon redemption
and which has investment objectives similar to those of the
Fund.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by broker-dealers, who have entered into a supplemental
agreement with Distributors or by registered investment
advisers affiliated with such broker-dealers, on behalf of
their clients who are participating in a comprehensive fee
program (sometimes known as a wrap fee program).
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by anyone who has taken a distribution from an existing
retirement plan already invested in the Franklin Templeton
Funds (including former participants of the Franklin
Templeton Profit Sharing 401(k) plan), to the extent of such
distribution. In order to exercise this privilege a written
order for the purchase of shares of the Fund must be
received by Franklin Templeton Trust Company (the "Trust
Company"), the Fund or Investor Services, within 120 days
after the plan distribution. A prospectus
outlining the investment objectives and policies of a fund
in which the shareholder wishes to invest may be obtained by
calling toll free at 1-800/DIAL BEN (1-800/342-5236).
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by any state, county, or city, or any
instrumentality, department, authority or agency thereof
which has determined that the Fund is a legally permissible
investment and which is prohibited by applicable investment
laws from paying a sales charge or commission in connection
with the purchase of shares of any registered management
investment company ("an eligible governmental authority").
SUCH INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Municipal investors
considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Fund or its
investment manager on arbitrage rebate calculations. If an
investment by an eligible governmental authority at net
asset value is made through a securities dealer who has
executed a dealer agreement with Distributors, Distributors
or one of its affiliates may make a payment, out of their
own resources, to such securities dealer in an amount not to
exceed 0.25% of the amount invested. Contact Franklin's
Institutional Sales Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Shares of the Fund may also be purchased at net asset value
and without the imposition of a contingent deferred sales
charge by certain designated retirement plans, including
profit sharing, pension, 401(k) and simplified employee
pension plans ("designated plans"), subject to minimum
requirements with respect to number of employees or amount
of purchase, which may be established by Distributors.
Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the
amount invested or to be invested during the subsequent 13
month period in the Fund or in any of the Franklin Templeton
Investments total at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of
the Code ("non-designated plans") may be afforded the same
privilege if they meet the above requirements as well as the
uniform criteria for qualified groups previously described
under "Group Purchases" which enable Distributors to realize
economies of scale in its sales efforts and sales related
expenses.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by trust companies and bank trust departments for funds over
which they exercise exclusive discretionary investment
authority and which are held in a fiduciary, agency,
advisory, custodial or similar capacity. Such purchases are
subject to minimum requirements with respect to amount of
purchase, which may be established by Distributors.
Currently, those criteria require that the amount invested
or to be invested during the subsequent 13-month period in
this Fund or any of the Franklin Templeton Investments total
at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or
other means of electronic data transfer directly from the
bank or trust company, with payment by federal funds
received by the close of business on the next business day
following such order.
Shares of the Fund may be purchased at net asset value and
without the imposition of a contingent deferred sales charge
by
trustees or other fiduciaries purchasing securities for
certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without
regard to where such assets are currently invested.
Refer to the SAI for further information.
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling
Fund shares may be required to register as dealers pursuant
to state law.
GENERAL
Securities laws of states in which the Fund's shares are
offered for sale may differ from the interpretations of
federal law, and banks and financial institutions selling
Fund shares may be required to register as dealers pursuant
to state law.
PURCHASING SHARES OF THE FUND
IN CONNECTION WITH RETIREMENT PLANS
INVOLVING TAX-DEFERRED INVESTMENTS
Shares of the Fund may be used for individual or employer
sponsored retirement plans involving tax-deferred
investments. The Fund may be used as an investment vehicle
for an existing retirement plan, or Franklin Templeton Trust
Company ( the "Trust Company") may provide the plan
documents and serve as custodian or trustee. A plan
document must be adopted for a retirement plan to be in
existence.The Trust Company, an affiliate of Distributors,
can serve as custodian or trustee for retirement plans.
Brochures for the Trust Company plans contain important
information regarding eligibility, contribution and deferral
limits and distribution requirements. Please note that an
application other than the one contained in this Prospectus
must be used to establish a retirement plan account with the
Trust Company. To obtain a retirement plan brochure or
application, call toll free 1-800/DIAL BEN (1-800/342-5236).
Please see "How to Sell Shares of the Fund" for specific
information regarding redemptions from retirement plan
accounts. Specific forms are required to be completed for
distributions from Franklin Templeton Trust Company
retirement plans.
Individuals and plan sponsors should consult with financial
planners or benefits and pension consultants before choosing
a retirement plan.
OTHER PROGRAMS AND PRIVILEGES AVAILABLE TO FUND SHAREHOLDERS
Certain of the programs and privileges described in this
section may not be available directly from the Fund to
shareholders whose shares are held, of record, by a
financial institution or in a "street name" account or
networked account through the National Securities Clearing
Corporation ("NSCC") (see the section captioned "Account
Registrations" in this Prospectus).
SHARE CERTIFICATES
Shares for an initial investment, as well as subsequent
investments, including the reinvestment of dividends and
capital gain distributions, are generally credited to an
account in the name of an investor on the books of the Fund,
without the issuance of a share certificate. Maintaining
shares in uncertificated form (also known as "plan balance")
minimizes the risk of loss or theft of a share certificate.
A lost, stolen or
destroyed certificate cannot be replaced without obtaining a
sufficient indemnity bond. The cost of such a bond, which is
generally borne by the shareholder, can be 2% or more of the
value of the lost, stolen or destroyed certificate. A
certificate will be issued if requested in writing by the
shareholder or by the securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to each shareholder
quarterly to reflect the dividends reinvested during that
period and after each other transaction which affects the
shareholder's account. This statement will also show the
total number of shares owned by the shareholder, including
the number of shares in "plan balance" for the account of
the shareholder.
AUTOMATIC INVESTMENT PLAN
Under the Automatic Investment Plan, a shareholder may be
able to arrange to make additional purchases of shares
automatically on a monthly basis by electronic funds
transfer from a checking account, if the bank which
maintains the account is a member of the Automated Clearing
House, or by preauthorized checks drawn on the shareholder's
bank account. A shareholder may, of course, terminate the
program at any time. The Shareholder Application included
with this Prospectus contains the requirements applicable to
this program. In addition, shareholders may obtain more
information concerning this program from their securities
dealers or from Distributors.
The market value of the Fund's shares is subject to
fluctuation. Before undertaking any plan for systematic
investment, the investor should keep in mind that such a
program does not assure a profit or protect against a loss.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a Systematic Withdrawal Plan and
receive regular periodic payments from the account, provided
that the net asset value of the shares held by the
shareholder is at least $5,000. There are no service charges
for establishing or maintaining a Systematic Withdrawal
Plan. The minimum amount which the shareholder may withdraw
is $50 per withdrawal transaction, although this is merely
the minimum amount allowed under the plan and should not be
mistaken for a recommended amount. Retirement plans subject
to mandatory distribution requirements are not subject to
the $50 minimun. The plan may be established on a monthly,
quarterly, semiannual or annual basis. If the shareholder
establishes a plan, any capital gain distributions and
income dividends paid by the Fund will be reinvested for the
shareholder's account in additional shares at net asset
value. Payments will then be made from the liquidation of
shares at net asset value on the day of the transaction
(which is generally the first business day of the month in
which the payment is scheduled) with payment generally
received by the shareholder three to five days after the
date of liquidation. By completing the "Special Payment
Instructions for Distributions" section of the Shareholder
Application included with this Prospectus, a shareholder may
direct the selected withdrawals to another of the Franklin
Templeton Funds, to another person, or directly to a
checking account. If the bank at which the account is
maintained is a member of the Automated Clearing House, the
payments may be made automatically by electronic funds
transfer. If this last option is requested, the shareholder
should allow at least 15 days for initial processing.
Withdrawals which may be paid in the interim will be sent to
the address of record.
Liquidation of shares may reduce or possibly exhaust the
shares in the shareholder's account, to the extent
withdrawals exceed shares earned through dividends and
distributions, particularly in the event of a market
decline. If the withdrawal amount exceeds the total plan
balance, the account will be closed and the remaining
balance will be sent to the shareholder. As with other
redemptions, a liquidation to make a withdrawal payment is a
sale for federal income tax purposes. Because the amount
withdrawn under the plan may be more than the shareholder's
actual yield or income, part of the payment may be a return
of the shareholder's investment.
The maintenance of a Systematic Withdrawal Plan concurrently
with purchases of additional shares of the Fund would be
disadvantageous because of the sales charge on the
additional purchases. The shareholder should ordinarily not
make additional investments of less than $5,000 or three
times the annual withdrawals under the plan during the time
such a plan is in effect. A Systematic Withdrawal Plan may
be terminated on written notice by the shareholder or the
Fund, and it will terminate automatically if all shares are
liquidated or withdrawn from the account, or upon the Fund's
receipt of notification of the death or incapacity of the
shareholder. Shareholders may change the amount (but not
below the specified minimum) and schedule of withdrawal
payments, or suspend one such payment by giving written
notice to Investor Services at least seven business days
prior to the end of the month preceding a scheduled payment.
Share certificates may not be issued while a Systematic
Withdrawal Plan is in effect.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or
exchanging shares of the Fund available to institutional
accounts. For further information, contact Franklin's
Institutional Services Department at 1-800/321-8563.
EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual
funds with various investment objectives or policies. The
shares of most of these mutual funds are offered to the
public with a sales charge. If a shareholder's investment
objective or outlook for the securities markets changes, the
Fund shares may be exchanged for shares of other Franklin
Templeton Funds which are eligible for sale in the
shareholder's state of residence and in conformity with such
fund's stated eligibility requirements and investment
minimums. Investors should review the prospectus of the fund
they wish to exchange from and the fund they wish to
exchange into for all specific requirements or limitations
on excercising the exchange privilege, for example, minimum
holding periods or applicable sales charges. Exchanges may
be made in any of the following ways:
EXCHANGES BY MAIL
Send written instructions signed by all account owners and
accompanied by any outstanding share certificates properly
endorsed. The transaction will be effective upon receipt of
the written instructions together with any outstanding share
certificates.
EXCHANGES BY TELEPHONE
SHAREHOLDERS, OR THEIR INVESTMENT REPRESENTATIVE OF RECORD,
IF ANY, MAY EXCHANGE SHARES OF THE FUND BY TELEPHONE BY
CALLING
INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS SYSTEM (DAY OR NIGHT) AT 1-800/247-1753.
IF THE SHAREHOLDER DOES NOT WISH THIS PRIVILEGE EXTENDED TO
A PARTICULAR ACCOUNT, THE FUND OR INVESTOR SERVICES SHOULD
BE NOTIFIED.
The Telephone Exchange Privilege allows a shareholder to
effect exchanges from the Fund into an identically
registered account in one of the other available Franklin
Templeton Funds. The Telephone Exchange Privilege is
available only for uncertificated shares or those which have
previously been deposited in the shareholder's account. The
Fund and Investor Services will employ reasonable procedures
to confirm that instructions communicated by telephone are
genuine. Please refer to "Telephone Transactions
Verification Procedures."
During periods of drastic economic or market changes, it is
possible that the Telephone Exchange Privilege may be
difficult to implement and the eleFACTS option may not be
available. In this event, shareholders should follow the
other exchange procedures discussed in this section,
including the procedures for processing exchanges through
securities dealers.
EXCHANGES THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the
Fund's shares, Investor Services will accept exchange orders
by telephone or by other means of electronic transmission
from securities dealers who execute a dealer or similar
agreement with Distributors. See also "Exchanges By
Telephone" above. Such a dealer-ordered exchange will be
effective only for uncertificated shares on deposit in the
shareholder's account or for which certificates have
previously been deposited. A securities dealer may charge a
fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
A contingent deferred sales charge will not be imposed on
exchanges. If, however, the exchanged shares were subject
to a contingent deferred sales charge in the original fund
purchased, and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will
be imposed. The contingency period will be tolled (or
stopped) for the period such shares are exchanged into and
held in a Franklin or Templeton money market fund. See also
"How to Sell Shares of the Fund - Contingent Deferred Sales
Charge."
Exchanges are made on the basis of the net asset values of
the funds involved, except as set forth below. Exchanges of
shares of the Fund which were purchased without a sales
charge will be charged a sales charge in accordance with the
terms of the prospectus of the fund being purchased, unless
the investment on which no sales charge was paid was
transferred in from a fund on which the investor paid a
sales charge. Exchanges of shares of the Fund which were
purchased with a lower sales charge to a fund which has a
higher sales charge will be charged the difference, unless
the shares were held in the Fund for at least six months
prior to executing the exchange. When an investor requests
the exchange of the total value of the Fund account, accrued
but unpaid income dividends and capital gain distributions
will be reinvested in the Fund at the net asset value on the
date of the exchange, and then the entire share balance will
be exchanged into the new fund in accordance with the
procedures set forth above. Because the exchange is
considered a redemption and purchase of shares, the
shareholder may realize a gain or loss for federal income
tax purposes. Backup withholding and information reporting
may also apply. Information regarding the
possible tax consequences of such an exchange is included in
the tax section in this Prospectus and in the SAI .
There are differences among the Franklin Templeton Funds.
Before making an exchange, a shareholder should obtain and
review a current prospectus of the fund into which the
shareholder wishes to transfer.
If a substantial portion of the Fund's shareholders should,
within a short period, elect to redeem their shares of the
Fund pursuant to the exchange privilege, the Fund might have
to liquidate portfolio securities it might otherwise hold
and incur the additional costs related to such transactions.
On the other hand, increased use of the exchange privilege
may result in periodic large inflows of money. If this
should occur, it is the general policy of the Fund to
initially invest this money in short-term, interest-bearing
money market instruments, unless it is felt that attractive
investment opportunities consistent with the Fund's
investment objectives exist immediately. Subsequently, this
money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as
orderly a manner as is possible when attractive investment
opportunities arise.
The Exchange Privilege may be modified or discontinued by
the Fund at any time upon 60 days' written notice to
shareholders.
RETIREMENT ACCOUNTS
Franklin Templeton IRA and 403(b) retirement accounts may
accomplish exchanges directly. Certain restrictions may
apply, however, to other types of retirement plans. See
"Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market
timing services to purchase or redeem shares based on
predetermined market indicators ("Timing Accounts") will be
charged a $5.00 administrative service fee per each such
exchange. All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective
prospectuses, certain funds do not accept or may place
differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently
terminate the exchange privilege or reject any specific
purchase order for any Timing Account or any person whose
transactions seem to follow a timing pattern who: (i) make
an exchange request out of the Fund within two weeks of an
earlier exchange request out of the Fund, or (ii) make more
than two exchanges out of the Fund per calendar quarter, or
(iii) exchange shares equal in value to at least $5 million,
or more than 1% of the Fund's net assets. Accounts under
common ownership or control, including accounts administered
so as to redeem or purchase shares based upon certain
predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund reserves the right to refuse the purchase side of
exchange requests by any Timing Account, person, or group
if, in the Manager's judgment, the Fund would be unable to
invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be
adversely affected.
A shareholder's purchase exchanges may be restricted or
refused if the Fund receives or anticipates simultaneous
orders affecting significant portions of the Fund's assets.
In particular, a pattern of exchanges that coincide with a
"market timing" strategy may be disruptive to the Fund and
therefore may be refused.
The Fund and Distributors also, as indicated in "How to Buy
Shares of the Fund," reserve the right to refuse any order
for the purchase of shares.
HOW TO SELL SHARES OF THE FUND
A shareholder may at any time liquidate shares owned and
receive from the Fund the value of the shares. Shares may be
redeemed in any of the following ways:
REDEMPTIONS BY MAIL
Send a written request, signed by all registered owners, to
Investor Services, at the address shown on the back cover of
this Prospectus, and any share certificates which have been
issued for the shares being redeemed, properly endorsed and
in order for transfer. The shareholder will then receive
from the Fund the value of the shares based upon the net
asset value per share next computed after the written
request in proper form is received by Investor Services.
Redemption requests received after the time at which the net
asset value is calculated (at 1:00 p.m. Pacific time) each
day that the New York Stock Exchange (the "Exchange") is
open for business will receive the price calculated on the
following business day. Shareholders are requested to
provide a telephone number(s) where they may be reached
during business hours, or in the evening if preferred.
Investor Services' ability to contact a shareholder promptly
when necessary will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURE(S) MUST BE
GUARANTEED IF THE REDEMPTION REQUEST INVOLVES ANY OF THE
FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone
other than the registered owner(s) of the account;
(3) the proceeds (in any amount) are to be sent to any
address other than the shareholder's address of record,
preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in
excess of $50,000; or
(5) the Fund or Investor Services believes that a signature
guarantee would protect against potential claims based on
the transfer instructions, including, for example, when (a)
the current address of one or more joint owners of an
account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c)
the Fund has been notified of an adverse claim, (d) the
instructions received by the Fund are given by an agent, not
the actual registered owner, (e) the Fund determines that
joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the
authority of a representative of a corporation, partnership,
association, or other entity has not been established to the
satisfaction of the Fund.
Signature(s) must be guaranteed by an "eligible guarantor
institution" as defined under Rule 17Ad-15 under the
Securities Exchange Act of 1934. Generally, eligible
guarantor institutions include (1) national or state banks,
savings associations, savings and loan associations, trust
companies, savings banks, industrial loan companies and
credit unions; (2) national securities exchanges, registered
securities associations and clearing agencies; (3)
securities dealers which are members of a national
securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that
participate in the Securities Transfer Agent Medallion
Program ("STAMP") or other recognized signature guarantee
medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share
certificates, the request for redemption must be accompanied
by the share certificate and a share assignment form signed
by the registered shareholders exactly as the account is
registered, with the signature(s) guaranteed as referenced
above. Shareholders are advised, for their own protection,
to send the share certificate and assignment form in
separate envelopes if they are being mailed in for
redemption.
Liquidation requests of corporate, partnership, trust and
custodianship accounts, and accounts under court
jurisdiction require the following documentation to be in
proper form:
Corporation - (1) Signature guaranteed letter of instruction
from the authorized officer(s) of the corporation, and (2) a
corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction
from a general partner and (2) pertinent pages from the
partnership agreement identifying the general partners or a
certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from
the trustee(s) and (2) a copy of the pertinent pages of the
trust document listing the trustee(s) or a Certification for
Trust if the trustee(s) are not listed on the account
registration.
Custodial (other than a retirement account) - Signature
guaranteed letter of instruction from the custodian.
Accounts under court jurisdiction - Check court documents
and the applicable state law since these accounts have
varying requirements, depending upon the state of residence.
Payment for redeemed shares will be sent to the shareholder
within seven days after receipt of the request in proper
form.
REDEMPTIONS BY TELEPHONE
Shareholders who complete the Franklin Templeton Telephone
Redemption Authorization Agreement (the "Agreement"),
included with this Prospectus may redeem shares of the Fund
by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts.
"INFORMATION MAY ALSO BE OBTAINED BY WRITING TO THE FUND OR
INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY
CALLING 1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL
EMPLOY REASONABLE PROCEDURES TO CONFIRM THAT INSTRUCTIONS
GIVEN BY TELEPHONE ARE GENUINE. SHAREHOLDERS, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER
"TELEPHONE TRANSACTIONS - VERIFICATION PROCEDURES."
For shareholder accounts with the completed Agreement on
file, redemptions of uncertificated shares or shares which
have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund
account. Telephone redemption requests received before 1:00
p.m. Pacific time on any business day will be processed that
same day. The redemption check will be sent within seven
days, made payable to all the registered owners on the
account, and will be sent only to the address of record.
Redemption requests by telephone will not be accepted within
30 days following an address change by telephone. In that
case, a shareholder should follow the other redemption
procedures set forth in this Prospectus. Institutional
accounts (certain corporations, bank trust departments,
government entities, and qualified retirement plans which
qualify to purchase shares at net asset value pursuant to
the terms of this Prospectus) which wish to execute
redemptions in excess of $50,000 must complete an
Institutional Telephone Privileges Agreement which is
available from Franklin's Institutional Services Department
by telephoning 1-800/321-8563.
REDEEMING SHARES THROUGH SECURITIES DEALERS
The Fund will accept redemption orders by telephone or other
means of electronic transmission from securities dealers who
have entered into a dealer or similar agreement with
Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is
that if the shareholder redeems shares through a dealer, the
redemption price will be the net asset value next calculated
after the shareholder's dealer receives the order which is
promptly transmitted to the Fund, rather than on the day the
Fund receives the shareholder's written request in proper
form. These documents, as described in the preceding
section, are required even if the shareholder's securities
dealer has placed the repurchase order. After receipt of a
repurchase order from the dealer, the Fund will still
require a signed letter of instruction and all other
documents set forth above. A shareholder's letter should
reference the Fund, the account number, the fact that the
repurchase was ordered by a dealer and the dealer's name.
Details of the dealerordered trade, such as trade date,
confirmation number, and the amount of shares or dollars,
will help speed processing of the redemption. The seven-day
period within which the proceeds of the shareholder's
redemption will be sent will begin when the Fund receives
all documents required to complete ("settle") the repurchase
in proper form. The redemption proceeds will not earn
dividends or interest during the time between receipt of the
dealer's repurchase order and the date the redemption is
processed upon receipt of all documents necessary to settle
the repurchase. Thus, it is in a shareholder's best interest
to have the required documentation completed and forwarded
to the Fund as soon as possible. The shareholder's dealer
may charge a fee for handling the order. The SAI contains
more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers
on investments of $1 million or more, a contingent deferred
sales charge of 1% applies to redemptions of those
investments within the contingency period of 12 months of
the calendar month following their purchase. The charge is
1% of the lesser of the value of the shares redeemed
(exclusive of reinvested dividends and capital gain
distributions) or the total cost of such shares, and is
retained by Distributors. In determining if a charge
applies, shares not subject to a contingent deferred sales
charge are deemed to be redeemed first, in the following
order: (i)
shares representing amounts attributable to capital
appreciation of those shares held less than 12 months; (ii)
shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than 12
months; and followed by any shares held less than 12 months,
on a "first in, first out" basis.
The contingent deferred sales charge is waived for:
exchanges; any account fees; distributions to participants
in Trust Company retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of
excess contributions to employee benefit plans;
distributions from employee benefit plans, including those
due to plan termination or plan transfer; redemptions
through a Systematic Withdrawal Plan set up prior to
February 1, 1995 and, for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's
net asset value (3% quarterly, 6% semiannually or 12%
annually); and redemptions initiated by the Fund due to a
shareholder's account falling below the minimum specified
account size. In addition to the waiver referred to above,
shares of participants in Trust company retirement plan
accounts will, in the event of death, disability or
attainment of age 59 1/2, no longer be subject to the
contingent deferred sales charge.
Requests for redemptions for a specified dollar amount,
unless otherwise specified, will result in additional shares
being redeemed to cover any applicable contingent deferred
sales charge while requests for redemption of a specific
number of shares will result in the applicable contingent
deferred sales charge being deducted from the total dollar
amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a
portion thereof, until the clearance of the check used to
purchase Fund shares, which may take up to 15 days or more.
Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these
checks will also be held pending clearance. Shares purchased
by federal funds wire are available for immediate
redemption. In addition, the right of redemption may be
suspended or the date of payment postponed if the Exchange
is closed (other than customary closing) or upon the
determination of the SEC that trading on the Exchange is
restricted or an emergency exists, or if the SEC permits it,
by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount invested
by the shareholder, depending on fluctuations in the market
value of securities owned by the Fund.
RETIREMENT ACCOUNTS
Retirement account liquidations require the completion of
certain additional forms to ensure compliance with IRS
regulations. To liquidate a retirement account, a
shareholder or securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from
such plans to a participant under age 59 1/2, unless the
distribution meets one of the exceptions set forth in the
Code, as defined in Treasury regulations.
OTHER
For any information required about a proposed liquidation, a
shareholder may call Franklin's Shareholder Services
Department
or the securities dealer may call Franklin's Dealer Services
Department.
TELEPHONE TRANSACTIONS
Shareholders of the Fund and their investment representative
of record, if any, may be able to execute various
transactions by calling Investor Services at 1-800/632-2301.
All shareholders will be able to: (i) effect a change in
address, (ii) change a dividend option (see "Restricted
Accounts" below), (iii) transfer Fund shares in one account
to another identically registered account in the Fund, and
(iv) exchange Fund shares as described in this Prospectus by
telephone. In addition, shareholders who complete and file
an Agreement as described under "How to Sell Shares of the
Fund - Redemptions by Telephone" will be able to redeem
shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by
telephone are genuine. These will include: recording all
telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or
account information requested by the telephone service agent
at the time of the call for the purpose of establishing the
caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time
account activity is initiated by telephone. So long as the
Fund and Investor Services follow instructions communicated
by telephone which were reasonably believed to be genuine at
the time of their receipt, neither they nor their affiliates
will be liable for any loss to the shareholder caused by an
unauthorized transaction. Shareholders are, of course, under
no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor
Services is not reasonably satisfied that instructions
received by telephone are genuine, the requested transaction
will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur
because of a delay in implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be
accepted on Franklin Templeton retirement accounts. To
assure compliance with all applicable regulations, special
forms are required for any distribution, redemption, or
dividend payment. While the telephone exchange privilege is
extended to Franklin Templeton IRA and 403(b) retirement
accounts, certain restrictions may apply to other types of
retirement plans. Changes to dividend options must also be
made in writing.
To obtain further information regarding distribution or
transfer procedures, including any required forms,
retirement account shareholders may call to speak to a
Retirement Plan Specialist at 1-800/527-2020 for Franklin
accounts or 1-800/354-9191 (press "2" when prompted to do
so) for Templeton accounts.
GENERAL
During periods of drastic economic or market changes, it is
possible that the telephone transaction privileges will be
difficult to execute because of heavy telephone volume. In
such situations, shareholders may wish to contact their
investment representative for assistance, or to send written
instructions to
the Fund as detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for
any losses resulting from the inability of a shareholder to
execute a telephone transaction.
The telephone transaction privilege may be modified or
discontinued by the Fund at any time upon 60 days' written
notice to shareholders.
VALUATION OF FUND SHARES
The net asset value per share of the Fund is determined as
of 1:00 p.m. Pacific time each day that the Exchange is open
for trading. Many newspapers carry daily quotations of the
prior trading day's "closing bid" (net asset value) and
"ask" (offering price, which includes the maximum front-end
sales charge of the Fund).
The net asset value per share of the Fund is determined in
the following manner: The aggregate of all liabilities,
including without limitation the current market value of any
outstanding options written by the Fund, accrued expenses
and taxes and any necessary reserves, is deducted from the
aggregate gross value of all assets, and the difference is
divided by the number of shares of the Fund outstanding at
the time. For the purpose of determining the aggregate net
assets of the Fund, cash and receivables are valued at their
realizable amounts. Interest is recorded as accrued and
dividends are recorded on the ex-dividend date. Portfolio
securities listed on a securities exchange or on the NASDAQ
National Market System for which market quotations are
readily available are valued at the last quoted sale price
of the day or, if there is no such reported sale, within the
range of the most recent quoted bid and ask prices. Over-the-
counter portfolio securities for which market quotations are
readily available are valued within the range of the most
recent bid and ask prices as obtained from one or more
dealers that make markets in the securities. Portfolio
securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the
broadest and most representative market as determined by the
Manager. Portfolio securities underlying actively traded
call options are valued at their market price as determined
above. The current market value of any option held by the
Fund is its last sales price on the relevant exchange prior
to the time when assets are valued. Lacking any sales that
day or if the last sale price is outside the bid and ask
prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is
believed to fairly reflect the contract's market value.
Other securities for which market quotations are readily
available are valued at the current market price, which may
be obtained from a pricing service, based on a variety of
factors, including recent trades, institutional size trading
in similar types of securities (considering yield, risk and
maturity) and/or developments related to specific issues.
Securities and other assets for which market prices are not
readily available are valued at fair value as determined
following procedures approved by the Board of Trustees. All
money market instruments with a maturity of more than 60
days are valued at current market, as discussed above.
With the approval of trustees, the Fund may utilize a
pricing service, bank or securities dealer to perform any of
the above described functions. Securities denominated in
foreign currencies and traded on foreign exchanges or in
foreign markets will be valued in a similar manner and their
value translated into U.S. dollars at the bid price of their
respective currency
denomination against U.S. dollars last quoted by a major
bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established
in good faith by the Board of Trustees. Because the value of
securities denominated in foreign currencies must be
translated into U.S. dollars, fluctuations in the value of
such currencies in relation to the U.S. dollar will affect
the net asset value of Fund shares even though there has not
been any change in the values of such securities.
Because foreign securities markets may close prior to the
time the Fund determines its net asset value, events
affecting the value of portfolio securities occurring
between the time prices are determined and the time the Fund
calculates its net asset value will not be reflected in the
Fund's calculation of net asset value unless the Adviser or
Subadviser, under supervision of the Board of Trustees,
determines that the particular event would materially affect
the Fund's net asset value. The Fund's portfolio securities
listed on foreign exchanges may trade on days other than the
Fund's normal business days, such as Saturdays. As a result,
the net asset value of the Fund may be significantly
affected by such trading on days when shareholders have no
access to the Fund.
HOW TO GET INFORMATION REGARDING AN INVESTMENT IN THE FUND
Any questions or communications regarding a shareholder's
account should be directed to Investor Services at the
address shown on the back cover of this Prospectus.
From a touch-tone phone, shareholders may obtain current
price, yield or performance information specific to a fund
in the Franklin Funds by calling the automated Franklin
TeleFACTS system (day or night) at 1-800/247-1753.
Information about the Fund may be accessed by entering Fund
Code followed by the # sign, when requested to do so by the
automated operator. The TeleFACTS system is also available
for processing exchanges. See "Exchange Privilege."
To assist shareholders and securities dealers wishing to
speak directly with a representative, the following is a
list of the various Franklin departments, telephone numbers
and hours of operation to call. The same numbers may be used
when calling from a rotary phone:
DEPARTMENT NAME TELEPHONE NO. HOURS OF
OPERATION
(PACIFIC TIME)
(Monday through Friday)
SHAREHOLDER SERVICES 1-800/632-2301 6:00 A.M. TO 5:00
P.M.
DEALER SERVICES 1-800/524-4040 6:00 A.M. TO 5:00
P.M.
FUND INFORMATION 1-800/DIAL BEN 6:00 A.M. TO 8:00
P.M.,
8:30 A.M. TO 5:00 P.M.
(SATURDAY)
RETIREMENT PLANS 1-800/527-2020 6:00 A.M. TO 5:00
P.M.
TDD (HEARING IMPAIRED) 1-800/851-0637
6:00
A.M. TO 5:00 P.M.
In order to ensure that the highest quality of service is being
provided, telephone calls placed to or by representatives in
Franklin's service departments may be accessed, recorded and
monitored. These calls can be determined by the presence of a
regular beeping tone.
PERFORMANCE
Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance, including current yield, various expressions of
total return and current distribution rate. They may
occasionally cite statistics to reflect its volatility or risk.
Average annual total return figures as prescribed by the SEC
represent the average annual percentage change in value of
$1,000 invested at the maximum public offering price (offering
price includes front-end sales charge) for one-, five- and ten-
year periods, or portion thereof, to the
extent applicable, through the end of the most recent
calendar quarter, assuming reinvestment of all
distributions. The Fund may also furnish total return
quotations for other periods or based on investments at
various sales charge levels or at net asset value. For such
purposes total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of
all distributions, plus (or minus) the change in the value
of the original investment, expressed as a percentage of the
purchase price.
Current yield reflects the income per share earned by the
Fund's portfolio investments; it is calculated by dividing
the Fund's net investment income per share during a recent
30-day period by the maximum public offering price on the
last day of that period and annualizing the result.
Yield which is calculated according to a formula prescribed
by the SEC (see the SAI ) is not indicative of the dividends
or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to
shareholders are reflected in the current distribution rate,
which may be quoted to shareholders. The current
distribution rate is computed by dividing the total amount
of dividends per share paid by the Fund during the past 12
months by a current maximum offering price. Under certain
circumstances, such as when there has been a change in the
amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize
the dividends paid during the period such policies were in
effect, rather than using the dividends during the past 12
months. The current distribution rate differs from the
current yield computation because it may include
distributions to shareholders from sources other than
dividends and interest, such as shortterm capital gain, and
is calculated over a different period of time.
In each case performance figures are based upon past
performance, reflect all recurring charges against Fund
income and
will assume the payment of the maximum sales charge on the
purchase of shares. When there has been a change in the
sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment
results of the Fund, like all other investment companies,
will fluctuate over time; thus, performance figures should
not be considered to represent what an investment may earn
in the future or what the Fund's yield, distribution rate or
total return may be in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends October 31. Annual Reports
containing audited financial statements of the Trust,
including the auditors' report, and Semi-Annual Reports
containing unaudited financial statements are automatically
sent to shareholders. Copies may be obtained by investors or
shareholders, without
charge, upon request to the Trust at the telephone number or
address set forth on the cover page of this prospectus.
Additional information on Fund performance is included in
the Fund's Annual Report to Shareholders and the Statement
of Additional Information.
ORGANIZATION
The Trust was organized as a Massachusetts business trust on
December 16, 1986. The Trust is authorized to issue an
unlimited number of shares of beneficial interest, with a
par value of $.01 per share in various series. All shares
have one vote and, when issued, are fully paid,
nonassessable, and redeemable.
All shares of each series have equal voting, dividend and
liquidation rights. Shares of each fund vote separately as
to issues affecting that fund, or the Trust, unless
otherwise permitted by the 1940 Act. The shares have
noncumulative voting rights, which means that in all
elections of trustees, the holders of more than 50% of the
shares voting can elect 100% of the trustees if they choose
to do so and in such event, the holders of the remaining
shares voting will not be able to elect any person or
persons to the Board of Trustees. The Trust does not intend
to hold annual meetings. The Trust may, however, hold a
special shareholder meeting for such purposes as changing
fundamental investment restrictions, approving a new
management agreement or any other matters which are required
to be acted on by shareholders under the 1940 Act. A meeting
may also be called by a majority of the Board of Trustees or
by shareholders holding at least ten percent of the shares
entitled to vote at the meeting. Shareholders may receive
assistance in communicating with other shareholders in
connection with the election or removal of trustees such as
that provided in Section 16(c) of the 1940 Act. The Board of
Trustees may from time to time establish other funds of the
Trust, the assets and liabilities of which will be separate
and distinct from any other fund.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value,
shares of any shareholder whose account has a value of less
than $50, but only where the value of such account has been
reduced by the shareholder's prior voluntary redemption of
shares and has been inactive (except for the reinvestment of
distributions) for a period of at least six months, provided
advance notice is given to the shareholder. More information
is included in the Statement of Additional Information.
OTHER INFORMATION
Shares have no preemptive or subscription rights, and are
fully transferable. There are no conversion rights; however,
holders of shares of any fund may reinvest all or any
portion of the proceeds from the redemption or repurchase of
such shares into shares of any other fund as described in
"Exchange Privilege."
Distribution or redemption checks sent to shareholders do
not earn interest or any other income during the time such
checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss to the shareholder
caused by the shareholder's failure to cash such check(s).
"Cash" payments to or from the Fund may be made by check,
draft or wire. The Fund has no facility to receive, or pay
out, cash in the form of currency.
ACCOUNT REGISTRATIONS
An account registration should reflect the investor's
intentions as to ownership. Where there are two co-owners on
the account, the account will be registered as "Owner 1" and
"Owner 2"; the "or" designation is not used except for money
market fund accounts. If co-owners wish to have the ability
to redeem or convert on the signature of only one owner, a
limited power of attorney may be used.
Accounts should not be registered in the name of a minor
either as sole or co-owner of the account. Transfer or
redemption for such an account may require court action to
obtain release of the funds until the minor reaches the
legal age of majority. The account should be registered in
the name of one "Adult" as custodian for the benefit of the
"Minor" under the Uniform Transfer or Gifts to Minors Act.
A trust designation such as "trustee" or "in trust for"
should only be used if the account is being established
pursuant to a legal, valid trust document. Use of such a
designation in the absence of a legal trust document may
cause difficulties and require court action for transfer or
redemption of the funds.
Shares, whether in certificate form or not, registered as
joint tenants or "Jt Ten" shall mean as "joint tenants with
rights of survivorship" and not as "tenants in common."
Except as indicated, a shareholder may transfer an account
in the Fund carried in "street" or "nominee" name by the
shareholder's securities dealer to a comparably registered
Fund account maintained by another securities dealer. Both
the delivering and receiving securities dealers must have
executed dealer agreements on file with Distributors. Unless
a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and
will so inform the shareholder's delivering securities
dealer. To effect the transfer, a shareholder should
instruct the securities dealer to transfer the account to a
receiving securities dealer and sign any documents required
by the securities dealer(s) to evidence consent to the
transfer. Under current procedures the account transfer may
be processed by the delivering securities dealer and the
Fund after the Fund receives authorization in proper form
from the shareholder's delivering securities dealer. In the
future it may be possible to effect such transfers
electronically through the services of the NSCC.
The Fund may conclusively accept instructions from an owner
or the owner's nominee listed in publicly available nominee
lists, regardless of whether the account was initially
registered in the name of or by the owner, the nominee, or
both. If a securities dealer or other representative is of
record on an investor's account, the investor will be deemed
to have authorized the use of electronic instructions on the
account, including, without limitation, those initiated
through the services of the NSCC, to have adopted as
instruction and signature any such electronic instructions
received by the Fund and the Shareholder Services Agent, and
to have authorized them to execute the instructions without
further inquiry. At the present time, such services which
are available, or which are anticipated to be made available
in the near future, include the "NSCC's Networking,"
"Fund/SERV," and "ACATS" systems.
Any questions regarding an intended registration should be
answered by the securities dealer handling the investment,
or by
calling Franklin's Fund Information
Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund
may be required to report to the Internal Revenue Service
("IRS") any taxable dividend, capital gain distribution, or
other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to
individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN")
and made certain required certifications that appear in the
Shareholder Application. A shareholder may also be subject
to backup withholding if the IRS or a securities dealer
notifies the Fund that the number furnished by the
shareholder is incorrect or that the shareholder is subject
to backup withholding for previous under-reporting of
interest or dividend income.
The Fund reserves the right to (1) refuse to open an account
for any person failing to provide a TIN along with the
required certifications and (2) close an account by
redeeming its shares in full at the then current net asset
value upon receipt of notice from the IRS that the TIN
certified as correct by the shareholder is in fact incorrect
or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a
certified TIN within 60 days after opening the account.
PORTFOLIO OPERATIONS
The following persons are primarily responsible for the day
today management of the Fund's portfolio.
Neil S. Devlin
Executive Vice President and Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Devlin holds a Bachelor of Arts degree in economics and
philosophy from Brandeis University. He is currently a
level III CFA candidate. Prior to joining Templeton in
1987, Mr. Devlin was a portfolio manager and bond analyst
with Constitutional Capital Management of Boston and a bond
trader and research analyst for the Bank of New England. He
has been actively involved in management of the Fund since
1994.
Thomas J. Dickson
Portfolio Manager
Templeton Investment Counsel, Inc.
Mr. Dickson received his Bachelor of Science degree in
managerial economics from the University of California at
Davis. He joined Franklin in 1992 and moved to Templeton in
1994. He has been actively involved in management of the
Fund since 1994.
Serena Perin
Portfolio Manager
Templeton Investment Counsel, Inc.
Ms. Perin holds a Bachelor of Arts degree in business
economics from Brown University. She served as a research
assistant to a member of Parliament in England. Ms. Perin is
a member of several securities industry-related committees
and associations. She joined Franklin in 1991 and Templeton
in 1994. She has been actively involved in management of
the Fund since 1991.
FRANKLIN INVESTORS SECURITIES TRUST
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INVESTMENT MANAGER
Franklin Advisers, Inc.
777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
PRINCIPAL UNDERWRITER
Franklin/Templeton Distributors,
Inc. 777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
CUSTODIAN
Bank of America NT & SA
555 California Street, 4th Floor
San Francisco, California 94104
SHAREHOLDER SERVICES AGENT
Franklin/Templeton Investor Services,
Inc. 777 Mariners Island Blvd.
P.O. Box 7777
San Mateo, California 94403-7777
INDEPENDENT AUDITORS
Coopers & Lybrand
333 Market Street
San Francisco, California 94105
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
Philadelphia, Pennsylvania 19103
For an enlarged version of this
prospectus please call 1-800/DIAL
BEN.
Your Representative Is:
35 P 09/94
